Follow-Ups

The Trend to Smaller Stores
Last week we noted Meijer’s new down-sized store format, and here’s an article about Wal-Mart and Target doing much the same thing.

Target and Wal-Mart have both told analysts they are creating smaller stores that could fit in the heart of densely packed cities where they have no presence. But analysts warn that creating a small store doesn't just mean shrinking a big one. Big box retailers need to whittle their merchandise to suit shoppers who live in smaller spaces, use public transportation and prefer eating at coffee tables to large dining sets. They also need to figure out how to make money if they cannot stock as many high-profit margin goods, like clothes, to offset brisk sales of low-margin items, like pasta sauce. "When you have a big box mentality, your orientation is toward lots of SKUs (items) across lots of categories," said Leon Nicholas, director of retail insight at Kantar Retail. "When you try to move into a small box the question then becomes do you cut SKUs or do you cut categories so far ... that you lose that one-stop-shop kind of mission?" Or, he said: "Can you be Wal-Mart in a small box?"

Online: Pricing, Conversion
There has been discussion and commentary concerning online retailers who hide their prices, apparently in response to manufacturers who don’t want to facilitate comparison shopping that would lead to eroded margins. As a consumer, I hate it when I can’t find the price – online or in-store – but as a marketer I understand the suppliers’ sensitivity.

The missing prices are part of a larger battle sweeping the world of e-commerce. Wary of the Internet’s tendency to relentlessly drive down prices, major brands and manufacturers — and now, book publishers — are striking back, deploying a variety of tactics and tools to control how their products are presented and priced online. “You are seeing firms of all types test the waters” with strategies to control online pricing, said Christopher Sprigman, associate professor of intellectual property at the University of Virginia School of Law and a former antitrust lawyer at the Justice Department. “They feel they have more freedom to do it now.” In many cases that freedom stems from a 2007 Supreme Court ruling in the case of Leegin Creative Leather Products v. PSKS. The ruling gave manufacturers considerably more leeway to dictate retail prices, once considered a violation of antitrust law, and it set a high legal hurdle for retailers to prove that this is bad for consumers. Ever since that decision, retailers say manufacturers have become increasingly aggressive with one tool in particular: forbidding retailers from advertising their products for anything less than a certain price.

I’ve mentioned before that I wonder how much longer the Leegin decision will stand before Congress overturns it.

In Australia, the two giant retailers who almost totally dominate that country are taking the opposite tack – putting more pricing online as proof of their price-cutting:

Woolworths' move to put the price of 5000 products online has been cautiously welcomed by consumer advocates, and has its major rival looking at following suit. The grocery giant yesterday took what it called "the first step in the journey" by posting the information online, but admitted it had some way to go. Its move follows criticism … of recent claims by both Woolworths and Coles that they were lowering prices, without providing hard evidence. […] Woolworths earlier said it was permanently reducing prices of 3500 products - but provided just 16 examples - while Coles said it was committed to uniform statewide pricing.

And our interesting factoid of the week: Here’s a chart of the top ten online retailers by conversion rate. Interesting that most (except Amazon) are relatively smaller niche sites – but that may explain why they convert relatively higher percentages of shoppers.

Private Label
There’s always more news in the private label arena. Wal-Mart is experimenting with private label spices, a move that must have folks at McCormick tossing and turning all night:

McCormick generates 11% of its revenue from sales to Wal-Mart, mainly by selling brand-name spices. But Wal-Mart has considered switching to private-label spices, testing the idea by replacing McCormick products with generics in some stores. True, McCormick's sales at Wal-Mart may not be wiped out altogether if such a switch gathered pace. The company also produces private-label spices that could replace some of its brand-name products on Wal-Mart's shelves. Even so, McCormick's margins could take a big hit. The company's generic spices sell for 30% to 40% less than its regular products.

Family Dollar is also looking to increase its private label share:

Kenneth Smith, Family Dollar's chief financial officer, said the company sees an opportunity to increase consumable private-label sales from current levels of 10% of sales to 15% to 20%. Storewide, Smith said Family Dollar plans to increase private brand penetration from its current 19% level to 25% penetration.

