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Walmart returns to playing offense with price?

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According to RetailWire and reports in The Wall Street Journal, Walmart CEO Doug McMillon said the chain was going back to its roots and "playing offense with price" to help achieve market share gains. The company's increased emphasis on price was recently borne out by a Credit Suisse study, which found the price gap on consumables between Walmart and its competitors grew to 17.9 percent in January, above the one-year average of 16.2 percent. "It's a proven business model that works," Deisha Barnett, a spokesperson for Walmart, told the Journal. "We think the smart investment is to put the dollars into price." But is Walmart right in this regard?

Is pricing really all that important? I’m sure most people in the retail sector are very aware of the progress that’s been made by the hard discounter chains like Aldi and Lidl. The market share of these deep discounters has increased steadily in recent years in their core markets and they continue to expand their store presence in several countries just as some mainstream retailers are reducing their store count. In the UK, Tesco, the market leader for a number of years, has just announced they are closing some stores and putting a brake on new store openings. This is in stark contrast to Aldi who has announced plans to open several hundred new stores in the coming years. In the US, Aldi recently purchased a number of Bottom Dollar stores from Delhaize US and continues to announce more and more store openings. It’s not just Aldi and Lidl that are making progress. The Dollar chains in the US continue to open new stores at an impressive rate and Walmart continues to grow. What is it that is driving this rapid expansion of these low-priced retail chains?

What is the consumer perspective on pricing? All of this focus on low prices is playing out against the backdrop of the Great Recession which has led a number of consumers to experience stagnating or declining incomes. There’s been a lot of discussion within the retail industry and within the media about consumers heightened sensitivity to grocery prices and the permanent shift in consumer expectations. There is some truth to these stories; a subset of shoppers has probably materially changed in this regard, but there are also some shoppers who will have experienced a temporary change and there are yet other shoppers who were not overly impacted and will carry on much as before. One only has to look at the performance of Whole Foods during the Great Recession to find an example of consumers who did not dramatically change their shopping habits in favor of low priced retailers. Given all of this, how important is consumer price perception to grocery retailers?What is the consumer perspective on pricing?

Consumer price perception can be a bit of a vague concept, especially when you ask a retailer how to define it and measure it. Some retailers will perform primary market research where they ask consumers what are their perceptions of a retailer’s prices. The use of the word perception is instructive; it’s challenging to scientifically pin-down price perception. Most studies I’ve seen where consumers are asked to name the prices of their groceries reveal that consumers only remember the actual price points for a very small subset of items. If retailers can isolate the items where consumers remember the prices maybe they could positively impact consumer price perception by aggressively pricing a small number of items? However consumers form their perception of a retailer’s prices, one thing is for sure; having a negative price perception in the market will present significant challenges to attracting and retaining shoppers on a regular basis. And there are plenty of new developments that can influence consumer price perception.

What are all of these new pricing-related capabilities and buzz words?Attention is being grabbed by a number of new pricing-related capabilities for both shoppers and retailers that have spawned a handful of new buzz words that are entering the retailing lexicon. This, in turn, is also adding fuel to the pricing conversation. Attendance at any recent retailing conference is sure to be filled with discussion of price comparison apps, omni-channel pricing, price transparency, dynamic pricing and personalized pricing. Some of these developments are being driven by the internal vision of some leading retailers, some are driven by competitive dynamics and some are driven by the shopper. But what is the staying power of some of these new pricing-related concepts and which will have any kind of meaningful impact?

Are retailers' pricing strategies and tactics delivering or are they too complicated? Another challenge for retailers is that pricing rapidly becomes very tactical and overly complex to manage effectively. A recent RetailWire discussion focused on the approaches that retailers use when setting prices. The key question was “Are retailers’ pricing strategies too complex?” The discussion referenced a number of approaches to pricing and ranked them in order of the most frequently used: Discount, Bundle, Below Competition, MSRP, Odd pricing, Price lining, Dynamic, High-low. I was struck by the combination of tactical, strategic and operational approaches that were being employed and I wondered whether they were actually realizing the retailer’s pricing objectives.

How should retailers think about pricing?

Lets have a conversation about pricing. It was the combination of all of the above factors that prompted me to consider sharing some of my thoughts on the topic of pricing. Over the past fifteen years I’ve worked with dozens of retailers on pricing engagements that covered hundreds of categories, thousands of stores and millions of customers and along the way I’ve had some wonderful conversations with industry leaders that have helped to shape my thinking on pricing. Lets start the conversation by discussing a framework for addressing the topic of pricing.

How retailers should think about pricing in four steps. From what I’ve seen the most successful approaches to pricing have started by defining a pricing strategy that is aligned with the overall brand position of the retailer’s banner and then employs a variety of pricing tactics that enable the successful and consistent execution of the pricing strategy. Generically this has usually involved a four step process:

  1. Define the price strategy
  2. Align prices with the strategy
  3. Manage and maintain prices
  4. Monitor prices and measure performance

One of the biggest challenges is connecting the pricing strategy to the exact set of prices that will faithfully execute the strategy in stores or online – going from step 1 to step 2 in the four step pricing process. On more than one occasion when I’ve shared analysis of the pricing that is executed in stores I’ve had the response from a retailer: “that’s not our pricing strategy!” The reality is that translating pricing strategy into pricing execution is not easy but the strategy has to be right to start with so lets begin there.

Three over-arching approaches to pricing strategy. In talking with various retailers they’ve all given different and varied responses to the question: what is your pricing strategy? Some of the responses have been more about pricing tactics; some have been operational in nature and yet others have been financially motivated. But in general it can be boiled down to the following three broad approaches to pricing strategy:

  • Cost-driven Pricing: Using costs plus a markup to set and manage prices
  • Market-driven Pricing: Using competitor prices to set and manage prices
  • Customer-driven Pricing: Using an understanding of customer needs to set and manage prices

There is sometimes a fourth approach, variously called intuition or gut-feel, which predominantly relies on some omniscient individual discerning what the “right” price should be by some impenetrable methodology that has always escaped me. For the purposes of this discussion we will focus on the three approaches outlined above that are grounded in earthly realities that I could comprehend.

If you look across the retail landscape you see a number of retailers employing each of the above approaches. Some retailers predominantly favor one or another and yet others combine elements of all three in some way. The pricing approach a retailer takes is often driven by their history with their over-riding pricing philosophy laid down many years ago at the early stages of their incarnation and growth. But over time retailers have evolved their approaches and oftentimes they combine various different approaches, some of which don’t always look very cohesive as a result of the evolutionary nature of the process. There are also situations where a CFO has asked a Chief Merchant to help address a sagging top or bottom line by increasing or decreasing prices; as a result a well-meaning pricing strategy is sometimes subverted to the short-term, “greater good” of achieving a financial target so everyone will receive their bonus.

What we’ll cover in this article series…

In this series of articles we’ll discuss each of these strategic approaches to pricing in some more detail and we’ll discuss some of the challenges of translating pricing strategy into the prices that are executed in stores/online. We’ll also discuss some of the pricing trends that are in evidence in the market and we’ll wrap-up the series by talking about what the future holds for pricing in retail.

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