Home > Business, Cost Reduction, Supply Chain > The Power of Every Day Low Prices

The Power of Every Day Low Prices

Many of my friends and colleagues know I am a huge proponent of Wal-Mart’s and their Every Day Low Prices.  I frequently have lively discussions about my love for Wal-Mart and their low prices.  In mid December, I came across an article that discussed Chicagoland’s grocery chains and their battle for shoppers.  The article got me thinking about how powerful Wal-Mart’s “Every Day Low Price” strategy is.  Two lessons can be learned from the Every Day Low Price strategy: consumers don’t shop where they are unhappy, and innovative companies are profitable.

Pricing Strategies

Grocery stores primarily use one of two different pricing strategies: High-Low, or Every Day Low Prices (EDLPs).

Stores with “high-low” pricing strategies price some products at low prices, while having other products at higher prices.   These stores use promotional sales to lure shoppers into the store in order to persuade them to buy other high priced high margin items by utilizing other marketing techniques.

The competing grocery pricing strategy is “Every Day Low Prices”, or what I like to call, EDLPs.  Wal-Mart popularized this strategy and uses it to this day.  Prices are set low, and stay low.  The only time a price changes is when supply or demand changes, or when the retailer forces the supplier to innovate.  Furthermore, if prices do change, they usually go down.  Remember Wal-Mart’s “falling prices” marketing campaign? EDLPs have helped Wal-Mart become the world’s largest retailer.

The Grocery Store Game

Lesson one: Consumers don’t like to shop where they feel unhappy.

I don’t know about other shoppers, but I don’t like to play games when I shop. I like to know I am getting a fair price for everything I buy.  If I wanted to play games with my money, I would gamble.

Every time I shop at stores like Jewel and Dominick’s, stores that use the “high-low” pricing model, I feel like I am loosing a game of pricing. With the “high-low” pricing model, prices don’t change because of supply or demand; they change to trick the customer.  I always leave the store feeling like I lost the game, which makes me very unhappy.

The “high-low” pricing model is about as close as it can get to a “bait and switch” technique without actually being it.  Actually, when an item is out of stock, it does become a “bait and switch” technique.  Does anyone actually go through the hassle of getting a rain check on a bag of peas?

Let’s look at the shopping game in the eyes of an offensive or defensive player.

Defensive shoppers, like my self, usually go to the store when they need something.  And when they buy a product, they are at the store’s pricing mercy.

As stated in the fore mentioned article, stores who use the “high-low” pricing strategy have higher total transaction values; on average, 13% higher.

My defensive shopping habits cause me much frustration when I see the price I am paying.  As a price conscious consumer, I tend to remember what prices are good, and what prices are bad.  To this day, I know when I shop at Wal-Mart I can buy a cake mix for roughly $0.87 , no matter which store I am at or what day of the year it is.  At Jewel or Dominick’s, that price can range from a rare $1.00, to the usual $3.00.  Prices of many items at Jewel or Dominick’s fluctuate to this extreme, and it really makes me unhappy.

On the other hand, shoppers that buy offensively at these “high-low” stores, only buying products when they are on sale, usually do pay a decent price.  But that comes at a cost, shopping offensively is not only inconvenient; it requires a tremendous amount of planning and researching.  As explained in the story She’s crazy for coupons by the Star Tribune:

If you want to learn to save as much as the pros, check out their websites or attend one of the classes. Before long you’ll be buying 10 or more Sunday papers a week just for the coupons, going online for additional coupons and tips, devoting an entire room to food storage, and slashing grocery costs by 75 percent.

The Star Tribune is not alone, local and national news segments frequently feature customers that play the game so well, they can save nearly 85%.

I have tried this offensive technique, but living in downtown Chicago without a car, it is very difficult.  I am lacking both storage and transportation capacity.  It would cost me tens of thousands of dollars to devote a whole room to this strategy; eliminating any possibility to save money.

