When Are Price Reductions a Good Idea?

Last month, Food Lion lowered prices on thousands of items such as apple juice, peanut butter, frozen vegetables, canned beans, paper towels, detergents and more. The Salisbury, N.C.-based chain heralded the campaign with extensive signage throughout its stores so shoppers could easily find deals. Special savings are available to shoppers who have an MVP card to identify them as members of the chain’s frequent shopper program.  

Food Lion officials announced that affordable prices and great deals are a big part of the chain’s heritage. The goal of this new initiative is simple and straight-forward: Give shoppers even lower prices. It doubles down on Food Lion’s motto: “Easy, Fresh and Affordable. You Can Count on Food Lion Every Day!”

That sounds very altruistic. But here are some obvious questions: Is there another reason for such dramatic price reductions? Will the lower prices attract new shoppers to Food Lion? If so, will they remain loyal to the store if prices inch up some day?

Major reductions in price by Food Lion and other grocers are typically driven by the competition. And the elephant in the marketplace is usually Walmart. Lowering prices to draw shoppers from the King of Low Prices is a bold strategy even for a retailer known for its everyday low prices. It’s more likely that the idea is to keep Food Lion shoppers from defecting to Walmart.    

But Food Lion competes with more than the largest retailer in the world. Other grocers nearby include Harris Teeter, Publix and Lowe’s Foods. They typically have higher prices, but justify this by offering enhanced service, better in-store ambience, etc. Maybe they are effectively using new price optimization software to charge what the market will bear (I don’t have any insider information on that). But if even one of them suddenly or slowly lowers prices, it’s a threat that has to be addressed by a competing everyday low-price chain like Food Lion. The idea is to prevent leakage.   

Maybe the way to analyze these situations is to apply the short-term vs. long-term rule. Shoppers love lower prices – especially on items they buy anyway. Why go elsewhere? Such price reductions may even lure consumers from other supermarkets that charge more for weekly shopping. More shoppers means more total store sales. That’s the short-term view.

Nobody knows how Food Lion’s action will affect its profitability over the long-term: Whether new shoppers will arrive and whether current shoppers will buy more. The larger question is whether the lower prices will be sustained or will go away eventually. That information will determine the success of the program at Food Lion or any other grocer deploying such a strategy.