Since the first cash register door slip open, the most basic tenet of retailing has always been pricing. Whether the formula was “wholesale plus 40 percent” or promoting seasonal discounts, pricing was the equation that led to profits. But runaway inflation for some basic goods, often led by the explosion in oil prices, have made retailers and analysts reevaluate how prices are set and communicated to customers.
“To an extent it’s still an algorithm that’s seasonally driven and also driven by whether a product is food or non-food,” says W. Frank Dell II, President of Dellmart & Company, which advises retailers on pricing issues. “I think consumers are used to that. The bigger problem is on the branded side. Consumers are used to some fluctuation, but not at the extremes we see now. I can’t recall pricing fluctuations ever being this extreme or this rapid.”
The fluctuations in gas prices have been well-chronicled. But other goods have seen swings that are hardly reflected in the Consumer Price Index. The CPI was up 4.1 percent in June, according to the Labor Department, absent of food and gas prices. But prices of staple goods have skyrocketed this year. Milk prices, for example, increased 26 percent over the year. Egg prices jumped 40 percent. Iron and steel prices have leaped 32.6 percent.
This has led to innovative price calculations and ways to communicate them. Among the high-profile strategy changes have been at Home Depot. It announced in late June that declining home prices and higher fuel costs have focused the chain on individual store growth rather than adding new stores. And those existing stores will have more latitude on pricing depending on the market and product. Craig Menear, executive vice president, merchandising, made the remarks, which were webcast, at the William Blair & Co. annual growth stock conference in Chicago.
“Field merchants will partner with merchants in Atlanta (Home Depot’s headquarters) to offer more localized products,” Menear said. Price points also could be different in different parts of the country, according to Menear.
Dealing with inflation has defined some big retailers. Kroger took a 5% earnings hit in its second quarter this year, in part due to the necessity to stay price competitive. And Wal-Mart has been outspoken about the fact that it refuses to pass on supplier price increases, choosing instead to throw its weight around with suppliers and where possible buy from local growers or manufacturers.
Communicating price spikes has also come under scrutiny. Harvard Business School professor John Quelch in his recent “Seven Tips For Managing Price Increases” counsels retailers to understands the customers and how they view the increases, be very discerning about the goods that are increased and negotiate as much as possible with suppliers to keep price increases minimal. Ignoring price increases, he writes, may be hurtful in the long run.
“If you’ve always passed through raw material price increases to the end consumer, you don’t necessarily need to change that policy,” write in the June 16 issue of HBS Working Knowledge. “However, lagging competitors in passing on price increases can have the same effect as a temporary price promotion. More customers than usual will be looking out for price promotions, but don’t give away the store to those who don’t need the discount, and cut prices not across the board but only on items selected as your inflation-busters. For cash poor consumers, these promotions should hit the key price points on small pack sizes. For cash rich consumers, encourage multi-unit purchases ahead of the inevitable next price increase.”
Dell says retailers need to keep pricing communication simple. He is not a fan of pawning price increases off on the economy or greedy suppliers. He urges retailers, especially grocery retailers, to focus on the image items that stick in consumer’s minds. For example, milk has traditionally set the pricing tone for convenience stores. Fruits and vegetables may set the “image” for a grocer.
“People will know the price of about 200 items in the store on average,” he says. “I would stay close to those items and when I promoted them in-store or through the media I would call them “inflation fighters.” That takes responsibility. It shows you’re looking out for the customer. Anything else shows that it’s not a merchant making the decision. It’s an accountant.”
The pricing conundrum is also complicated by e-commerce. A new survey on overall e-retail customer by the Interactive Media in Retail Group (IMRG), eDigitalResearch, and the online loyalty coalition iPoints, shows “a clear increase in the number of consumers who are happy with the competitive prices, range of products available, and information about products provided online. This suggests that, in a challenging economic climate, there is a strong opportunity for e-retailers to drive their business forward, often at the expense of the High Street.”
The e-CSI found that the numbers of consumers preferring to shop online rather than in-store had increased across almost all industry sectors and product categories. Out of a maximum score of 10 (with 10 meaning the customer always uses the internet for their purchases), those that purchase books, CDs, music, games, videos, DVDs, and software registered an average of 7.85 in May (up from 7.82 in January), while travel (including flights, holidays, and car hire) and tickets (for the cinema and other events) increased to 7.28 in May compared to 7.10 in January. Even those products that are not traditionally purchased online have recently seen an increase in sales. Consumers’ preference to shop online for clothing, footwear and jewellery all increased from 4.06 in January to 4.25 in May, while food drink and household supplies rose from 3.88 to 3.94. At the same time, furniture, DIY and gardening grew from 4.30 to 4.34.