Efficiency

Lesson two: Companies that innovate are profitable.

As Jim Hertel points out in Food fight: Grocery chains, discounters in battle for shoppers, operating “high-low” pricing strategies actually creates inefficiencies, which translates into higher inventory costs.   I could not agree more with Jim.  Stocking and tracking inventory for temporary specials is extremely expensive. I recently discussed this along with many other inefficient practices associated with “high-low” pricing strategies in my recent post The Costs of Promotional Sales.

Jim also discussed the high amount of variety at stores like Jewel and Dominick’s.  Jewel and Dominick’s defend their vast variety, almost twice that of discounters such as SuperTarget, as adding to their level of service.  Stating,

Price comparison between conventional retailers like Dominick’s and low-cost discounters like Wal-Mart, SuperTarget and Food 4 Less is fundamentally unfair.

They continued,

We have different business models, and our format, offerings and overall selection and pricing strategy are not the same.

The last time I went to Jewel, there was half an isle of Jelly, Jam, and Peanut Butter.  How many varieties does the consumer need? I see the benefit of different brands and flavors, but there are countless sizes and varieties of each! Imagine the cost associated with stocking and tracking five different sizes/containers of each brand and type of jelly! This practice is not service, it is gross inefficiency that brings higher prices across the board.

One store has this “few varieties” concept down so well, I believe it has lead to their prices being lower than Wal-Mart’s prices.  Yes you heard me right; there is a retailer with lower prices than Wal-Mart. Aldi, well known in Europe for decades, has been expanding the number of their United States locations rapidly in recent years.  Aldi sells one size and one brand of grape Jelly. They only stock two peanut butter types: creamy and chunky, with one size fits all containers. Prices at Aldi are unbelievably low.

I can go on and on about Aldi, but I will save that for another day.  I will say, however, their business model is not only admirable, it’s brilliant and innovative.

Innovation is not unique to Aldi.  In order for Wal-Mart to have Every Day Low Prices, prices that are consistently lower than the competition, they need to lower costs.  Lowering costs is a religion at Wal-Mart.  The company is constantly innovating their supply chain and retail operations.

The most profitable companies are the ones that innovate: Wal-Mart, Apple, Google.  These companies are companies that I, along with most of the business community, admire to a great extent.

Innovation is, if anything, my religion.  Innovation should be never-ending.

In order for Wal-Mart to continue their goal of having EDLPs, they require their suppliers innovate and increase productivity. Many people see Wal-Mart as the goliath who forces suppliers to reduce wholesale prices, which, on occasion, puts the supplier out of business.

One of the most predominant examples of a supplier that Wal-Mart ruined was Rubbermaid.  Rubbermaid insisted on raising prices due to higher material costs.  Wal-Mart stopped selling Rubbermaid’s products.  A different supplier, Sterilite, quickly took advantage of the situation by innovating and became a significant supplier to Wal-Mart.  If Sterilite was able to supply Wal-Mart profitably, Rubbermaid should have been able to do so as well.  It was Rubbermaid’s failure to innovate which led to their failure, not Wal-Mart’s strength.

In fact, as mentioned in Wal-Mart’s Influence Grows, published in USA Today, Wal-Mart accounted for 25% of the late 1990s’ productivity gains. In the article, McKinsey & Co also explained that profit gains in the late 90s were primarily due to Wal-Mart.

The costliest thing a company can do is “do it like is has always been done” and languish in gross inefficiencies.

The Power of Every Day Low Prices

Looking at national, public grocer chains, and their financial data**, it is easy to see how powerful EDLPs can be. Stores that use the EDLP pricing model tend to be more profitable than those that do not.  Both Target and Wal-Mart have a healthy 4% average Net Margin for the last four fiscal years.  Kmart also utilized the EDLP strategy, but they stand out from the crowd.  Kmart’s refusal to innovate was, in large part, the reason for their demise.  As mentioned before, innovation is essential to the EDLP strategy.  Without innovation, the strategy will fail.

