June 5, 2008
CPGmatters: Kellogg Touts Collaboration to Optimize Shelf Prices
By Al Heller
Through a special arrangement, what follows is an excerpt of a current article from the monthly e-zine, CPGmatters, presented here for discussion.
Retailers considering any new pricing approach ought to first develop a clear strategic pricing plan with CPG suppliers before making dramatic changes.
High-low retailers often surrender profits unnecessarily when they convert highly promoted or merchandised categories to EDLP or hybrid pricing on their own. They change their pricing strategy in the mistaken belief they can turn promotional volume into strong base sales and grow from there — even in categories where promotions produce 50 percent or more of sales.
“Our research shows that EDLP might increase unit volume, but in almost every situation we studied we saw category dollar sales decline,” said Michael Greene, vice president-customer marketing of morning foods sales at Kellogg, in an interview with CPGmatters. “When retailers decide they want to approach a highly promoted or merchandised category in a new way, they first need to realize that shoppers have been trained. They expect to see promotions in cereals, for instance, and these incentivize people to stock up, buy more and consume more.”
He and Amjad Malik, senior director-business analytics and CRM at Kellogg, presented to a packed room at the recent Food Marketing Institute Conference on the topic, “Optimizing Shelf Prices for a Highly Merchandised Category.”
That’s not to say EDLP wrecks category performance. According to Mr. Greene, retailers don’t get strategic pricing input often enough from trading partners, either because they don’t ask (“They believe their shoppers want lower prices, so they simply proceed.”) or CPG fails to share a clear step-by-step approach which retailers could adopt.
To accurately project the impact of price changes within a category, Mr. Greene says it takes a deep understanding of the roles of specific brands and items within the shelf set. It also takes knowing the effect price changes would have on these brands and items (base-price elasticity), and the effect price changes would have on related items within the set (cross-price elasticity).
“With our proprietary pricing methodology, Kellogg can help chains that want to get more aggressive on price, ask the right questions, choose the right approach for their objectives and their shoppers, and make effective fact-based decisions,” explained Greene. “Retailers don’t have to discount as deeply as they think they do. They can price within 4 percent to 5 percent of a competitor and be considered even. At a 5 percent to 8 percent difference, consumers start to notice, but still don’t change their buying patterns. Above 10 percent may be the tipping point for people to buy elsewhere.”
The Kellogg approach begins with the notion that every SKU in every store is different. Opening questions include: What is your price gap to the competition? Who do you compare yourself to? What is the role of the brand/item in the category? (If a traffic driver, price closer to the competition; if a cash generator, can price further away.)
Equally important, says Greene, is for retailers to communicate any price drops they take, so shoppers are aware, can respond by buying more units, and give the store the credit due for making such a move. “If people didn’t buy more products, are you accomplishing your goals?” he posed.
Discussion Questions: What’s the best way to change a highly promotional category to more of EDLP one? What factors should be considered when making the pricing change? Do you see a need for a more collaborative approach with CPG vendors around pricing changes?
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I’m a big fan of price optimization services such a Revionics and others. They provide a ‘macro’ or whole-store approach to pricing which, once in place, can then enable retailers to focus on individual categories by first creating a model to predict results. And after helping retailers make price changes, price optimization services can give them the most accurate picture of the success or lack of success created by the changes. Depending on individual vendors to help guide pricing strategies is problematic, especially in the center store where nearly all of them face competitive brands. How can they be expected to play fairly in such a situation?
EDLP pricing is a viable tactic in the right environment and with the right retailer. Retailers targeting lower income demographics and using this tactic across multiple categories for a high net impact on savings for their customers can leverage EDLP as a theme across the entire store.
However, manufactures lose one of their most valuable tools which is high impact event style promotions. EDLP not only sacrifices retailer profits, but also profits of the manufacturer. While most retailers realize nearly uniform blended profit margins across the entirety of products in any given category, manufacturers–due to tremendous variances in cost of goods manufactured–sometimes realize a huge difference in profit margins on various offerings in any given segment. As such manufacturers have ability to target higher profit margin items for deeper discounts and higher impact promotions for the retailers and their customers.
Due to manufacturing and distribution efficiencies as well as high volume on flagship brands, manufacturers can realize greater profits and therefor more flexibility in promo pricing on these items. In defense of manufacturers, it should be noted that higher margins on some items cover lower or negligible profits on other items that nevertheless still have a high level of demand and serve to create representation and competition in various segments. Allowing manufactures to take the lead in pricing strategies is the right course to follow predicated on the right mix of transparency in pricing and as always, good communication between the trading partners.
