Every Day Low Pricing: Pros and Cons

EVERY DAY LOW PRICING (EDLP) is a pricing strategy that has been a remarkable success for some manufacturers/retailers and a disaster for others. 

                        Despite some rather high-profile failures, the strategy attracts attention among all types of marketers. 

                        Recent reports indicate that 27% of consumer non-durable manufacturers and 23% of consumer durable manufacturers have adopted an Every Day Low Pricing strategy. 

                                                The key question is: “what conditions are most critical for successful implementation of the strategy?”

How it works

EDLP is a low-price strategy designed to enhance the competitive position of the supplier based on the following basic premises:

·          A consistent, competitive price will lead to an even demand for products

·          Inventory and other logistical costs will drop because of better management of product flows.

·          Promotional costs and other forms of trade spending will be reduced.

·          The cost advantages of steady demand and better inventory management will lead to even lower prices.

One of the advantages of EDLP is that it often leads to more consistent or predictable demand.                 Suppliers or retailers are able to more effectively control and forecast production, inventory costs, and shipping costs thus stabilizing demand

                        Since periodic deals are replaced by a single, no-deal low price, there is no advantage to customers to postpone a purchase.

                        Successful EDLP strategies tend to generate large volume sales that allow companies to cut costs and pass these savings along to customers.

                        At the same time, retailers or manufacturers are able to leverage their own buying power to reduce their purchase price. These savings, as well, are then passed along to customers. 

Where it works best

EDLP works best under many of the same conditions that support other low price strategies. Typically, these include:

·          Consumer demand is relatively unaffected by large seasonal variations or other timing considerations

·          The company is able to sustain a low price competitive position through a cost advantage

·          Consumers place little value in waiting for —deals“ on merchandise

·          Suppliers are willing and able to provide just-in-time delivery

·          The company‘s size justifies the investment in the information systems required to manage inventory turns precisely

                        Purchases that can be delayed or timed to coincide with price discounts are often less amenable to an EDLP strategy, while repetitive purchases lend themselves particularly well to this type of pricing.

                        Consumer disposables, such as toothpaste, soap, or groceries, for example, are typically purchased on a daily, weekly or – at most – a monthly basis.

                        Consequently, consumers have less ability to time the purchase of these goods in order to save money.

                        EDLP works well for these types of products, especially at a retail level, because it offers consumers a bundle of low prices on a range of goods that they buy on a regular basis.

Caution advised

                        Seasonal products and services such as tourism and snowmobiles, or highly perishable products such as flowers, have a limited shelf life and discrete time periods during which product or services must be moved. In these situations, EDLP may not be the preferred strategy.

                        EDLP often doesn‘t make sense where demand is so high that price increases are warranted, or when demand declines to the point that price discounts are needed to reduce inventories. Implementing EDLP for some consumer durables is difficult because consumers can often afford to wait for special deals or incentives to buy these products.

Article Written by

Michael Hurwich, President of SPMG

Sobeys expected to follow competitors, hike prices - Article by ROGER TAYLOR in The Chronical Herald

Sobeys expected to follow competitors, hike 
prices (found at www.thechronicalherald.ca)

By ROGER TAYLOR Business Columnist

Tue, Mar 8 - 7:24 AM

We should find out today whether Sobeys Inc. will follow the lead of its competitors and raise food prices in response to inflation. All the signs suggest it will.

In the days leading up to its third-quarter results, out today, the Stellarton-based grocery chain, a wholly owned subsidiary of Empire Co. Ltd., was in a quiet period and could not respond publicly to the suggestion by competitor Loblaws that it’s expected to raise food prices.

In Empire’s second-quarter report, released in December, Sobeys did indicate it was willing to eat rising costs because it couldn’t afford to give up on competitive pricing at that time.

Sobeys president and CEO Bill McEwan told analysts during a conference call: "We have begun to see some commodity price increases but clearly we anticipate considerably more."

He said grocery prices at Sobeys had declined by about one per cent during the second quarter, which ended Oct. 30, 2010.

But since that time, dramatically rising fuel costs have been adding to the demand to raise food prices. That is why it is expected that Sobeys, Canada’s second-largest grocery chain, will re-evaluate the low- price strategy while remaining price competitive in an increasingly tough business.

Sobeys, market leader Loblaws and third place Metro, which together account for about 60 per cent of the Canadian grocery market, have complained in previous quarters that falling retail prices due to stiff competition were taking a toll on profits.

That is why food executives are hopeful consumers will be willing to accept at least some of the price inflation; otherwise, the companies will be forced to continue absorbing the increased costs, which will affect the bottom line.

When contacted for a comment on whether Sobeys believes it will be able to pass along price inflation to the consumer this time around, a company spokesman indicated management could not comment before today’s conference call.

However, I was referred to comments McEwan made at a CIBC World Markets conference in Toronto a couple of weeks ago:

"We remain committed to being price competitive in each market we serve. . . . We are seeing signs of balanced inflation starting, in which retail prices rise in step with manufacturer prices and the general cost of doing business. There appears to be an appetite for that to happen but we shall see. If we behave like a mature industry, it will happen.

"If we continue to pursue business that is not there, we will see continued deflation."

In the parent company’s second quarter, Sobeys reported strong profits despite heavy competition.

The grocery business in Canada is increasingly fragmented. It isn’t only the grocery stores selling food these days. Competition is coming from retail giant Walmart, drug chain Shoppers Drug Mart and even Canadian Tire has been experimenting with selling groceries.

In December, McEwan said he was optimistic the market would soon be in a position to hike prices in line with food inflation.

He also pointed out that some parts of the country have a more competitive retail marketplace than others, so price increases wouldn’t necessarily be felt equally across the country.

In the Toronto marketplace, for example, all companies are engaged in a cutthroat battle to gain market share that means the grocery chains will be watching each other very closely.

While no one wants higher food prices, it is important that Canada maintain a competitive retail food sector. In the end, competition is the best way to safeguard against unfair price rises.

It should be interesting to hear what Empire and Sobeys officials have to say today.