Grocery Pricing in a Pandemic

Grocery Pricing in a Pandemic

There is a purported ancient Chinese curse that is deceptively simple: “May you live in interesting times.”

Today’s grocers might be forgiven for thinking that these times are, in short, too interesting. In the fairly recent past, which now feels like ancient history, there were four relatively constant pillars in the grocery landscape:

  • Limited shopper loyalty, both to store banners and to specific brands
  • An overwhelming preference for in-store shopping versus online, where uptake had been increasing steadily but slowly as a percent of overall sales
  • Well-established KVIs, and shopper predictability around them
  • A predictable, stable supply chain

While grocery demand surges – the U.S. Census Bureau said that grocery store sales increased 25.6% in March 2020 over March 2019 – the chaos of today’s pandemic and economic uncertainty unseen since the 1930s mean that the familiar ground has shifted underneath us. The good news for progressive grocers is that those that embrace science to help them solve the pricing puzzle are successfully finding a solution for a key strategic element of their business while addressing each of our four shifting pillars. Let’s examine the power and benefit of a science-driven approach for each.

The Always-On, Unloyal Shopper and a Shrinking Wallet

Grocery was already under increasing pressure with Amazon entering the sector and the rise of supercenters’ and warehouse clubs’ focus on grocery. Already unstable and fickle shopper behaviors grew even more unpredictable as the pandemic swept the globe.

The degree of uncertainty and the speed of change wreaked by COVID-19 has changed the shopper experience into something almost unrecognizable. The shopping experience, whether in-store or online, has radically changed, replaced by long waits in lines just to find alarming stock-outs, in turn driving shoppers to visit alternative stores, move to online and abandon what was left of some preferences in favor of a preferred grocer.

What has surfaced are completely different basket preferences as the option to eat out disappeared and kids, work-from-home parents and the newly furloughed hunkered down and ate in, meaning what was left of shoppers’ traditional brand selections and loyalties have gone out the window, replaced by, the relentless search across multiple banners and formats for hand wipes, sanitizer and toilet paper.

Grocers using science-based price optimization have had a leg up on other retailers during the pandemic because they have been able to gain early insights into changing shopper demand signals and price sensitivities. They can quickly adjust pricing and assortments  and accommodate the rapid shift toward shelf-stable selections and pantry loading, while optimizing prices across the full assortment to deliver pricing that entices demand beyond pantry-loading items, thereby maximizing the shopping trip, which in turn grows the basket and protects margins.

AI-based algorithms quickly separate the signal from the noise, provide clarity and prescribe the answers that countless days of humans sifting through data could never achieve.

A Stampede to Online and App-based Shopping – In Some Unlikely Demographics

Grocery shoppers have historically trailed other sectors in embracing online and delivery options, but that’s about to change. Even older shoppers, who usually enjoy trips to the grocery store and actively resist online alternatives, were deeply shaken by a virus that disproportionately threatens their age group. What was once a positive experience has turned into an experience one would have thought was reserved for scary movies. 

Grocery shopping now comes with face masks and gloves, the sight of employees sanitizing grocery carts between each shopper, 6-foot marks spacing queues as shopper access to stores is physically limited, and sneeze guards in checkout lines. Harried parents working from home with bored, cooped-up children can no longer fit in time for a personal grocery trip.

What just weeks ago was unthinkable has become the norm: shoppers in all demographics flock to contactless channel options, whether mobile app or online, curbside pickup or home delivery, and grocers struggle to accommodate demand in the new channels.

Once again, grocers armed with science gained earlier insights and prescriptive pricing to combat the changing channel preferences, allowing them to more rapidly adjust their pricing while taking into consideration the limited staff and reduced stocking schedules, ensuring that if retailers could only execute a small number of price changes, they knew the most powerful ones to take. Those grocers that have teamed dynamic price optimization with electronic shelf labels (ESLs) were the biggest winners of all, as they were able to remove the store labor constraint and execute a far greater range of price recommendations.

Emerging KVIs, Increased Price Sensitivity

Much energy has always gone into applying a laser-focused strategy towards key value items (KVIs) those well-known items that drive high demand and which shoppers are highly price-sensitive to.  Although items have always entered and dropped from the group of items shoppers view as KVIs as shopper’s preferences change, today the rules of the game have completely changed, making it even more difficult for retailers to know their KVIs  let alone price them. 

There is a rapid shift from perishables to more shelf-stable foods as shoppers try to limit their grocery trips, whether online or in-store, with more frozen and less fresh fruits and vegetables, less fresh bread flour for home-baked loaves. At the same time, the swiftness with which unemployment surged puts all consumers on edge and probably not just for the near-term. Combined, these factors mean shoppers have upended known KVI assumptions heightened price sensitivity, which may even persist for an entire generation, as with the children of the Great Depression.  Shoppers under stress are acutely sensitive to the perception of any retailer unfairly boosting prices.

One of our large Latin American grocers recently noted how these factors might also play out in KVIs: “The fall of consumers’ income and employment rates may lead to a greater demand for private label and economic choice brands.”

Hand sanitizer and wipes may permanently play a more prominent role in shopper choices as hygiene awareness remains heightened.

Science-driven analytics and algorithms can delve deeply and rapidly into shifting price sensitivities and competitive elasticities to identify their KVIs and align their price strategies to support their desired price image, while accurately predicting performance in the face of rapidly changing sensitivities and elasticities.

The Collapse of Supply Chain Predictability

As meat packing facilities became COVID-19 hotspots and were abruptly closed, the meat supply chain contracted rapidly. The shutdown of shipping from China impacted vast parts of the food supply, while the ongoing chaos of shipping delays and port buildups worldwide further convulses supply sources and timing. This is on top of an already chaotic landscape of tariff and trade wars.

All roads lead back to the need for AI-driven pricing for navigating the shift in shopper behavior and ensuring that pricing aligns with the most current demand signals. Although pricing alone cannot avoid the supply chain challenges retailers are encountering as a result of the pandemic, a quick identification of price sensitivity level and resulting demand can help retailers minimize the impact.

The Elusive Win-Win

In an increasingly unpredictable world, those with science-based pricing are best positioned to predict demand, get early insights into demand signal changes, and normalize historical data to better optimize prices, deliver optimal promotions, manage their supply chain, and ultimately build shopper loyalty and drive business results. Ultimately, science-enabled grocers are better able to achieve the holy grail of pricing: fair prices that engage shoppers and help ensure their loyalty, all while they know where in the assortment the business can recover margins to sustain a long-term healthy business.

About the Author

Cheryl Sullivan

Cheryl Sullivan is president of San Mateo, California-based DemandTec, a provider of lifecycle pricing solutions that serves retailers and manufacturers in the consumer packaged goods industry. She has more than 30 years experience in the technology world.

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