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Techno Pricing

The rising cost of food commodities has led to the biggest jump in retail food prices in 17 years, the Wall Street Journal reported on Jan. 3. Food retailers are mostly passing along their higher costs to consumers, but so far companies like Safeway and Kroger say they are not seeing a negative impact on sales. It appears that consumers are willing to pay 5.3% more that was the jump in the Consumer

The rising cost of food commodities has led to the biggest jump in retail food prices in 17 years, the Wall Street Journal reported on Jan. 3.

Food retailers are mostly passing along their higher costs to consumers, but so far companies like Safeway and Kroger say they are not seeing a negative impact on sales. It appears that consumers are willing to pay 5.3% more — that was the jump in the Consumer Price Index for food last year through November.

Still, a growing number of retailers, including Safeway, are not relying simply on the good graces of consumers to continue buying higher-priced products. These retailers have invested in price optimization applications that give them a much clearer forecast of what consumers are likely to do — and how profit margins will be impacted — when prices are raised, lowered or left the same.

Price optimization tools have been available to retailers for at least a decade, but the interest in the technology has heated up recently as pricing has grown more complex and competitive pressures have made already slender margins harder to maintain. “There has been a desperation in the past few years, with retailers finally realizing that without a scientific approach to pricing, they are not going to find margin improvement,” said Scott Langdoc, vice president of research and business leader, Global Retail Insights, a division of IDC, Framingham, Mass.

For several years, KhiMetrics and DemandTec dominated the retail price optimization market. Two years ago, software giant SAP, Walldorf, Germany, acquired KhiMetrics (see story, Page 78), and since then several other vendors have emerged, notably KSS and Revionics. Oracle also offers price optimization tools, as does a smaller player, Athens Group. Last summer, DemandTec, San Carlos, Calif., went public with an initial public offering.

DemandTec's customers include Wal-Mart, Safeway, Giant Eagle, Food Lion, Brookshire Grocery, H.E. Butt Grocery and Best Buy. KSS customers include Brookshire Brothers, Raley's (signed in December), Ball's Food Stores, Rite Aid and Mexican retailer Gigante.

Some of the software companies, including DemandTec and Revionics, offer their applications via a “software-as-a-service” model, which typically means faster deployment and more frequent updates. Overall, the increase in competition has led to price optimization tools that are easier to use, noted Langdoc.

In addition to price optimization geared to everyday pricing, the vendors also offer promotion optimization tools aimed at finding the best discounts, with many retailers employing both. DemandTec also offers a trade promotion management network connecting retailers with CPG companies.

The cost of price optimization varies widely among vendors, in some cases exceeding seven figures, but retailers contacted by SN have generally found an acceptable return on their investment.


Giant Eagle, Pittsburgh, is near the end of its first three-year subscription with DemandTec for price optimization and plans to renew it, said Stephanie White, vice president of sales systems for the chain. Previously, the chain had to resort to “piles and piles of spreadsheets” to analyze pricing.

The system has helped Giant Eagle deal with the cost volatility that has led to increases on about 60% of its items during the past year, said White. The chain waits until its competitors pass on cost increases before following suit, but uses the optimization tool to “understand the implications of moving prices and forecast the results of doing so,” she noted. “And if we hold a price, it tells us what would happen then.”

If anything, though, Giant Eagle has endeavored to reduce prices, investing over $100 million in price reductions over the last three years, said White. “We've used the [price optimization] tool to help us select the items for price reduction.”

Retailers typically apply price optimization to a category, changing prices of products within the category to achieve a particular goal, such as profit or revenue maximization. Giant Eagle has applied price optimization to between 70 and 80 categories, with half or more of them targeted for price reductions. In general, “our goal is to drive sales, not maximize margins,” White said.

Giant Eagle has also embraced price optimization as a way to handle the sheer complexity of pricing decisions. White pointed out that changing one price in the peanut butter category can lead to thousands of other changes when accounting for all of the sizes, specialty brands, national brands and private-label items, as well as geographic pricing zones and competitive considerations. The technology allows the retailer to impose its own rules on these prices and “see the implications of those rules,” she said.

But those strategies and rules have to be in place before the technology can be used. White acknowledged that Giant Eagle “had to get alignment” on its pricing strategies and rules. The chain also created a centralized group of pricing analysts to use the technology in partnership with category managers.

White declined to cite the cost of the system, but noted that its benefits have been “pretty significant” — enough the justify renewing the subscription. DemandTec's three-year subscription costs upwards of $1 million, depending on the size of the user and how the system is used, the company said.

Another retail user of DemandTec, who requested that his name and company affiliation not be used, said the system helps his chain ensure that pricing rules are being implemented. “It uncovered a lot of things we were doing wrong,” he said.

The technology also enabled the chain to pay attention to slower-moving items that had often been overlooked in the past. “It's constantly looking at our whole product line,” he said. Whether lowering prices to be more competitive and drive volume, or raising prices to extract more margin, the system “takes the emotion out of it,” he said. But the retailer still makes the final judgment about whether to pull the trigger on price changes, he added.

