Kroger records 45 quarters of sales growth but are they EDLP or Hi-Lo?
- April 29, 2015
- Type: Blog
- Featured in: LinkedIn
Kroger just posted a record 45th straight quarter of positive sales numbers – what an incredible performance! I remember a colleague relating a conversation with the senior executives from Kroger back in the early 2000’s; one of the executives asked “how do I compete successfully when my largest competitor (Walmart) doesn’t need to make any profit dollars on groceries?”. A look at a great infographic on SupermarketNews provides an insight into how Kroger has been so successful. One part of the infographic particularly caught my attention: Kroger invests $3.5B annually in lower prices. This made me wonder if Kroger is an EDLP retailer or a Hi-Lo retailer and if the traditional pricing strategies of EDLP and Hi-Lo are even still relevant?
In the first article in this series of pricing articles we discussed why pricing is a hot topic these days and provided a framework for thinking about pricing. We also discussed three over-arching approaches to pricing: cost-driven pricing, market-driven pricing and customer-driven pricing. In the second article we discussed cost-driven pricing in some detail, in the third article we discussed market-driven pricing and in the fourth article we discussed customer-driven pricing. In this fifth article we’ll discuss the traditional pricing approaches of EDLP and Hi-Lo and whether or not they’re still relevant.
Why do EDLP and Hi-Lo even exist? EDLP and Hi-Lo are primarily thought of as pricing strategies but they’re much more than that. They’re philosophical differences that are leveraged extensively with the same objectives: to drive shoppers into stores. But how did they evolve? I often find it instructive to look back at history to understand how we arrived at today’s situation.
Decades ago manufacturers realized that if retailers ran in-store (or trade) promotions with their brands (usually involving Temporary Price Reductions (TPRs), Ads and Displays) then they would experience significant increases in sales volumes. As most manufacturer sales representatives were historically rewarded based on the number of cases they shipped, promotions became a great mechanism to earn their individual bonuses.
Retailers also knew that promotions were a great mechanism to encourage shoppers to come into their stores. This became an even more attractive approach when manufacturers were willing to provide trade funds to finance the TPRs. Retailers then became “addicted” to promotions as a way to achieve their financial targets and, as a result, the practice of Hi-Lo (Higher everyday prices and Lower promotional prices) took off.
EDLP was, in some respects, a backlash against Hi-Lo. Walmart is the most prominent example of an EDLP retailer. With Walmart’s lower cost structure and their brand position in the marketplace, pursuing an EDLP approach made sense: it provided a very clear marketing message to shoppers and it kept their internal operational processes simple. But Walmart wasn’t going to give up all those trade dollars so instead they took their share and drove them all into the cost to enable them to have the lowest everyday price. So are EDLP and Hi-Lo simply a shell game with trade dollars?
EDLP and promotions as marketing vehicles.While EDLP and Hi-Lo are executed via price and promotion decisions made by merchants they are also very powerful marketing vehicles. Almost every Walmart TV ad highlights their EDLP approach (although they also feature their famous rollbacks, which are TPRs in all but name) while more traditional Hi-Lo retailers often feature their special deals on their TV ads. The question is: are the marketing messages connected to the reality of the pricing execution?
EDLP and Hi-Lo as price strategies. Another way to view EDLP and Hi-Lo are simply as guiding lights that provide category teams with the direction they need to determine the right promotional intensity. At the EDLP extreme of the spectrum all trade funds are put into lowering the everyday price and there is no promotional activity at all. At the Hi-Lo extreme of the spectrum the category team invests all trade funds into promotional activity and determines the extent to which they will be deep-and-infrequent versus shallow-and-frequent in their promotional approach.
Over time a number of retailers have found that their approach has evolved away from being purists at either end of the spectrum. The Hi-Lo retailers were finding that their everyday “Hi” price was too high relative to EDLP competitors and the EDLP retailers were finding they couldn’t compete against the “Lo” prices of their Hi-Lo competitors. The result has been that a number of retailers now offer price match guarantees, which makes me wonder how retailers differentiate in this sort of environment?