The most effective means I’ve witnessed for changing the average price in a category is when the manufacturers change the game. By this I mean that they reinvent the category and likely introduce entirely new pack and case sizes.
This change disrupts the historic price points and provides the opportunity to increase $/ton.
Communication between business partners is important but the truth is that Grocery retailers in North America leave too much of the decision making to the manufacturers. It is time for the retailers to take a step back and reconsider how successful their promotions are. Continuous high low pricing does not build brand loyalty nor does it instill trust with the customer. Retailers should ask their branded manufacturing partners to raise customer expectations through innovation and (in-store) promotions and leave margin calculations to the retailer.
Michael Greene of Kellogg: “Retailers don’t have to discount as deeply as they think they do. They can price within 4 percent to 5 percent of a competitor and be considered even….”
Maybe Kellogg would consider it “even” but a grocery shopper buying the same items over and over again learns the prices to the penny. Learning is reinforced through repetition. If you buy cranberries once a year, and milk every 3 days, you’ll learn the price of milk very quickly. You might forget the price of cranberries. But the 6 supermarket flyers you get on the same day will all scream the price of cranberries the week before Thanksgiving.
Through repetition, grocery shoppers get to know their stores as well as they know their own kitchens. They learn the prices through repetition and competitive advertising. Any grocer who thinks folks will consider 4 to 5 percent “even” will probably lose market share big time.
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I’m a big fan of price optimization services such a Revionics and others. They provide a ‘macro’ or whole-store approach to pricing which, once in place, can then enable retailers to focus on individual categories by first creating a model to predict results. And after helping retailers make price changes, price optimization services can give them the most accurate picture of the success or lack of success created by the changes. Depending on individual vendors to help guide pricing strategies is problematic, especially in the center store where nearly all of them face competitive brands. How can they be expected to play fairly in such a situation?
EDLP pricing is a viable tactic in the right environment and with the right retailer. Retailers targeting lower income demographics and using this tactic across multiple categories for a high net impact on savings for their customers can leverage EDLP as a theme across the entire store.
However, manufactures lose one of their most valuable tools which is high impact event style promotions. EDLP not only sacrifices retailer profits, but also profits of the manufacturer. While most retailers realize nearly uniform blended profit margins across the entirety of products in any given category, manufacturers–due to tremendous variances in cost of goods manufactured–sometimes realize a huge difference in profit margins on various offerings in any given segment. As such manufacturers have ability to target higher profit margin items for deeper discounts and higher impact promotions for the retailers and their customers.
Due to manufacturing and distribution efficiencies as well as high volume on flagship brands, manufacturers can realize greater profits and therefor more flexibility in promo pricing on these items. In defense of manufacturers, it should be noted that higher margins on some items cover lower or negligible profits on other items that nevertheless still have a high level of demand and serve to create representation and competition in various segments. Allowing manufactures to take the lead in pricing strategies is the right course to follow predicated on the right mix of transparency in pricing and as always, good communication between the trading partners.
The most effective means I’ve witnessed for changing the average price in a category is when the manufacturers change the game. By this I mean that they reinvent the category and likely introduce entirely new pack and case sizes.
This change disrupts the historic price points and provides the opportunity to increase $/ton.
Communication between business partners is important but the truth is that Grocery retailers in North America leave too much of the decision making to the manufacturers. It is time for the retailers to take a step back and reconsider how successful their promotions are. Continuous high low pricing does not build brand loyalty nor does it instill trust with the customer. Retailers should ask their branded manufacturing partners to raise customer expectations through innovation and (in-store) promotions and leave margin calculations to the retailer.
Michael Greene of Kellogg: “Retailers don’t have to discount as deeply as they think they do. They can price within 4 percent to 5 percent of a competitor and be considered even….”
Maybe Kellogg would consider it “even” but a grocery shopper buying the same items over and over again learns the prices to the penny. Learning is reinforced through repetition. If you buy cranberries once a year, and milk every 3 days, you’ll learn the price of milk very quickly. You might forget the price of cranberries. But the 6 supermarket flyers you get on the same day will all scream the price of cranberries the week before Thanksgiving.
Through repetition, grocery shoppers get to know their stores as well as they know their own kitchens. They learn the prices through repetition and competitive advertising. Any grocer who thinks folks will consider 4 to 5 percent “even” will probably lose market share big time.