December 20, 2012
Study: EDLP to Become More Prevalent
Through a special arrangement, presented here for discussion is a summary of part of a current article from the monthly e-zine, CPGmatters.
The days of traditional high/low retailers may soon be gone with nearly 75 percent of retailers expected to be either EDLP or some form of hybrid EDLP/high-low format within three years, according to a study around trade promotions by AMG Strategic Advisors.
The study solicited direct feedback from shoppers and gathered feedback from the Acosta sales teams executing trade promotions with retailers across the country every day on behalf of clients.
As retailers shift strategies to a more EDLP focus, trade spend is often allocated to buy price down every day or on long-term temporary price reduction (TPR).
AMG evaluated a number of eight-week TPR promotions and found the first week for a TPR returns the highest lift on average. Each additional week of promotion shows a lower lift than the previous week and the eighth week shows a 31 percent lower lift than the first week.
But EDLP and long-term price reduction promotions are effective with many retailers, specifically in categories where it is necessary to manage to key price points or where specific price gaps must be maintained relative to other competitive brands. For example, one CPG manufacturer recently experienced significant and unexpected volume and share losses due to shoppers switching to a new market entry and/or switching to private label. Unable to effectively combat this shopper switching behavior, the company offered to selected retailers an EDLP allowance that was then used to lower the everyday retail price. Closing the price gap with private label worked, and the company subsequently experienced an increase of 30 percent in base volume for the brand.
As retailers begin to do more competitive price matching, like the Walmart "Ad match guarantee" or the Safeway "Just for U" program, everyday retail pricing can be equally or more important than the trade promotion strategy.
On the manufacturing side, Trade Promotion Optimization solutions are being implemented to generate better ROI but they may not drive the same lift as less profitable promotions. Many promotions generate lower lift levels, but return a better ROI for manufacturers or meet other promotional objectives like gaining trial from new users or driving repeat purchases from loyal shoppers.
To maximize return, two thirds of CPG manufacturers are segmenting retailers and executing trade promotion strategies based on the programs retailers offer. Forty-two percent of manufacturers plan to spend more on long-term TPRs to buy price down.
BrainTrust
Recent Discussions
Discussion Questions
What do you think are the advantages and disadvantages of an EDLP strategy for CPG categories? Does it simplify or even further complicate trade promotion efforts? Is a high/low or EDLP strategy better for CPG vendors?
Poll
If everybody is EDLP, is anybody EDLP? It doesn’t simplify, but doesn’t necessarily complicate life either—it could be neutral with respect to trade promotion efforts to support it.
If everybody goes EDLP, high/low chains need to have something special to justify the high prices (like Publix service?)
I hate to get into dueling statistics, but RSR has absolutely no data to support this claim (that retailers are moving more into EDLP) and we’ve been tracking pricing strategies for 5+ years.
In fact, our data supports just the opposite—the number of price changes sent to stores continues to increase, retailers report they are either moving to more promotional or more high/low strategies than EDLP.
I just don’t see it in our data, nor do I see it in the ads I see. Maybe purely in grocery this is true, or in C-Stores, but not at all in any kind of general retail. In fact, I might go as far as to say EDLP is moribund.
The private label “problem” is a real one for CPG manufacturers, and if Walmart ever figures out how to get it right, it’ll be an even bigger problem for them. EDLP is the least of their problems.
I know there is comfort in standing side by side generalizations…such as belief regarding EDLP strategies in general. But it’s about how particular retailers practice and package their EDLP and the image they deliver to their shoppers.
Messages that don’t break through and get shopper’s attention won’t create the differentiation of EDLP or influence store visits and purchases. It goes back to delivering what shoppers want in terms of reality AND perception. If you understand that and can package your offerings…products and price…to meet that want you’ll have them at “hello.”
EDLP is frequently no more than what a retailer’s thoughts make it. Perhaps Walmart could dispute that. If every retailer were to opt for EDLP, which would be like embracing a commodity mentality, they would disarm themselves of offering charm, service and consumer-appreciated uniqueness.
