Recent Trends and Emerging Practices in Retailer Pricing

Abstract

Profitability in retailer pricing has become a paramount concern. Retailers, especially, grocery retailers, are operating on razor-thin margins. On average, a supermarket’s margin is about one percent of net sales. A typical supermarket today is bigger than ever before, with several thousands of items – and, due to mergers and acquisitions, it is part of an even larger retail chain. Prices are set weekly on these items, so supermarkets are challenged to develop a coherent and profitable pricing strategy. Moreover, retailers receive trade allowances from manufacturers for promotional pricing. Pressured by competition and by consumers who have come to expect frequent price discounts, retailers have fallen into a price-promotion trap. Although only about 20 % of retail sales come from promotions, supermarkets devote about 80 % of their week managing them. The same retail pricing battle is being waged across department stores, convenience stores, and stores in other traditional retailing categories.

The current focus on profitable pricing strategies is also due to a changing retail landscape. Cross-channel consumer shopping is becoming increasingly common and is altering the pricing practices of many retailers. Competition across retail channels and formats such as grocery (e.g., Kroger), drug (e.g., Walgreens), mass merchandise (e.g., Wal-Mart), convenience and gas (e.g., 7 Eleven), club (e.g., Costco), and dollar (e.g., Dollar General) appears to be much more intense than ever before. Ongoing expansion by Wal-Mart's Supercenters, plus recent growth in club and dollar stores, has lowered the price floor in many markets and categories. Concurrently, the growth of dollar stores is challenging the dominance of the giant low-cost mass merchandiser, Wal-Mart. This phenomenon parallels the rise of low-cost competitors in other industries. For example, competition in the airline industry has intensified with point-to-point airlines, such as Southwest Airlines and Jet Blue, stealing market share from the long standing hub-and-spoke airlines, such as United Airlines and Delta Airlines.