Analysis: the fixed low price's beckoning call

Analysis: the fixed low price's beckoning call

A high-low model or fixed low prices, the choice is a well-known retail conundrum. Several European supermarket chains seem to want to get rid of the very large discounts, but is that actually a realistic ambition to have?

Shopping habits change

British supermarket chain Sainsbury announced last week that it would dial down on all of its volume discounts (the so-called "multi-buy" promotions, 1+1 or 2+1) and eventually get phase them out slowly. The chain already halved this type of promotion since March 2015 and the consumer has reacted positively.


An Everyday Low Pricing model (EDLP) is the future, according to Sainsbury. The chain feels shopping habits have changed: "People shop more frequently, often seeking to buy what they need at that moment", food commercial director Paul Mills-Hicks told The Guardian.


“With fixed low prices, we make it easier for the customer to buy items they need, in the quantities they need, without the need to buy multiple items to get a discount. We see a larger variety in our customers' shopping baskets, which shows they appreciate the flexibility to make their own choices."

 

Jumbo is also altering its course

Sainsbury is alone in thinking this. Dutch Jumbo is also keen on a return to EDLP. Even back when it launched, it believed in the power of permanently low prices, but it seemed almost impossible to maintain once it acquired the high-low player C1000. That is why Jumbo also went ahead with promotions back then and will now backpedal. 


Late last year, the retailer introduced the "monthly offers", promotions that guarantee a low price for an entire month, changing the idea to "yearly offers". One could consider this to be a fixed low price, but more attractively offered to the customer as it still contains the word "offer". 

 

Difficult strategy

Knowing promotional pressure is 22 % in our country and that 70 % of all promotions do not make a profit, as Nielsen calculated last year, it is not surprising to see companies like Sainsbury's and Jumbo go for alternative routes.


The EDLP approach definitely has its benefits for retailers, because inventory and supply costs are more manageable and stock can more easily be maintained as there are any huge sales variations anymore. 


However, is EDLP a sustainable supermarket strategy? Can you convince shoppers that have become so used to (or addicted t) weekly magazine discounts, that their shopping trip will actually become cheaper without promotions? It is a matter of reason versus emotion and we all know that shoppers are human and therefore not very rational.


Besides, a retailer needs the occasional newsworthy item to remain top of mind with the customer. Fixed low prices are not such a news item, which is why EDLP is such a difficult strategy to maintain for supermarkets. Your competitors have all the ammunition they need to blow holes right through your EDLP strategy, it is a matter of perception versus numbers. This will lead to a surge in promotions, dragging everyone along. The 1+1 promotion only became popular in Belgium once Albert Heijn joined the fray, did it not? 

 

Does EDLP even exist? 

Another reason to doubt EDLP is that it is quite costly to switch from a high-low model to fixed low prices, about six times more expensive than the other way around according to a Stanford Business study from 5 years ago. That is also why many retailers choose to keep their promotion-based strategy.


One could question whether there are actual EDLP players in the food retail market. Is Walmart an example? Well, not really, because the chain does actually use huge promotions, called "Rollbacks" and "Daily Savings". What about Colruyt? It is all relative: the retailer does guarantee the lowest prices, but lures customers in with its Rode Prijzen (Red Prices) and Extra discounts. Besides that, Colruyt reacts to every one of its competitors' promotions. Even Aldi and Lidl need weekly promotions to keep traffic coming to their stores.

 

Less is more

Retailers need an excellent price image in the hyper competitive food market and a consistent low price policy can contribute to that image. That is why it makes sense what Sainsbury and Jumbo are willing to do, especially as the demographical evolutions (smaller families, more single people) are not exactly in favour of volume-based promotions.


It does seem that no supermarket chain can go without promotions and while it is a good idea to eliminate expensive and ineffective promotions as much as possible, you cannot throw away the promotion tool. Use them more creatively and intelligently, instead of merely giving away products. Fewer, but better promotions can help you stand out in a packed crowd of promotions. Less is more may also be the way to go with promotions.