The Sports Desk: Super Bowl Advertising
As we mentioned last week, the Super Bowl came in second last year in viewers to the European soccer championship. We’ll see how it does this year against the Olympics and the World Cup, but it broke all previous records – not only for viewers, but for number of ads run, and a Doritos ad is said to be the most-watched ad ever:

A fourth-quarter Doritos commercial featuring two men attacked in a gym for stealing someone else's Doritos, was seen by an estimated 116.2 million viewers during the Super Bowl, making it the most watched television commercial of all time, according to Nielsen.

In other Super Bowl news, I understand Drew Brees had a good game, too.

Upcoming Webinar Reminder
I’ll be moderating a webinar for DemandTec next Wednesday, Finding True North in Trade Analytics Adoption, and on March 10, we’ll be hosting a webinar by MEI, What Does ‘Trade Promotion Optimization’ Really Mean? Click on the links to get more information and to register.

Follow-Ups

Music and Book Pricing

Most people who buy digital music think it’s overpriced, and it appears some judges agree. So does a recent study by the Wharton School of Business, although their perspective is that the labels would be wise to lower prices because it would increase profits:

The music labels "seem to be charging much higher [fees] than they should," Iyengar says. "If I compare what their profits are when a record company charges a retailer 60 cents a song, I find that [the current] overall profits for the entire channel, which is the label and the retailer, are almost 50% lower than what they could optimally be when the record label charges lower wholesale prices."

This has an impact on the iPad/Kindle discussion above, since book publishers seem intent on following the same path as the recording companies.

In negotiations with Apple, publishers agreed to a business model that gives them more power over the price that customers pay for e-books. Publishers had all but lost that power on Amazon.com’s Kindle e-reader. With Apple, under a formula that tethers the maximum e-book price to the print price on the same book, publishers will be able to charge $12.99 to $14.99 for most general fiction and nonfiction titles — higher than the common $9.99 price that Amazon had effectively set for new releases and best sellers.

We wish them well, but copying the music business, considering how things are going for them, does not seem like a really great idea.

Private Label
Procter & Gamble and Colgate-Palmolive both reported better than expected results, leading to optimism about the resurgence of brands after the tidal wave of private label growth during the recession.

P&G’s sales were up 6.4%, though profits declined slightly, because the increased sales came with heavy marketing costs. Colgate did even better, with sales up 11% and a good profit increase.

"This idea that this economy is causing everyone to trade down is a little bit overly general and too broadly applied," P&G Chairman and Chief Executive Bob McDonald said during a conference call.

But, on the other hand, there’s this: “Unit sales of private label goods have jumped 8 percent since 2007, while brand names have declined roughly 4 percent, according to Nielsen Co.”

Poll Results: Optimization Tools

In last week’s TPMA Outlook, we discussed how the continuation of tight inventory policies among retailers points up the need for collaboration by suppliers on pricing and promotion optimization, and asked: “Does your company have the tools you need to collaborate with your retailers on pricing and promotion optimization?” The results were a surprise:

• 16% Yes - we have a good toolset
• 47% We have some of the tools needed, but not all
• 37% We lack the proper tools

I guess I sometimes get so close to an issue that I think we’re a lot farther along than we are, but that only 16% say they have all the tools and 37% say they don’t is a bit shocking.

Retailers Still Keeping Inventories Tight

2009 was the Year of Tight Inventory, but suppliers who have been hoping retailers were planning to re-load the shelves in 2010 are likely to be disappointed.

Retailers want to get out of the deep discounting trap they found themselves in this time last year, forced to cut prices to unsustainable levels in order to clear out overstocks. According to NPD’s chief analyst:

Cohen says retailers will start a "discount detox" process this year, trying to wean consumers off deep discounts by offering fewer of them. "This year will be more about the planned discount rather than the panic discount," Cohen says. The panic discounts of 2008 occurred because of excess inventory going into the holidays, while 2009 featured retailers selling to manage inventory. Cohen predicts retailers in 2010 will focus on planned discounting and promotions as well as non-discounting on new and innovative products.