I agree with Dr. Needel that expansive use ELPD removes or certainly lessens a point of differentiation (price) from the retailer’s tool set. The example used indicates why it worked well for a CPG company to slow or remove the sales erosion to PL, but what happened to the retailer. Did they gain or lose margin? I would also think that it would make the weekly sales circular a lot less of a factor in influencing customers.
To EDLP or not to EDLP, that is the question. Fact is the majority of items in a supermarket are actually on EDLP as they are never promoted. The market place determines if an item or category should be promoted. If by promoting the item it does not get a significant sales increase or return higher total gross margin dollars, why promote?
If the format does not control the major share of category sales, it is unlikely to achieve promotional effectiveness. Clubs and supercenters have taken the major share away from supermarkets in some categories. The supermarket really has no choice but to follow the market leaders with EDLP.
Is EDLP a competitive strategy? Or is it simply retailer capitulation on price transparency?
Real prices (a good substitute statistic being Average Retail Price if you follow syndicated data) for food and most consumables have been steadily marching higher for decades—with a brief interruption during the Great Recession. Consumers know this. And they know that the “real price” is now the the “deal price.”
That’s right, the real price is the deal price. So consumers don’t buy the 200 or so basic items they use until they go on sale. EDLP pricing is simply an overt admission by retailers that the game of peekaboo is over. And that is a good thing.
If stores in this day and age haven’t figured out by now that discounting works, than they are living on Mars or Rodeo Drive. You can not gouge the customer, and must have in place a pricing strategy across all goods in your business. There is way too much competition to try to sell key items at regular price.
Amazon keeps an eye on all of this pricing stuff, and with phone apps, you better be right on pricing, or become another memory in your town. The truth sucks sometimes, but price was, is, and always will be the King in retail.
There are advantages to both retailers and manufacturers for EDLP strategies, particularly on the manufacturing and inventory management fronts. Items not susceptible to expandable consumption such as toothpaste and laundry soap will benefit from a smoother level of sales.
On the other hand, many consumables are at a disadvantage as retailers and consumers spend less on promotion and items that may be consumed faster or more often based on hi-lo promotions. The CPG manufacturers have the data to determine whether EDLP or hi-lo promotions benefit their items or categories the most and the best ones can find ways to encourage more purchases even in an EDLP environment, through targeted consumer marketing and creative merchandising.
I agree with Paula Rosenblum. Well said.
Seeing EDLP as a “promotional” issue misses a huge point: EFFICIENCY drove the second wave of retailing over the past 100 years, and will be at the base of the third wave, now lapping at our toes.
The second wave began 100 years ago with A&P and other self-service retailers in the van. They slaughtered the semi-functional retailing of the day with forced improvements from store operations, all the way back up the supply chain. EDLP became the dominant single principle that drove Walmart to become the world’s largest business, just as A&P became the world’s first billion dollar business.
So we’re having a discussion of EDLP as a “promotional” issue??? The gross INEFFICIENCY of Hi-Lo pricing continues—and will continue in some fashion—because shoppers love the casino nature of shopping, even though, as in Vegas, they are guaranteed to lose in the long run. See: “No, the Customer is NOT Always Right!“
However, continuing to accommodate shoppers—and the retailer’s own promotional fee business structure—virtually “forced” the industry to take a back seat to Walmart. Fine, somebody has to be first. May as well be Walmart, although there are a lot of very fine retailers finally playing serious catch-up ball. A little late to be any threat to Walmart’s global hegemony.
But the third wave of retailing will accelerate the winners with consistent double digit increases in sales. Efficiency gains from operations, distribution and the supply chain are slowing, but there are MASSIVE opportunities in the efficiency of the shoppers themselves, the shopping PROCESS on the “sales” floor—as contrasted with the past 100 years of the store as a “warehouse” floor. See: “Efficiency & Convenience: An Introduction to ‘The Third Wave’ of Retailing.“
I ALSO agree with Paula Rosenblum!
Most studies show that the EDLP model has a lower overall cost for the retailer, while promotional based pricing models are more expensive but drive additional sales.
