A string of reports in recent weeks shows supermarkets are under intense pressure to keep prices in line. Is the economy finally catching up to them? Are they unable to pass along inflationary increases? None of the above. Retailers aren't complaining about the economy, consumer spending or inflation.
The culprit this time is retail competition. Supermarkets are relying more on price as a weapon in battling rivals, which is good news for consumers but hurting the gross margins of some chains.
When New Jersey-based cooperative ShopRite recently mounted an aggressive promotion, competitor A&P viewed it as “a move to opportunistically grab market share” because ShopRite perceived A&P to be distracted by its Pathmark merger, said Christian Haub, A&P's executive chairman, earlier this month. Not to be outdone, A&P responded with price moves of its own.
Florida appears to be a hotbed of retail price activity. That state's Sweetbay chain has encountered a highly promotional market even though consumers aren't trading down or resisting inflationary price hikes. Faced with heightened competition, Sweetbay reacted with price strategies that will help ensure sales gains but will also impact margins, according to parent company Delhaize Group.
Other chains are giving more thought to price. BJs said it is actively narrowing the price gap between itself and rivals Sam's Club and Coscto. Ahold is pressing ahead with its Value Improvement Program at Stop & Shop and Giant-Landover, with pricing (and assortments) reduced on about 25% of store categories recently.
Wal-Mart, meanwhile, appears to be making more aggressive moves, but it's hard to tell exactly what's going on. Observers said the retail giant is holding to its sharp prices while adding a new layer of promotions in some markets, a highly unusual direction for the company. The speculation is that Wal-Mart is embracing aspects of the high-low supermarket business model, which has the advantage of generating consumer excitement.
Price competition isn't an exclusive U.S. phenomenon. A story in this week's SN (Page 14) describes the retail wars in Ontario as Wal-Mart Supercenters and Loblaw lock horns.
Few geographic markets are immune to these flare-ups, but some retailers are finding ways around the skirmishes. The more differentiated a retailer's approach, the more leverage it has on price. That's why when retailers talk about seeking sales-building strategies, they often point to meals and perishables, businesses that lend themselves to signature presentations.
Retailers that develop something unique shouldn't keep it buried behind a glass case. Safeway's Steve Burd recently outlined his firm's efforts to build a meals business, emphasizing the key role of in-store sampling. “With our signature soups … we've noticed that where we do heavy sampling, 65% of consumers who buy one unit average 12 units over a 12-month period,” he said.
While Burd didn't say so, you can bet that price becomes less of a barrier once a shopper decides he or she can't live without that soup at the sampling counter. That leads to the best of all worlds, in which a retailer wins using food rather than merely price as its weapon.