The good news is that the year ended strong, with December showing decent increases. Bernard Sands’ Comp Store Sales Analysis quotes the International Council of Shopping Centers as reporting a 2.8% increase. John Walsh of Sands adds that, “because inventories were better aligned with demand this year, many chains didn’t have to slash prices in order to sell goods.”

So how does this net out? I look back up a couple paragraphs to what Mr. Cohen from NPD says: “[R]etailers in 2010 will focus on planned discounting and promotions.” It is always essential that planning be done well, but well-done planning in 2010 will be planning based on optimization of pricing and promotions. Key suppliers will be expected to collaborate with their retailers in accurately forecasting demand on promotions to avoid creating new overstock problems, and in setting price points that minimize the need to constantly cut prices and assist in the "discount detox" process.

Abercrombie & Fitch Bargains for a Rebound

A&F has been the poster child for maintaining brand integrity in the face of overwhelming pressure to cut prices, but it appears they are finally giving up the fight. After a 22% sales drop in the third quarter – the eighth consecutive down quarter – the chain has finally begun taking major markdowns (30%-40%) and putting clearance signs in the windows. Will it be too little, too late? Stay tuned.

Is There a Method in Cell Phone Madness?

Confused by the complexity of cellular service plans? You’re not alone -- so are economists. The plans, in which a service provider’s best customers are punished with exorbitant per-minute charges for going over their limit, make little sense at first glance – until you realize that the point is to get customers to buy bigger plans than they need. Lots of interesting insights in this article, including this example: “When Apple and AT&T started offering the iPhone for $199, plus $30 a month for Internet access, sales shot up, even though the previous deal — $399 for the phone and $20 a month — cost less over a two-year contract.”

Poll Results: Holiday Discounting

Last week, we discussed the deep and early discounting we’re seeing this holiday season, and wondered what effect it will have on next year, so we asked, “When will the deep discounts begin in the 2010 holiday season?”

• 26%: Starting at Halloween, like this year
• 21%: Even earlier than this year
• 53%: Retailers will start moving back toward black Friday

There’s not much consensus. Just over half think the discounts will come later, but almost half think retailers will start cutting prices at Halloween again, or perhaps even earlier.

Costco and Coke Battle over Pricing

Costco has taken the unusual step of throwing one of the world’s most popular brands out of their stores.

Costco customers may have to look elsewhere for Coca-Cola products now that the retailer has stopped carrying them because the pair are fighting over prices.

The public squabble between one of the nation's largest wholesale club operators and the world's largest soft drink maker is likely to fizzle quickly. But it reveals real tensions as retailers and product makers square off on prices.

As shoppers continue to grapple with the recession, retailers want to win their favor by giving them low prices. However, this has been creating tension between product makers like Coca-Cola Co., who are working hard to maintain profit margins while meeting retailer demands.

We don’t know the details of the dispute, of course, but it must be pretty serious to go public with it. As the article notes, the matter will be settled reasonably quickly; the two sides need each other. The interesting question for onlookers is who will blink.

There was a time when my money would have been firmly on Coke to win such a battle – it has long been an absolute ‘must-have’ brand for any grocer. Few Costco customers will stop shopping there over Coke’s absence from the shelf, but some will make an extra stop on the way home to get their 12-pack of Coke. Others, however, will substitute a Pepsi, RC, or private label product and may never return to Coke.

I’m not sure anymore which needs the other more – the iconic brand or the behemoth retailer.

Is Black Friday Passé?

Christmas decorations seem to appear in stores earlier every year. Maybe that’s just one of those false impressions we have as we get older – like baseball players were better when we were kids. But what is not a false impression is that the discounting is starting earlier this year.

