"Three is the charm," appears to be the hope of major supermarket operators around the country as they look to build sales and recapture market share with heavy promotions.
Throughout much of 2003, food retailers from regional chains like Harris Teeter to national powerhouses like Kroger have resorted to a variety of promotional gimmicks, often based on the magic of three. There have been three-day sales, three-for-the-price-of-one sales and triple-coupon offers.
None of these is new, industry observers told SN.
Moreover, few of them are effective, at least in terms of building profitable, long-term sales, several observers quickly added.
Noted Neil Stern, a senior partner at McMillan Doolittle, a Chicago-based retail consultancy, "Pricing is a dangerous tool to use promotionally. I don't think it's a terribly effective way to get shoppers back from alternate formats. Many of them are going to alternate formats because of all the pricing games in supermarkets in the first place."
Retailers said they feel the weakened economy of the past few years has driven consumers to become more frugal, which in turn puts pressure on supermarkets to deliver a more powerful message on price.
"We are seeing a lot of [extreme pricing and promotion], and it's the cumulative effect of all the months and/or years that we've had where customers have been very cautious about their spending," said Rich Niemann, president and chief operating officer, Niemann Foods, a 53-unit operator based in Quincy, Ill. "It's been that way for the last two or more years in some places. We've been doing whatever we can to try to shake people loose, but people have been very cautious about what they purchase."
Managing Costs
Niemann said the key to running such promotions is to manage expenses. "If your margins are going to be pinched some, you'd better be doing some things on the cost side to try to level that out a bit," he said. "You've got to try to maintain your profitability, and generate cash to do the things you need to do for future growth."
Ron Pearson, chairman and chief executive officer, Hy-Vee, West Des Moines, Iowa, said supermarket retailers seem to be reacting to pressure from alternative formats, primarily supercenters, when they implement aggressive pricing and promotional offers.
"I think there's been an increase in that, in what we've seen in the seven states in which we operate," he said. "What we've seen in those heavy promotional activities is a reaction from a lot of the new square footage that's in the marketplace, mainly supercenters that have moved in. Everybody's positioning to retain some of the market share, or gain some back."
He said that although he hasn't seen triple couponing in his markets, and Hy-Vee refrains from such aggressive promotions and pricing itself, he has seen increases in ad activity, plus a lot of double-couponing and buy-one, get-one-free offers.
Neil Golub, president and CEO, Price Chopper Supermarkets, Schenectady, N.Y., said it is the nature of promotional retailers to react "appropriately and geographically" to such competitive pressures.
"We are seeing it, and it is situational," he said. "Being a promotional retailer, you have to respond to what goes on."
He noted that in Price Chopper's market area, which includes six states in the Northeast, even the everyday-low-price retailers "have gotten a much more promotional look to them" recently.
Price Wars
Cautioned an industry source who requested anonymity, "Price is very important. Price moves customers when one person establishes a lower price. It's much less effective when more than one party begins to cut it."
However, extreme pricing is rarely a game of solitaire. Consider some of the reported instances of triple couponing from earlier this year.
In March, there were published reports of Harris Teeter, the supermarket subsidiary of Ruddick Corp., Charlotte, N.C., offering triple coupons in Nashville, Tenn. A week later, Kroger Co., Cincinnati, gave that city's residents the opportunity to redeem manufacturers' coupons for twice their face value up to $2, according to a story in a local newspaper, as opposed to the company's usual policy of only doubling coupons up to 50 cents.
In May, according to published reports, Louisville, Ky., had four supermarket companies tripling the value of coupons: Kroger; Meijer, Grand Rapids, Mich.; Valu Market, Louisville; and Winn-Dixie Stores, Jacksonville, Fla.
Until August, when Meijer changed its policy, Fort Wayne, Ind., had three companies more or less permanently offering triple coupons, with Kroger and Scott's, a Fort Wayne-based subsidiary of Supervalu, Minneapolis, engaging in the coupon competition, according to published reports.
Finally, late last month in northeastern Ohio, when Giant Eagle, Pittsburgh, and Tops Market, an Ahold operating company based in Buffalo, N.Y., launched major advertising campaigns built around lower prices, Tops also started offering triple coupons, according to Jason Whitmer, an equity analyst at Midwest Research, Cleveland.
Whitmer noted that Cleveland has been a very competitive market for a while. However, he said, at the same time that some supermarkets were offering double coupons, shelf prices for non-promotional items were creeping up.
Then, in the last week of September, Giant Eagle announced price reductions "on several thousand products," and added that "the new pricing will be sustained for the foreseeable future." Tops Market proceeded to launch its own price promotion so quickly that it is not clear who is responding to whom, Whitmer said.
Or, in the words of an anonymous industry source, "It's like the chaos of war. You don't know who's shooting at you or whom you're shooting at."
Another Cleveland-based equity analyst, Chuck Cerankosky of McDonald Investments, said the two companies did not have much choice but to compete on the basis of price. "This is still a marketplace that features consumers reluctant to trade up," he said, "and with consumers reluctant to trade up, price becomes more important.
"Giant Eagle may feature a better seafood department than any supercenter operator in the country, but the consumers coming into the store are also very aware of the price of a box of cereal."
Some analysts maintain that instead of thinking of the Cleveland situation as a "price war," as it has been dubbed in the local press, it might be more accurate to describe it as a situation in which supermarkets are looking to regain the price image they have lost to other formats, particularly the mass merchants.
Sending a Message
Andrew Wolf, an equity analyst at BB&T Capital Markets, Richmond, Va., said, "I think the supermarkets as a sector used to have a better price image. Now, their price image relative to mass merchants is really down there.
"If pricing improves, if there's a permanent price change, there's a chance to win back share from other channels. 'Price war' is a loaded term. This industry has no choice but to get better on price."
However, it is possible to lower prices dramatically and still lose the battle, much less the war. Whitmer noted that last quarter, Winn-Dixie ran a number of extreme promotions, including triple-couponing and buy-one-get-two-free sales. The company had expected to get a 60% sales lift on bonus items, he said, but it ended up only getting 30%.
Also, some industry observers warned that extreme pricing can send a wrong message to shoppers.
Noted Stern, "Obviously, it can work to attract consumers to the store. But is that how you really want to fight those other formats?"
He said Wal-Mart Stores, Bentonville, Ark., and other mass merchants, with their focus on everyday low prices, "are trying to tell the consumer, 'We're there for you every day."'
What's more, industry observers noted that the shoppers who are most attracted by extreme promotions are those least likely to become loyal customers.
Commented the anonymous industry source, "Price wars and triple couponing build sales on the part of cherry-pickers, not your best shoppers."
