RESHAPING RETAIL WITH LOW PRICES: Everyday low pricing was the retail theme of 2000, but the reality is that promotions and 'excitement' in stores live on

Everyday low pricing (EDLP), a technique blamed by some for squeezing manufacturers until their pips squeak, was, ironically, invented by Procter & Gamble in the US. The rationale was to smooth out the supply pipeline and do away with the surges and slumps in demand that characterise promotion-driven retailing. It also meant price consistency and transparency for consumers baffled by a barrage of price promotions.

Everyday low pricing (EDLP), a technique blamed by some for squeezing manufacturers until their pips squeak, was, ironically, invented by Procter & Gamble in the US. The rationale was to smooth out the supply pipeline and do away with the surges and slumps in demand that characterise promotion-driven retailing. It also meant price consistency and transparency for consumers baffled by a barrage of price promotions.

In the UK, Asda enthusiastically adopted the concept of permanently low prices some five years ago. Last year's takeover by Wal-Mart, whose might and muscle meant it could cut prices by 20% and still maintain its margins, further fuelled the strategy. Other supermarkets were forced to react, and most launched EDLP strategies in summer 1999.

EDLP stands accused of putting more pressure on manufacturers, reducing investment in stores and brands, reducing consumer choice and driving sales promotion agencies out of business. But EDLP is not as pervasive as was originally thought.

In its pure form, EDLP relegates promotions to a minor role. But even Asda still uses promotions to drive most of its sales. Moreover, EDLP has had only a negligible impact on underlying trends, according to Taylor Nelson Sofres (see box).

Paul Smiddy, retail analyst at Credit Lyonnais, argues that promotions and EDLP are mutually exclusive. Clive Vaughan, director of consultancy at Retail Intelligence, agrees. 'Essentially, EDLP is about fairness, rather than unfair tactical pricing, and about maintaining low prices forever. The grocery trade is still largely promotion-driven and pays lip service to EDLP,' he says.

But EDLP is only a partial solution. Customers are interested in range, convenience, service, availability and quality, as well as price. Permanently low prices might excite some, but the absence of promotions alienates others. Customers like interest, theatre and, permanently low prices notwithstanding, 'bargains'.

According to Adam Donaldson, consulting group manager at ACNielsen: 'What you are seeing now is more of a spectrum, rather than just EDLP or high/low strategies (relatively high prices with deep discounts).' The main players are busily repositioning themselves.

Paul Murphy, analytics director at Taylor Nelson Sofres, says that Asda is the only retailer to have successfully brought the image and the reality together, with its 'Asda Price' and 'Rollback' campaigns. But strong initial growth has not been sustained. 'Asda needs something else now to boost growth,' he says.

Tesco, which went down the EDLP route 18 months ago, has invested pounds 400m in reducing prices on everyday items. But it was quick to reintroduce promotions. Shoppers 'definitely want to see products getting cheaper', says spokesman Russell Craig, but he adds that 'service, quality and innovation are also very important'.

Sainsbury's, too, runs EDLP on some 1000 everyday lines. Its focus is extraordinary quality food at ordinary prices. But, says spokesman Greg Dawson: 'We won't lead on price, as our customers appreciate high quality food, choice and service.' Sainsbury's continues to run tactical price cuts and promotions: 'Customers like them, and they help build incremental sales,' says Dawson.

Safeway alone among the major retailers has rejected EDLP. Instead, it cuts the price of around 50 big volume items by 40% to 60% each week, and carries out local door-drops to flag the offers. 'Asda's philosophy is that having the lowest prices leads to increased loyalty. We challenge that view,' says communications director Kevin Hawkins. 'The British shopper is so used to promotional activity that to wind it down is to shoot yourself in the foot.' He adds: 'If Asda becomes the dominant player in the UK, it can manipulate prices. EDLP is a manipulative philosophy that anaesthetises the consumer.'

Safeway also ditched its loyalty card earlier this year, and reinvested the pounds 60m it saved into promotions. In former times promotions, to launch a product or clear old stock, would run for four weeks. 'That gave competitors time to respond and customers got bored,' says Hawkins. 'Moving quickly and being fast on our feet is all part of the system now.'



Suppliers can benefit, too

This applies to suppliers, too. With sales of deeply discounted items typically rising 300% to 400%, manufacturers need to ensure they don't run out of stock. 'It's been a steep learning curve for all of us,' admits Hawkins. But he adds: 'Suppliers have done very well indeed over the past year. In a broadly stable and mature market product sales are up 30% to 40% or more.'

EDLP has dealt suppliers a double blow, however, forcing them to reduce prices, and then, faced with declining volumes and the need for excitement in-store, having to start promoting again.

One problem is that some brands simply don't benefit from EDLP. ACNielsen's Donaldson says: 'EDLP doesn't work that well for premium brands, as customers buying those products aren't very price sensitive. Premium brands benefit more from high/low strategies. But mid-range items are price sensitive, whereas promotions can often cannibalise the category.'

Donaldson says retailers and manufacturers are being forced to collaborate more closely to ensure they get the right mix of EDLP and promotions to benefit the category. One example is Bestfoods.

Bestfoods strategic business manager David Lowes says: 'Retailers asked us to put the money we had previously spent on promotions into cutting prices. Such corporate strategies have to be understood and managed in specific categories.' But Bestfoods was concerned the strategy would have an adverse effect on its Ambrosia desserts, and turned to ACNielsen for data to back this view.