Sears started the whole business by announcing that it was “Black Friday Now” on Oct. 28. Everyone from Wal-Mart to CVS to Ace Hardware has followed suit in some way or another, rolling out commercials and flashing the type of deep discounts normally reserved for those willing to camp out outside of major retailers on the morning after Thanksgiving.

But the problem for shoppers, retailers, and suppliers, may be that there won’t be anything to buy at those fabulously low prices.

“In anticipation of weak demand, many retailers scaled back on inventory levels to prevent unplanned markdowns at the end of the season,” says NRF President and CEO Tracy Mullin in a press release. “Once the most popular items are gone, retailers won’t have anywhere to get them, so if there was ever a holiday season to buy early, this is it.”

So we may be moving into the mother of all out-of-stocks by early December. If the heavy and early discounting does what it should do – generate demand – then what happens when prices go even lower on Black Friday, and shelves begin to get bare?

Here I insert my standard admonishment about the need to have solid forecasting tools and processes in place.

The other problem retailers and suppliers are going to face is that we have created the same situation for next year. Early shoppers will be reluctant to buy anything not discounted. In addition, there will be the problem of hitting the previous year’s numbers, which began an uptick weeks earlier, and also the fear that a competitor will jump the gun. In other words, there will be multiple pressures to continue early discounting even when the recession is over. It will take discipline to resist.

Follow-Ups: Shopper Marketing, Price Wars

The GMA, Booz & Co. and SheSpeaks released a study on shopper marketing, a frequent topic here, making the point that shopper marketing is being siloed, rather than integrated into comprehensive marketing programs:

Overall investment in shopper marketing -- defined by the Marketing Leadership Council as in-store advertising, promotion and design initiatives intended to extend brand equity and provide the retailer with differentiation -- is estimated to be growing at 21% annually, according to hardknoxlife.com.

However, this new study concludes that CPG manufacturers have yet to align shopper marketing initiatives with the advertising and promotions that reach consumers at home and on the go. That results in disconnected marketing messages, wasted spending and missed opportunities to drive purchases.

Coincidentally, another article published the same day offered an example of one company that is beginning to integrate – Del Monte named agencies to take responsibility for both consumer promotions and shopper marketing for two of its divisions:

The move is part of the company’s efforts to better streamline marketing resources and “produce best-in-class marketing programs that deliver on the company’s accelerated growth plan,” per Del Monte.

The New Yorker takes a look at price wars, using Amazon/Wal-Mart as an example, and opines that often, “price wars are like games of chicken, and typically end just as badly.” The magazine, though, concludes that this case is not a bad move for the two primary participants, but that (agreeing with our readers’ opinions in our poll) it will be tough on everybody else:

Outraged book publishers and booksellers are making exaggerated claims about how the discounts will devalue books and wreck the industry. But they’re right about one thing. The real competition in this price war is not between Wal-Mart and Amazon but between those behemoths and everyone else—and the damage everyone else is incurring is deliberate, not collateral. Wal-Mart and Amazon have figured out how to fight a price war and win: make sure someone else takes the blows.

Follow-Ups: The Book War and ‘Project Impact’

There has been a lot of action and commentary on the Amazon/Wal-Mart battle that we commented on last week.

Other stores, of course, have waded into the fight. Target matched the Wal-Mart and Amazon cuts, but Sears took a different approach:

Buy any one of those deep-discounted books at Target, Wal-Mart, or Amazon, and send Sears the receipt … and they'll give you a credit of $9 towards anything you buy from Sears online.

So now your book is free (you could even have made a two cent profit if you bought it at Wal-Mart). And you end up with an incentive to shop at Sears.com. I haven’t seen much clever marketing from Sears in recent years, but this strikes me as an excellent job of piggybacking on what other stores are doing, without it being a me-too effort.

Meanwhile, though, the independent booksellers (who will be most hurt by this, according to respondents to our poll) have asked the Justice Department to intervene:

The American Booksellers Association has asked the U.S. Department of Justice to investigate the book price war under way between Wal-Mart Stores Inc., Amazon.com Inc. and Target Corp. to determine if it constitutes "illegal predatory pricing."

