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Why Follow the Leader Isn't Best Pricing Game

Why Follow the Leader Isn't Best Pricing Game

Food retailers battling in this recession often opted to “invest in price,” which means they cut prices to stay competitive and keep market share.

However, often this led to more problems than solutions. Retailers lost margin by chasing price leaders, and tended to react to developments rather than take control.

Now, it seems, more companies are beginning to get a handle on the situation, based on reports emerging in recent weeks. This news feature outlines how operators are finding a better balance, sometimes by using unique solutions.

On the big-chain side, Whole Foods Market is a case in point. The company spent much of the recession trying to change its image as a pricey shopping outlet. For part of that time, the Austin, Texas-based chain responded to price moves by other retailers, but it finally found its footing last year.

“We made the shift from being fairly reactionary on pricing to being much more strategic,” John Mackey, chairman and CEO, said in a recent call with financial analysts.

How did Whole Foods do this? A crucial shift came when Whole Foods took more control by developing a flexible regional strategy, explained A.C. Gallo, co-president and co-chief operating officer. “We realized we could set a strategy where we could really make our mark, so we adopted pricing that was a little bit different in each region,” he said.

The results were clearly displayed in the recently reported first quarter, in which sales, gross margins and other measures exceeded expectations.

A very different example of a retailer taking control is Riesbeck's Food Markets, a relatively small company in St. Clairsville, Ohio. The 14-unit supermarket operator chose a seemingly counter-intuitive strategy in its David vs. Goliath battle with Wal-Mart Stores. Rather than trying to match or beat the price leader, it actually widened its spread on items with the most cost-effective competitor in the market, usually Wal-Mart.

Riesbeck's came to recognize that it would be impossible to operate profitably while going head-to-head with the Bentonville, Ark.-based giant. This independent operator's formula had been to keep a 6%-to-10% spread with Wal-Mart, but on some items the difference was far less.

So the retailer widened its spread to between 10% and 15%, said Leo Braido, Riesbeck's director of sales, marketing and store management, in a presentation at the recent National Grocers Association Convention.

That move produced savings that were injected into specific value programs, including multi-day specials promoted in weekly ads, and so far the company is satisfied with its strategy, Braido told me last week.

Whole Foods and Riesbeck's each discovered how to make pricing more rational. They are part of a growing club of retailers that are wisely looking inward for solutions rather than outward at the latest price moves by competitors.

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