The product that bore the brunt was the 425g tin of Ambrosia Creamed Rice. Ambrosia had always been strongly promoted, as this has been the most cost-effective way of reminding consumers about the product and encouraging them to buy. A price reduction, and a lack of promotion, resulted in a sales slump.

When ACNielsen examined the price elasticity of the different Ambrosia rice lines it found there would never be a significant benefit from cutting the price of the 425g can, no matter how much. The effect of EDLP on Ambrosia was to reduce the stores' earnings from the brand.

Retailers largely accepted the argument and Bestfoods developed an individual retailer strategy covering both price and promotions for the Ambrosia brand.

'For EDLP to work you have to understand the effect it has on the category,' says Lowes. 'It is a valid strategy, but if it is applied indiscriminately it devalues certain categories and brands. It can also cost the retailer a great deal of money.'

Bestfoods avoided a difficult situation. While it had to invest in research, 'every manufacturer needs to know the dynamics of price and elasticity, so it was money well invested, and a good discipline for us,' says Lowes.

Retailers insist that suppliers benefit from increased volumes. But Kevin Twittey, chairman of Triangle Group, insists EDLP is 'an absolute problem for manufacturers. They are under more pressure than ever before. Look at the relative share prices of retailers and manufacturers to see that.'

Grocery producers are having to be much more inventive, he continues.

'As well as competing on price, you have to maintain your share of voice with the end consumer.'

And Deborah Wallace, director of Haygarth Promotional Marketing, points out that manufacturers are having to switch their focus from trade marketing to brand marketing.

'In the EDLP environment, manufacturers must build the brand away from stores. That means spending more on TV advertising, outdoor event sampling, direct response ads and door drops, for example. EDLP is changing the marketing landscape.'

Sectors offering the greatest potential for pure EDLP are those such as DIY and electricals, which have been characterised by huge price swings that have alienated consumers. Comet implemented EDLP across all its products a year ago. 'The sales we all used to hold were about smoke and mirrors,' says marketing director Paul Geddes. 'Customers didn't trust us because we had the image of spivvy market traders.'

Prices are now transparent: 'There is no haggling, no trading, no rip-offs,' says Geddes. 'The average consumer in our industry goes to 2.7 shops before purchasing. We give them confidence that if they come to us they don't have to do that. We do the legwork to offer the lowest local price.'



Delivering the message

Comet's advertising supports its strategy. Employees deliver the message, demonstrating that Comet doesn't squander its customers' money on expensive advertising.

Comet has funded its price cuts through increased sales. These have risen 15% to 20%, driven primarily by the 1.3 million new customers its strategy has attracted. Comet claims it saved customers pounds 64m in the past year.

EDLP works for suppliers, too, says Geddes. 'We sell more units, and we've driven the size of the market, so people buy more and tend to renew more frequently.' And Comet's trust rating has soared. 'Through that comes loyalty and profitability,' says Geddes. 'There has been a huge change in customer perception.'

Comet deals with the problem of monotony by offering special deals - such as product bundles. 'You do need pricing excitement,' says Geddes.

'But everyone has access to them at the same price.'

Not everyone agrees that EDLP is here to stay, however. The pressure for EDLP is falling, according to ACNielsen's Donaldson. 'The Competition Commission has cleared supermarkets of ripping off customers, and disposable income has grown. The big dip in the early 1990s was the catalyst for low prices - and there are no signs of another dip.'

Retail Intelligence's Vaughan argues that EDLP is 'retailers justifying something to shareholders that they are being forced to do by the market'.

And Mike Godliman, director of sales and marketing at Verdict, predicts that price will be just one of a number of drivers. He says that foreign discounters such as Aldi, Netto and Lidl 'struggle with market share' in the UK, because their offer is one-dimensional. 'Most British customers judge stores on the total retail experience,' he adds.

Indeed, if anything, promotions will become more important. After all, around 30% of the average supermarket shopper's purchases are impulse buys. Peter Dart, chairman of design consultancy Brown KSDP, says: 'We buy things that catch our attention, so promotions are still very powerful. Shopping is so bloody boring, you need something to liven it up.'

Dart thinks 'promotions are set to make a big comeback' - fuelled by the internet, where promotions can be flagged in a far more calculated way than they can in-store.

There is, of course, one store that exemplifies the marriage between image and reality, yet it never gets a mention in the EDLP debate. John Lewis goes to great lengths to honour its commitment to be 'never knowingly undersold' - even reimbursing customers weeks after they have made a purchase if it finds someone selling that product cheaper. And John Lewis, which has made competitive pricing its core value, could teach supermarkets a thing or two about loyalty.



KEY FACTS ABOUT EDLP

- EDLP effectively started when Asda reduced the price of its top 100 brands in August 1999

- The average price reduction has been 10%

- Brands and private-label have both been reduced by similar amounts

- Typically more than 70% of the volume within a category has been reduced in price

- Nine out of the top ten-selling FMCG categories have been affected by EDLP

- On average, 20% of a category's volume is being sold temporarily below the EDLP price in the form of promotions

- Safeway and Boots are notable non-EDLP players. The two stores prefer to promote certain lines more heavily

- Most major category purchasing levels remain unchanged by EDLP

- Brands that have adopted a pure EDLP approach from a high/low price positioning typically show reductions in volume sales

Source: Taylor Nelson Sofres Superpanel EDLP study (May 2000).



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