Now, let’s look at the stores that use the High-Low pricing model. SUPERVALU lost $2.9 Billion last fiscal year, a -6% Net Margin.  Over the three prior years, SUPERVALU had a 1% average Net Margin. Safeway and Kroger did slightly better, both having an average of 2% Net Margin the last four fiscal years. None of these stores had a fiscal year better than that of an EDLP store.

Every Day Low Prices make customers happy.  People like to shop where they feel happy. Shoppers know prices are consistently low at stores with Every Day Low Prices. And because shoppers know prices will be consistently low, they will continue to shop at those stores.  It is literally a free marketing campaign. Furthermore, both efficiency and innovation are functions of Every Day Low Prices.  In order to keep prices low, retailers must constantly monitor and reduce costs.  Cost reduction is a never-ending process requiring companies to be lean and innovate every day.

**National Grocer Chains Fiscal Data.  In Millions of USD.

Wal-Mart

2009

2008

2007

2006

Revenue

$405,046

$401,087

$374,307

$344,759

Net Income

$14,414

$13,254

$12,863

$12,189

Net Margin

4%

3%

3%

4%

Target

2009

2008

2007

2006

Revenue

$64,948

$63,367

$59,490

$52,620

Net Income

$2,214

$2,849

$2,787

$2,408

Net Margin

3%

4%

5%

5%

SUPERVALU

2009

2008

2007

2006

Revenue

$44,564

$44,048

$37,406

$19,863

Net Income

$(2,855)

$593

$452

$206

Net Margin

-6%

1%

1%

1%

Safeway

2009

2008

2007

2006

Revenue

$44,104

$42,286

$40,185

$38,416

Net Income

$965

$888

$870

$561

Net Margin

2%

2%

2%

1%

Kroger

2009

2008

2007

2006

Revenue

$76,000

$70,235

$66,111

$60,553

Net Income

$1,249

$1,181

$1,115

$958

Net Margin

2%

2%

2%

2%

* Fiscal years are estimates; company fiscal years deviate slightly from normal Gregorian calendar years.
* Fiscal data gathered from Google Finance on February 23rd 2010.

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  1. Dick
    February 26, 2010 at 1:38 AM

    Ed, excellent article. I love the low prices of Aldi’s products, and the quality is also good.

    • February 26, 2010 at 2:52 AM

      Ya, there is only one problem with Aldi’s low prices, I can’t stand to shop at any of the other stores anymore!

  2. Charlie Hayes
    February 26, 2010 at 9:13 PM

    What’s really efficient is stocking both name brand and store brands that have identical product inside. Or having a stock that is much larger than is needed to ensure product on the shelves is never sold out.

    I’m just like you and remember low prices and can’t be bothered to buy at anything but the lowest price a product has ever been. I’ll never buy macaroni and cheese at a price above .25 cents per box now that I know I can find it at that price depending on the time of the year.

    What’s really confusing is Meijer’s pricing terminology. They have Price Drops, Every Day Low Price, Sale, and As Advertised. I know from experience that Price Drops are temporary, and Every Day Low Prices are higher than periodic sales. Another thing Meijer does that I just don’t understand is their clearance prices. The clearance prices are usually around 10% off. And for products that started out really expensive like Gluten Free or Organic products, the discounted price is still over three times as much as the normal price for other store brand products. I’d love to help Meijer get near-expiration products off their hands, but at prices HIGHER than what I normally buy, there’s no chance that’s going to happen.

    • February 26, 2010 at 10:52 PM

      Charlie, I agree with your statement on the clearance items. Meijer is diluting the power of a “clearance sale” when they only take 10% off. Ten percent is barely enough to say a product is on sale, and far from any rational clearance price.

  3. March 11, 2010 at 5:07 PM

    Ya, there is only one problem with Aldi's low prices, I can't stand tl shop at any of the other stores ahymore!;

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