In a letter dated Oct. 22, the ABA said it believes that the discount pricing—which has led to 10 of the most anticipated hardcover titles being priced as low as $8.98 on walmart.com—amounts to such an act and that it is "damaging to the book industry and harmful to consumers."

The letter said while it may appear that the prices will generate "more reading and a greater sharing of ideas in the culture," many of the independent stores that belong to the ABA won't be able to compete.

"The net result will be the closing of many independent bookstores and a concentration of power in the book industry in a very few hands," the letter said.

The Justice Department, Amazon and Target declined to comment.

The commentary on this that I’ve seen indicates that people knowledgeable in antitrust law don’t think the booksellers will get far with this.

As for the publishers, who look to be hurt almost as badly, they’re stuck between immediate gains and long-term damage to their margins. This blog notes something I had not thought of, that publishers might be able to use the Leegin decision to invoke minimum pricing rules:

What's interesting is that book publishers have the power to end this massive discounting. In 2007, the U.S. Supreme Court ruled in the Leegin case that it is legal for manufacturers to set a minimum retail price for their products. Thus, book publishers can legally tell Amazon and Wal-Mart that their books can be sold at a minimum price (say, 50% of retail price) or higher. So with the plethora of "devaluation" complaints, why aren't publishers doing this? They are stuck in a prisoner's dilemma.

The prisoner's dilemma is a classic game-theory case that shows when people behave in a manner that maximizes their welfare (profits/happiness), they can actually end up being worse off.

Consider how the prisoner's dilemma applies to the Wal-Mart/Amazon price war. Publishers have sunk millions of dollars in non-refundable advances to big-time authors. Especially in this economy, is a publisher really going to walk away from potentially an extra million units of sales by saying, "Don't sell our book for $9?"

Actually, saying flatly that the Leegin decision makes it “legal for manufacturers to set a minimum retail price for their products” is misleading, since the Court put a number of restrictions around the rule. But whether it might apply in this case is probably moot, since the publishers are unlikely to be brave enough to forego the immediate profits from the sales the price-cutting will generate regardless of what it does to their margins. The profits are today and the margin damage is tomorrow.

Advertising Age had an article on Wal-Mart’s Project Impact, reporting that the 32% of stores that have rolled out the new design are out-performing the rest of the chain, despite the elimination of millions of feet of merchandising space:

In fact, results to date indicate overall same-store sales are 1.25 to 1.5 percentage points higher in the remodeled Impact stores, which have 8% to 9% less inventory than similar un-remodeled stores, Chief Merchandising Officer John Fleming said in a presentation to analysts today. "One of the most important elements from a customer perspective is this idea of giving space back to customers," he said. "This has been highly controversial. There's been a lot of debate."

He said Wal-Mart has rolled out the elimination of in-aisle displays to an additional 300 stores beyond those fully remodeled, and that those stores have seen 0.4 percentage points faster same-store growth than control stores with a 3% decline in inventory. "It's working well," he said. "And we're rolling it to the [entire] chain next year."

Of course, there are options for suppliers losing out on those displays that are being eliminated:

Realistically, suppliers increasingly shut out of "action alley" will also be more motivated to pony up for Wal-Mart's growing number of pay-to-play in-store marketing options, including event marketing for $200 to $250 per store and end-cap displays linked to the Wal-Mart Smart Network in-store TV program, which will also bolster Wal-Mart's bottom line.

Poll Results: Wal-Mart's Pricing and SKU Rationalization

We discussed Wal-Mart’s SKU rationalization efforts and reports that they might be looking to cut margins next year. This raised the question of who such moves would hurt the most. So we asked: “Who will have the toughest time dealing with Wal-Mart’s pricing and SKU rationalization initiatives next year?”

• 80%: Wal-Mart's suppliers
• 14%: Wal-Mart's competitors
• 6%: Wal-Mart

Perhaps the Amazon item below is an early indicator that will let us know who suffers the most.