Overall, the system, in use for several years at this company, has “improved or maintained our profitability — it's been a factor in our profits,” the executive said, adding, “It's enabled us to compete with the giants.”


Brookshire Brothers, which operates more than 70 stores out of Lufkin, Texas, likes the price optimization system from KSS Retail, Florham Park, N.J., so much that it recognized KSS as its “Marketing Vendor of the Year” last November. The award previously went to CPG companies like Coca-Cola and Miller Brewing.

Brookshire had some good reasons for recognizing KSS. According to Mike Due, Brookshire's director of grocery and the principal user of the system, it has brought the retailer 5% to 7% on average above budget for gross profit dollars on a quarterly basis since it went live in April 2006. That has translated into category gains of between $400 and $1,200 in profit dollars, he said.

Unlike DemandTec's software-as-a-service model, KSS's system is installed at a retailer's headquarters. “We don't feel comfortable about sending our data off,” said Due. He declined to say how much the system cost, but said that it was paid for “within six months” of implementation.

According to Lyle Walker, vice president of marketing for KSS Retail, the company's price optimization system costs up to 50% less than DemandTec's over a three-year period.

Langdoc noted that while vendors like KSS and Revionics are “more nimble and cost-competitive,” DemandTec is the “most established and stable” provider. He encouraged midtier food retailers considering price optimization to “look at everybody and decide who's the best fit for me.”

Due said Brookshire changes between 250 and 400 prices from between eight and 12 categories on a weekly basis. The system analyzes three years of historical sales data in coming up with its price recommendations. On average, 55% of prices are reduced and 45% are increased. Forecasts of sales resulting from the price changes are found to be 95% to 99% accurate.

Due acknowledged that Brookshire was initially concerned that too many price changes would be perceived by consumers as “sticker shock” and limited them to no more than 25% of the items in a category. That limitation has since been lifted. “With the parameters we put in there, the system is smart enough not to alarm customers,” he said.


One of the more striking changes in the price optimization market has been the emergence of Revionics, Sacramento, Calif., which has positioned itself as the provider to the independent retailer market.

According to Todd Michaud, president and chief executive officer of Revionics, the company has between 70 and 75 retailers as customers, many of them independents with a handful of stores, though “we're working our way up in size.” Last year, Coborn's, St. Cloud, Minn., with 33 stores, signed up with Revionics.

Most retailers with between one and five stores pay $150 per week per store to Revionics for price optimization, which is provided on a software-as-a-service basis. The service covers base prices, temporary price reductions and weekly promotions.

One user of Revionics, Clark's Markets, a seven-store chain in Basalt, Colo., opted to try Revionics last September after a senior member of its pricing team retired. “We have a lot of natural and organic products, and it's important that they are priced appropriately so we get the most margin and yet don't look expensive,” said Tom Clark, Jr., owner of the chain and its director of IT. “We're happy with its ability to do that.”

At the same time, Clark said, he requests that the system ensure that his prices are in line with those of his competition. And if some prices need to be lowered to stay competitive, the system “looks at other items that are not competitive to see if it can increase the prices on those a little.” Overall, Clark sees product margins going up, though he couldn't offer specifics.

Clark gives Revionics two years of sales history as well as weekly uploads of movement data. Its wholesaler, Associated Food Stores, Salt Lake City, provides Revionics with competitive prices as well as cost information. Clark then receives weekly updates from Revionics.

Clark has set a limit of 1,500 price changes per week, “which is all we can handle.” Some of the changes are for temporary price reductions.

“It's comforting to know that the entire file is being looked at every week,” said Clark. If a cost change takes place, the system makes the change and “won't let us sell at a loss,” he noted. “We didn't deal with that as intelligently before.”

Clark acknowledged that there were a number of challenges he faced in implementing the Revionics system. For one, competitive data has to be checked before being entered into the system to avoid snafus. He also had to hand-code his programs to grab movement data and “put it in the form Revionics needs,” he said. And he had to create a category and subcategory classification for all of his items.

The setup work “can be a major challenge for an independent,” observed Clark, who sits on the technology board of Associated Food Stores. Michaud said Revionics “works with retailers who don't have an IT staff” and is able to accept “less-than-perfect data.”

Many independents have their pricing handled by their wholesaler as part of their overall fee, making them reluctant to take on the additional cost of price optimization, Clark said.

Dennis DeLano, owner of DeLano IGA Markets, an eight-store chain in San Francisco that is only a year old, has used Revionics since last September. He initially raised prices on 8,900 fast-moving items, leading to a 3% margin improvement.

“We've been able to maximize gross profits while maintaining a comfortable spread between ourselves and the competition,” he said.

DeLano noted that he chooses not to follow Revionics' suggestions to lower prices for slow-moving items. “It's not our job to create value for a slow mover,” he said. “The manufacturer needs to find a way to bring the cost down.”

DeLano added that he tries to keep the number of price changes below 2,500 per week in order to limit the cost of price tags and labor in the high-cost San Francisco labor market.