Are all categories and items created equally? Retailers have found that consumers shop different categories in different ways with some categories being bought mainly on an EDLP basis while others are bought mainly on a Hi-Lo basis. This gave rise to category roles which would alter the pricing and promotion strategy by category. But even within categories different brands and items play different roles.
On a very frequent basis whenever I’ve reviewed analyses on items within a category it is very common to find that the price and promotion elasticities vary dramatically by item across the category, and this happens within each single store. In addition, when I’ve reviewed the price and promotion elasticities for a single item across multiple stores it turns out that the price and promotion elasticities can also vary quite significantly. This illustrates that shoppers don't buy every item in the category based upon the same purchase decision criteria nor do customers in different stores have the same criteria for each item.
What do shoppers want? An EDLP marketing message is certainly a very simple value proposition to communicate and has a certain appeal to shoppers. At the same time a number of shoppers love the idea of getting a bargain and find special deals highly attractive. Over the past few years we’ve witnessed shoppers distributing their spend across a few different retailers; shoppers will go to the EDLP retailer for some of their center store purchases (laundry detergent, paper products, etc.) while they will go to the higher-end retailer for some of their fresh purchases (meat, fruit, vegetables, etc.). So what are retailers to do in situations such as this?
Have we really invented a new term: Lo-Lo? I recently heard a retailer lamenting this distribution of shopper spend and refer to it as "Lo-Lo": shoppers go to the Hi-Lo retailer to obtain low promotional prices on the items that happen to be on promotion during a given week and then they visit an EDLP retailer to obtain low everyday prices on everything else they require as part of their weekly shopping. As a result, some retailers have adopted hybrid approaches that have attempted to combine the best of EDLP with the best of Hi-Lo in an attempt to satisfy customer needs and encourage them to consolidate their spend.
Is Lo-Lo even possible? Retailers who are looking to compete for shoppers in this way and pursue a Lo-Lo approach are now confronted with a major challenge: how do they deliver low everyday prices and low promotion prices while still operating in a financially sustainable manner? After all, there isn't an infinite amount of trade funds to go around.
The answer is to take a more nuanced and multi-pronged approach. Retailers need to determine which items are essential to delivering on an EDLP value proposition and ensure they’re investing in low everyday prices where shoppers are buying mainly on the basis of price. In addition they need to ensure their marketing messages are fully aligned around these items or else shoppers may not give them full credit for these lower prices. I’ve seen consumer research for major EDLP retailers where consumers have given them more credit than they deserve for lower prices based mainly on the retailer’s overall value proposition and marketing campaigns.
What’s the right promotional approach? Retailers also need to determine which items are purchased mainly on the basis of promotional activity. In these instances it is essential that retailers determine the appropriate promotional intensity for these items. I frequently see retailers discounting at promotional prices that are lower than is required. When analyzing BOGOs (which equate to a 50% discount) it is not unusual for there to be no difference in the volume sold at a 35% or 40% discount than there is at the BOGO level. In effect retailers are giving away sales and profit dollars after the discount depth goes beyond 35% or 40%. This is a waste of trade funds, which could be redeployed to running more frequent promotions at shallower discounts.
By investing in lower every day prices where they matter most to shoppers, getting credit in the market for these lower prices by aligning marketing communications behind these EDLP items and by focusing promotional activity on the right items while simultaneously right-sizing promotional intensity a retailer can satisfy shoppers with an approach that looks and feels like Lo-Lo and also achieve their financial targets.
Is there a one-size-fits-all approach? Whether EDLP, Hi-Lo or some hybrid approach is right for a specific retailer depends largely on the types of customers that shop with that retailer. For some retailers customers self-select into more of an EDLP approach and that is the right pricing strategy for that retailer and their customers. For other retailers their customers are making their purchase decisions only partly on the basis of price or value and the remainder of the items they buy are bought based upon other purchase decision criteria.
Ultimately the right pricing strategy for each individual retailer will depend on understanding the needs of shoppers and taking the appropriate pricing approach that will satisfy the needs of their customers better than the competition. I think this is the lesson that can be drawn from Kroger’s success over the past decade or so – they’ve determined in which items to invest in lower everyday prices, they get credit for it from shoppers and they provide attractive promotions as well.