Wal-Mart and Amazon Going Toe-to-Toe

Wal-Mart appears to have thrown down the gauntlet to Amazon. As Amazon has expanded into numerous categories beyond their original book niche, they have been infringing on Wal-Mart’s turf. So the Bentonville gang has responded by attacking Amazon’s turf, cutting prices on pre-orders of some upcoming bestsellers on walmart.com to $10. As their CEO said, “If there is going to be a ‘Wal-Mart of the Web,’ it is going to be walmart.com.”

Amazon responded by cutting their price on the same books to $10, at which point Wal-Mart went to $9, and was again matched by Amazon. (As an aside, this may be a bit of confirmation of our item last week, about Wal-Mart possibly planning to cut margins in the coming year).

The Wal-Mart/Amazon battle is interesting in itself, but it also calls to mind an African proverb: “When elephants fight, it is the grass that suffers.” Playing the role of grass in this scenario are publishers and independent retailers (and maybe even Borders and Barnes & Noble).

At the moment, the prices Wal-Mart and Amazon are charging on these books make them loss leaders. Publishers normally sell to their customers at half the list price. Thus, Sarah Palin’s new book, which is one of the books being discounted and is listed at $28.99, will result in a loss of $5 or so on each copy Amazon and Wal-Mart sell.

But without bestsellers to pull in the customers, bricks and mortar bookstores will suffer, losing not only the sales on those popular books, but also the supplemental sales they might have made from browsing customers. Independent bookstores have been suffering for years, Borders has been in deep trouble recently, and even B&N had its sales drop 5% last quarter.

Publishers are concerned that this price-cutting, added to the effect of e-books (which are regularly priced at $10 or so) and the growing popularity of e-readers, will cause consumers to balk at paying full price for books, eroding their margins. It seems like a reasonable concern.

Poll Question: Who will suffer most from the Wal-Mart/Amazon battle?

Almost Half of U.S. Supermarket Purchases are Sold on Promotion

According to Nielsen, the percentage of items sold on promotion rose from 40.8% last year to 42.8%; an additional 1.3 billion items purchased on promotion. A few other factoids, the markets where the most purchases are on promo are Chicago (56%), Phoenix, Oahu, and Indianapolis. The least promotional markets are San Antonio, Oklahoma City/Tulsa, and Birmingham. The items that sell the most on promo are (not surprisingly) impulse items: ice cream, crackers, and soft drinks. Those that sell the least on promo: magazines, ice, and tobacco.

Walmart Tries a Contrarian Approach

The basic idea is that you cut pricing during a recession in order to gain market share, and then you raise prices in the recovery to reap the profits from the share gains. Right?

Wrong, says Walmart.

Walmart’s share gains during the recession have not been, for the most part, the result of price cuts. According to this Wall Street Journal article, Walmart has cut its grocery pricing only 2.6%, compared to 14.4% cuts at Kroger and 9.7% at Safeway (nonetheless Walmart remains substantially lower). The result has been that Walmart’s gross margins have been improving.

However, now that recovery seems to be on the horizon, we get the word from Bentonville that margins will cease to rise.

But with comparable-store sales barely growing, Wal-Mart appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. Following unusually high gross-margin growth in recent quarters, Wal-Mart Chief Executive Mike Duke told The Wall Street Journal Thursday he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves.

That could put Wal-Mart's smaller rivals further on the defensive.

Sure could. Many rival chains, in grocery and other channels, have been scraping by through the recession, cutting margins to the bone and looking forward to better times. But if Walmart is going to cut prices in the recovery, then there will be no easing of margin pressure for Walmart’s competitors.

Yet another argument for optimization tools.

In other Walmart news, the movie studios got a peek at ‘Project Impact’ and probably didn’t like what they saw (we commented on Project Impact a couple weeks ago).

In another WSJ item, we read that:

A recent shift in merchandising strategy by the world's largest retailer spells more trouble for DVD sales and the entertainment industry that depends on them for profits. As part of a larger effort to clean up its aisles and appeal to higher-end shoppers, Wal-Mart Stores Inc. is doing away with display cases to promote the latest hot movie titles.

