Profiting from the right price

Retailers prospered greatly in the last decade, but now face stiff competition and have accordingly adopted various pricing strategies to maximise profits

The retail sector is under increasing pressure from four main areas: new entrants, consumers, manufacturers and substitutes such as the well-documented threat of e-tailing.

The latest research from AC Nielsen Consulting Group examines the strategies adopted by retailers to tackle the influence of these elements and how manufacturers respond to them.

The study identifies two main pricing strategies that retailers use to cope with the pressures they face: everyday low pricing (EDLP); and high regular pricing with frequent reduced-price promotions – so-called hi-lo strategies.

Some investment analysts argue that the value of the retail sector is “going through the floor”. On the face of it they are right. The top 200 international retailers recorded an increase of just 7.6 per cent in annual turnover between 1994 and 1999. There are exceptions such as Wal-Mart, which has increased its annual turnover by 20 per cent.

The retail sector is also experiencing intense competition as a result of the huge increase in household consumption that retailers experienced in the late Eighties.

The retail industry’s response to this dramatic growth in demand was to increase the number of outlets – resulting in the proliferation of out-of-town retail complexes and stores in the early Nineties.

However, this strategy backfired as a subsequent slowdown in demand meant there were too many stores chasing too few customers. It was about this time that promotions began to take off in the UK.

However, the supply gap continues to put pressure on retailers’ margins.

For CE groups, (60 per cent of households), the most important factors when shopping are value for money and price. They are more likely to be attracted by an EDLP strategy – a strategy successfully pursued by Tesco and Asda. However, the most important factors for AB group shoppers are product range and location.

This is good news for those retailers that don’t have the financial clout which the major supermarkets have to introduce EDLP strategies.

In a recent study on EDLP, AC Nielsen found that three-quarters of the categories researched in Asda were running a form of EDLP, but only 33 per cent of items were implementing EDLP in full. EDLP strategies seem, therefore, far from pervasive.

Looking to the future, household consumption growth rates in the UK are forecast to be high this year and next at 3.6 per cent and 2.9 per cent respectively, since consumers’ sensitivity to price tends to change only during a recession when issues such as pay and redundancy are important.

There is, therefore, no reason to assume that consumers will become more price conscious in the near future.

With this in mind, EDLP is unlikely to become more pervasive as a retailer strategy – at least not until the next economic downturn.

Many manufactures will, nevertheless, have been hit by the retailers’ reduction of regular prices.

Three core elements that manufacturers need to tackle retailers on EDLP are: price sensitivity, promotions and loyal consumers.

AC Nielsen has examined both regular and promotions prices over a range of products. If knowledge of price and promotions sensitivity is combined with an understanding of customer attitudes to EDLP and promotions, manufacturers can negotiate with retailers on whether their shortand long-term strategies involve either EDLP or hi-lo mechanisms.

For example, categories such as spirits and sauces tend to benefit more from EDLP strategies, and those such as lager and soft drinks achieve a greater response from hi-lo promotions.

Four main conclusions can be drawn from this analysis of the current pricing policies in food retail:

– the UK retail sector is in the middle of consolidation

– EDLP is not as pervasive as originally perceived

– response to promotions is as strong as ever: consumers are simply more sophisticated so need more sophisticated promotions to interest them

– manufacturers can influence retailers pricing strategies through knowledge of price sensitivity and promotions.

There is much that manufacturers can do to help shape specific tactics of price and promotions within the retail environment.

Factfile is edited by Ãâ¦se Hedberg. Catherine Juckes, an AC Nielsen managing consultant, contributed