The challenge is that it’s very costly to switch from one model to the other.
That being said, I believe we are seeing a fundamental shift in the market that will change promotional pricing forever. Most promotional pricing strategies are based on being able to make offers to some shoppers without other shoppers knowing about it (i.e. price officiation).
Social Networks and Mobile are giving shoppers better pricing transparency than ever before. We’re seeing lots of retailers get burned by this. A UK paper wrote about “Professional shoppers” milking price match promotion to get as much as $14,000 a month in rebates. Or blogs teaching Target shoppers how to buy from inexpensive stores and then return at higher priced ones.
In the near future, retailers are going to have to live with the reality that there are no secrets, and formulate their pricing strategies with the customer sitting over their shoulder. That is going to result in a lot more shifts to EDLP and/or personalized pricing promotions such as Safeway’s Just for U program.
Buckle up, because it will probably be a bumpy ride.
Each category is different so I hesitate to make broad generalizations. However, my experience is that EDLP is rarely effective in growing sales in the mass market. Customers want deals and they don’t trust EDLP.
EDLP may work for Walmart. Not so much for JCP. Probably not so good for most retailers either.
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If everybody is EDLP, is anybody EDLP? It doesn’t simplify, but doesn’t necessarily complicate life either—it could be neutral with respect to trade promotion efforts to support it.
If everybody goes EDLP, high/low chains need to have something special to justify the high prices (like Publix service?)
I hate to get into dueling statistics, but RSR has absolutely no data to support this claim (that retailers are moving more into EDLP) and we’ve been tracking pricing strategies for 5+ years.
In fact, our data supports just the opposite—the number of price changes sent to stores continues to increase, retailers report they are either moving to more promotional or more high/low strategies than EDLP.
I just don’t see it in our data, nor do I see it in the ads I see. Maybe purely in grocery this is true, or in C-Stores, but not at all in any kind of general retail. In fact, I might go as far as to say EDLP is moribund.
The private label “problem” is a real one for CPG manufacturers, and if Walmart ever figures out how to get it right, it’ll be an even bigger problem for them. EDLP is the least of their problems.
I know there is comfort in standing side by side generalizations…such as belief regarding EDLP strategies in general. But it’s about how particular retailers practice and package their EDLP and the image they deliver to their shoppers.
Messages that don’t break through and get shopper’s attention won’t create the differentiation of EDLP or influence store visits and purchases. It goes back to delivering what shoppers want in terms of reality AND perception. If you understand that and can package your offerings…products and price…to meet that want you’ll have them at “hello.”
EDLP is frequently no more than what a retailer’s thoughts make it. Perhaps Walmart could dispute that. If every retailer were to opt for EDLP, which would be like embracing a commodity mentality, they would disarm themselves of offering charm, service and consumer-appreciated uniqueness.
I agree with Dr. Needel that expansive use ELPD removes or certainly lessens a point of differentiation (price) from the retailer’s tool set. The example used indicates why it worked well for a CPG company to slow or remove the sales erosion to PL, but what happened to the retailer. Did they gain or lose margin? I would also think that it would make the weekly sales circular a lot less of a factor in influencing customers.
To EDLP or not to EDLP, that is the question. Fact is the majority of items in a supermarket are actually on EDLP as they are never promoted. The market place determines if an item or category should be promoted. If by promoting the item it does not get a significant sales increase or return higher total gross margin dollars, why promote?
If the format does not control the major share of category sales, it is unlikely to achieve promotional effectiveness. Clubs and supercenters have taken the major share away from supermarkets in some categories. The supermarket really has no choice but to follow the market leaders with EDLP.
Is EDLP a competitive strategy? Or is it simply retailer capitulation on price transparency?
Real prices (a good substitute statistic being Average Retail Price if you follow syndicated data) for food and most consumables have been steadily marching higher for decades—with a brief interruption during the Great Recession. Consumers know this. And they know that the “real price” is now the the “deal price.”