The move comes as major film studios are reeling from declines in revenue from DVD sales as cash-strapped consumers turn to low-cost rental services and digital downloads for home movies. "We think the new strategy implies Wal-Mart no longer sees DVDs and Blu-ray discs as traffic drivers," J.P. Morgan analyst Imran Khan said.

The move fits in with two inter-related points of Project Impact: improving the look of the stores – which requires cutting out some displays and cutting back on the number of products carried – and concentrating on profitable and high-volume items in the reduced space.

This is a considerable blow to DVD suppliers, for whom Walmart represents one-third of their volume, and they’re already down double-digits this year as a result of video-on-demand and low-cost rentals from Redbox and Netflix.

The combination of these two items gives us some idea of what next year is going to look like for Walmart’s competitors: continued low margins; and their suppliers: pressure on shelf space and reductions in displays – which will presumably lead to higher costs for the displays and other in-store promotions that Walmart permits.

Paying the Price

Abercrombie & Fitch adamantly refused to cut prices last Christmas season and early this year, and many wondered what the results would be. The results are in. August sales were down 29% from August 2008 (which was down 11% from 2007). July was down 28%, June 32%, and soon for May. One consultant says that A&F "has mismanaged this economic downturn more than any other retailer." Hard to argue when you look at those numbers.

Laptops' Price Slide Continues

The inevitable has happened, Best Buy has introduced a laptop at a netbook price of $280 for an Acer laptop with a 15.6” display, 2gig memory, and a 160gig hard drive. When netbooks began eating seriously into laptop share last year it began to seem likely that there would be some form of convergence, of price or features or both. What will this do to manufacturer and retailer margins?

The End of Buy One, Get One Free in the U.K.?

The British government is considering legislation to outlaw BOGO promotions on the grounds of eliminating food waste. While the goal is good, how does a BOGO differ from offering better prices for larger packages (e.g., the quart bottle for $1.00, the half-gallon for $1.50) in terms of encouraging larger purchases? By the way, is it BOGO or BOGOF? I’ve always used BOGO, but I’m seeing a lot of BOGOF lately.

Tide Turns 'Basic' for P&G in Slump

Interesting article on how and why Procter & Gamble decided to bring out Tide Basic. (As a sidelight, I was fascinated to learn that they have a "Laundry Leadership Team" that has a weekly all-day strategy meeting). We'll see if Tide Basic can be a success without cannibalizing brand Tide, which still holds over 40% market share. The real switch for P&G is moving away from decades of "new and improved" to "new and, er, not quite as good."

Is This the Future of Price Comparisons?

Amazon has introduced a new Android application that allows shoppers to snap a picture or scan a barcode on a product and run price comparisons:

Using the Amazon App for Android, customers can snap a photo of a product or scan a barcode for a fun and easy way to build a list of photographs showing products they want to remember for later, make price comparisons across multiple merchants, and purchase products from Amazon.com and thousands of other retailers on the Amazon.com site...

So I go into Best Buy, see a flat-screen TV I like, scan the barcode into my phone, and immediately find out where I can buy it cheaper. How does a retailer (and their supplier) fight this? Or perhaps fighting it is futile, so how do you embrace it and make it work for you?

I'm not suggesting any answers – I just read about this and I'm still thinking it through.

Are the Price Wars Coming?

Financial Times reports on price-cutting by Kroger, Supervalu, Safeway, and some of their smaller competitors.

Kroger, the largest US traditional supermarket group by sales, has been rolling out a "new lower prices" campaign across its more than 2,400 stores, with yellow and red signs highlighting prices on fresh produce, meat, and health and beauty products.

Simultaneously, its weekly newspaper advertising inserts have been highlighting its low cost private-label goods under the heading "value for the way you live."

The adverts are part of a cacophony of price cutting promotions from America's national and regional supermarket chains – as they compete against Wal-Mart's low-cost supercenters and small hard discounters for their share of weekly food and grocery spending by hard pressed consumers.

