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TECHNOLOGY: The price is right

Managing prices is a difficult feat for any retailer. Doing so in the face of a highly consolidated, highly competitive environment doesn't make it any easier. With 480 stores throughout the United Kingdom and stiff competition from competitors Tesco, J. Sainsbury, and Wal-Mart-owned ASDA, Safeway Plc. (no relation to U.S.-owned Safeway) looked to technology for assistance.

"Our goal is to be the first-choice retailers for those customers who have the opportunity to shop locally in one of our stores," says commercial pricing manager Tim Lawrence, who spoke at the Retail Systems conference in June. "In order to do this, we needed to put together a local pricing and a local strategy, and have the best price perception locally."

Safeway UK traditionally was an "every day low price" (EDLP) retailer and operated much like any other EDLP retailer, averaging approximately 1,500 price changes a week using one weekly price batch file. It would distribute fliers to stores on Sundays, and national advertising was done via television.

Promoting on a national level, however, made it easy for competitors to copy or beat Safeway's prices. "These national ads were easy to copy, since they were national and came out once a week, and the other grocers would undercut us—we couldn't compete," Lawrence says.

In September 2000, Safeway became a Hi-Lo retailer, bumping up the number of weekly price changes to 3,300 and downloading four to five price files per week. "We began operating a promotional strategy based on rotating clusters," Lawrence says. "Each cluster consisted of a local group of stores that shared demographic characteristics. We stopped doing national television advertising and instead focused on fliers as the communication vehicle, and for each cluster we had different products and promotions on each of them. This confused the competition."

Growing the size and frequency of the price batch this dramatically was extremely difficult to manage, and Lawrence began to explore the potential of electronic shelf labels (ESLs) and revenue management software to ease some of the burden.

For ESLs Safeway went with NCR's RealPrice system because it had rail attachments, was wireless, had a design Safeway executives liked, and confirmed when the price was electronically received. Also, they weren't based on infrared technology. "We have lots of marketing messages and sign stands, which blocked the infrared signal," Lawrence says.

The RealPrice ESLs use spread spectrum frequency-hopping radio technology to transmit information from the product price file to the shelf labels. As a self-diagnosing system, NCR RealPrice continuously monitors each shelf label for accuracy with the price file, making sure the prices at the shelf and at the checkout are always the same—an important consideration when fines for misleading price indications are upwards of 5,000 pounds.

To test customer acceptance of the ESLs, Safeway ran a pilot at its St. Albans store. More than 80 percent of consumers accepted the ESLs, with 75 percent believing that they made the store look neater.

For price optimization, Lawrence selected Khimetrics because of the company's experience, methodology, flexibility, and scalability. "These were crucial to enable us to develop a truly customer-centric pricing strategy," he notes.

Khimetrics' Retail Revenue Management Suite is designed to maximize revenue and profitability through a modeling of enterprise variables, including price, promotion, customer demand, profit, sales, and price image. It uses retail point-of-sale data to model demand elasticity and optimize regular prices, clearance prices, and promotions. "The price optimization is based on price elasticity by product, Lawrence says. "We found that there were some instances where the price goes up and the volume still rises. This allowed us to build both sales and profit. And this elasticity becomes more confident over time, so we can set corporate goals by format and by store."

Lawrence expects the ESLs and price optimization software to work well together. "The ESLs allow the more dynamic use of batch frequency and larger price change batches than we would be able to use if we labeled by hand," he says. "This makes real-time pricing more viable. The two technologies together mean that the right price is sent and is accurate, and is the best use of each investment. However, retailers can still benefit greatly from the use of either of these technologies on their own."

So far, Safeway has already seen a change since the technology implementation. In comparing the optimized stores with ESLs vs. control stores, which didn't use the technology, Lawrence saw a 5.5 percent profit increase driven by the new technology (see chart on this page).

The biggest thing to watch out for with these technologies, according to Lawrence, is not the technology itself, but the company's reaction to it. "This is scary stuff that challenges traditional thinking and approaches to pricing," he says. "Stores don't react the same—even the ones with similar demographics."

Lawrence recommends having buyers interact with the tool, as their expertise in their various categories is crucial to understanding sudden changes. Most important, once the system is in place and has proved its worth, operators have to trust it. "In the past employees would check that everything matched afterward," he says. "But that's what the technology is there for—to enable us to do more with less."
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