That’s right, the real price is the deal price. So consumers don’t buy the 200 or so basic items they use until they go on sale. EDLP pricing is simply an overt admission by retailers that the game of peekaboo is over. And that is a good thing.
If stores in this day and age haven’t figured out by now that discounting works, than they are living on Mars or Rodeo Drive. You can not gouge the customer, and must have in place a pricing strategy across all goods in your business. There is way too much competition to try to sell key items at regular price.
Amazon keeps an eye on all of this pricing stuff, and with phone apps, you better be right on pricing, or become another memory in your town. The truth sucks sometimes, but price was, is, and always will be the King in retail.
There are advantages to both retailers and manufacturers for EDLP strategies, particularly on the manufacturing and inventory management fronts. Items not susceptible to expandable consumption such as toothpaste and laundry soap will benefit from a smoother level of sales.
On the other hand, many consumables are at a disadvantage as retailers and consumers spend less on promotion and items that may be consumed faster or more often based on hi-lo promotions. The CPG manufacturers have the data to determine whether EDLP or hi-lo promotions benefit their items or categories the most and the best ones can find ways to encourage more purchases even in an EDLP environment, through targeted consumer marketing and creative merchandising.
I agree with Paula Rosenblum. Well said.
Seeing EDLP as a “promotional” issue misses a huge point: EFFICIENCY drove the second wave of retailing over the past 100 years, and will be at the base of the third wave, now lapping at our toes.
The second wave began 100 years ago with A&P and other self-service retailers in the van. They slaughtered the semi-functional retailing of the day with forced improvements from store operations, all the way back up the supply chain. EDLP became the dominant single principle that drove Walmart to become the world’s largest business, just as A&P became the world’s first billion dollar business.
So we’re having a discussion of EDLP as a “promotional” issue??? The gross INEFFICIENCY of Hi-Lo pricing continues—and will continue in some fashion—because shoppers love the casino nature of shopping, even though, as in Vegas, they are guaranteed to lose in the long run. See: “No, the Customer is NOT Always Right!“
However, continuing to accommodate shoppers—and the retailer’s own promotional fee business structure—virtually “forced” the industry to take a back seat to Walmart. Fine, somebody has to be first. May as well be Walmart, although there are a lot of very fine retailers finally playing serious catch-up ball. A little late to be any threat to Walmart’s global hegemony.
But the third wave of retailing will accelerate the winners with consistent double digit increases in sales. Efficiency gains from operations, distribution and the supply chain are slowing, but there are MASSIVE opportunities in the efficiency of the shoppers themselves, the shopping PROCESS on the “sales” floor—as contrasted with the past 100 years of the store as a “warehouse” floor. See: “Efficiency & Convenience: An Introduction to ‘The Third Wave’ of Retailing.“
I ALSO agree with Paula Rosenblum!
Most studies show that the EDLP model has a lower overall cost for the retailer, while promotional based pricing models are more expensive but drive additional sales.
The challenge is that it’s very costly to switch from one model to the other.
That being said, I believe we are seeing a fundamental shift in the market that will change promotional pricing forever. Most promotional pricing strategies are based on being able to make offers to some shoppers without other shoppers knowing about it (i.e. price officiation).
Social Networks and Mobile are giving shoppers better pricing transparency than ever before. We’re seeing lots of retailers get burned by this. A UK paper wrote about “Professional shoppers” milking price match promotion to get as much as $14,000 a month in rebates. Or blogs teaching Target shoppers how to buy from inexpensive stores and then return at higher priced ones.
In the near future, retailers are going to have to live with the reality that there are no secrets, and formulate their pricing strategies with the customer sitting over their shoulder. That is going to result in a lot more shifts to EDLP and/or personalized pricing promotions such as Safeway’s Just for U program.
Buckle up, because it will probably be a bumpy ride.
Each category is different so I hesitate to make broad generalizations. However, my experience is that EDLP is rarely effective in growing sales in the mass market. Customers want deals and they don’t trust EDLP.
EDLP may work for Walmart. Not so much for JCP. Probably not so good for most retailers either.