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Have you hit a wall with grocery coupons? Is chasing after bargains from store to store costing more in time and gas than it’s worth, even for frugal folks?
Knowing how grocers deal out savings through four pricing strategies can help you reach the next level of savings.
“It’s an age of transparency now. Consumers now have more weapons than they have ever had,” says Venkatesh Shankar, professor of marketing at the Mays Business School at Texas A&M University in College Station, Texas.
“Once you see the value proposition you are getting out of your stores, you can determine which retailers best meet your needs.”
Grocery stores comprise a more than $500 billion industry in the U.S., according to U.S. Census figures. Not surprisingly, there is fierce competition for a pie that large. As a result, profit margins are razor-thin.
Grocers use pricing strategies to make ends meet. These pricing models — deployed over tens of thousands of items in a typical supermarket — allow retailers to offer just enough in discounts without giving away the store.
4 pricing strategies
The four major grocery pricing strategies are:
1. High-low: Popular with savvy bargain hunters who save by stocking up, these supermarkets offer deep markdowns on some items. Typically, high-low grocers offer an enticing array of weekly grocery coupons, promotions, buy-one-get-one-free, or BOGO, offers and special discounts for loyalty-card holders. The grocers recoup their lost profits by charging slightly higher margins on other items. High-low grocers also typically charge vendors for warehousing, shelf space and promotional displays. High-low chains include Kroger, Publix, Safeway and Winn-Dixie.
2. Everyday low prices: Popular with price-sensitive shoppers, EDLP retailers negotiate rock-bottom wholesale prices from their vendors in lieu of charging fees. They then pass on the savings to customers. EDLP chains include Walmart, Target, Food Lion and Lucky.
3. Discount clubs: Discount clubs make their profits from membership fees and reduced overhead. As a result, their markup is usually half that of supermarkets. Their warehouse stores typically stock a small fraction of a supermarket’s inventory (1,500 items or so) and package it in large quantities to maximize the savings to members. Discount clubs include Costco, BJ’s Wholesale Club and Sam’s Club.
4. Aggressive pricing: Although these retailers generally carry fewer than 1,000 items, they specialize in selling name-brand products packaged to sell at attractive prices. Aggressive pricing stores include Dollar General, Family Dollar and Dollar Tree.
Each pricing strategy offers bargains for shoppers willing to put in the work, says Neil Stern, a senior partner at McMillanDoolittle LLP, a retail consulting firm in Chicago.
“High-low stores have lots of deals if you’re willing to be a card member, if you’re willing to switch brands, switch sizes and pay close attention to what’s on sale,” he says. “EDLP is hard to beat on price, but they may not have your brand of everything. The clubs have a limited assortment and you have to buy in quantity, but you know their prices are going to be great.”
Mixing it up
In theory, high-speed computing and data crunching allow retailers to counterpunch a competitor’s prices on a daily or even hourly basis. In reality, most supermarkets remain slaves to the ingrained weekly cycle of their advertising and vendor deliveries.
That said, retailers mix up marketing today as never before, making it more difficult for consumers to dial into a store’s sales rhythm. Even Walmart, the nation’s largest food retailer by far, offers three pricing tiers: EDLP, “rollback” and “save even more,” which is essentially a sale.
“It’s become extremely dynamic now,” Stern says. “You’ve got this gigantic competitor that has forced its competitors to get a lot smarter and more sophisticated about what they’re doing.”
With margins already wafer thin and everyone from Target to Ikea invading the food space, grocery chains are doubling down on loyalty programs and mobile technology to attract and retain customers.
In the near future — given your consent, of course — that same loyalty program will know when you enter the store by the GPS on your mobile phone, and use it to guide you aisle by aisle to advertised and unadvertised savings based on your shopping history.
“They are trying to see how to best customize their value to you,” Shankar says. “Once you learn their pricing strategies, you just experiment to determine their value proposition to you.”