That retailers cut prices in a recession is hardly surprising, but it does seem that things are a bit more extreme this time than I recall from past recessions. Perhaps that's fed by the fall in commodity prices:

The price of a gallon of milk, for instance, has dropped 50 per cent from last summer in the US – reducing both the identical store sales figures that are closely watched by investors, and the net profit per unit sold to the retailer. In May, food prices fell 0.2 per cent from the month before, according to US labour department figures.

FT notes that Kroger came into the recession with an established EDLP strategy, while Supervalu was still absorbing its 2006 Albertsons acquisition and Safeway had been positioning itself as somewhat upscale. The results are that Kroger's same-store sales are up 3%, while Supervalu is down 3%, and Safeway up 0.5%-1.0%.

Since Supervalu seems to be hurting the worst, the thought is that a price war could break out in earnest if their new CEO decides to deepen the cuts there (my local Jewel sure looks like Supervalu is serious about price-cutting).

Robert Summers, retail analyst at Pali Capital, said in a note to clients on Supervalu, that weak identical store sales "in one of the major players tends to create ripples across the industry, and makes for the potential for escalating price competition".

Stay tuned, this could get interesting.

Price Discrimination Decision Could Have Impact

Time will tell how big this is, but a food distributor in Pennsylvania won a Robinson-Patman suit against a supplier for discriminatory pricing and against Sodexho for inducing discriminatory pricing.

Feesers filed its complaint against Michael Foods and Sodexho on March 17, 2004, alleging price discrimination in violation of the Robinson-Patman Act. A three-week bench trial took place in early 2008 before Judge Sylvia Rambo in the federal district court in Harrisburg, which resulted in the April 27, 2009 decision.

At trial, Michael Foods and Sodexho argued that Feesers and Sodexho were not in "actual competition" for purposes of the Robinson-Patman Act because Sodexho provides food management services to its customers, whereas Feesers is a food distributor. The court found, however, that both Feesers and Sodexho procure and distribute food for the same institutional customers and, thus, are in actual competition for the same food dollar.

Although the injunctions issued by the district court are binding only as to Michael Foods and Sodexho, it is now clear that price discrimination by food suppliers against distributors such as Feesers and in favor of large-volume food management companies and GPOs such as Sodexho will not be tolerated by the courts.

This law blog quotes attorneys for the two sides, who disagree (no surprise) as to the importance of the decision:

Kessler [Feeser's attorney] told us Wednesday that the decision could have a major impact on the food distribution industry. In recent years, he explained, food management companies like Sodexo--which provide procurement and management services for cafeterias at schools, hospitals, and prisons--have used their large client base as leverage to extract better pricing deals from suppliers. That's hurt distributors like Feesers. "Sodexho [said to its clients], 'We don't compete with distributors so you can give huge discounts,'" Kessler told us.
Peggy Zwisler of Latham & Watkins, who represented Michael Foods at trial, disputed Kessler's view of Judge Rambo's opinion. She told us it's "very fact specific" and does not have broad implications. She also said that Michael Foods has "strong grounds for appeal" and it intends to do so.

The decision is here.

I am not an attorney, so take my opinions with several grains of salt, but it seems to me that the most significant point in the decision is that no proof of competitive harm is required, that harm can be assumed from the size of the price differential. It seems that this interpretation, if upheld, would make such suits easier to win in the future.

"Competitive injury" is established prima facie by proof of "a substantial price discrimination between competing purchasers over time." In order to establish a prima facie violation of section 2(a), Feesers does not need to prove that Michael Foods' price discrimination actually harmed competition, i.e., that the discriminatory pricing caused Feesers to lose customers to Sodexho. Rather, Feesers need only prove that (a) it competed with Sodexho to sell food and (b) there was price discrimination over time by Michael Foods. This evidence gives rise to a rebuttable inference of "competitive injury" under § 2(a). The inference, if it is found to exist, would then have to be rebutted by defendants' proof that the price differential was not the reason that Feesers lost sales or profits.