When the Price Is Right

Customers are complaining, "Prices are too high"; "Safeway only charges 98 cents for milk"; "Your produce prices are too high." Yet, at the same tirne, your gross margin is only 24 percent, and the co-op is barely at a breakeven position. Generally, the problem is not that all prices are too high, but that key items are priced too high. This is a problem of price image.

Studies have shown that most consumers can name the price of popular, basic products within five percent of the correct price when asked. They do not just know the price, they perceive it. Their image of prices on basic staples and commonly bought items has been developed from years of shopping and an industry-wide pricing structure of these common products.

Large chains use a variable pricing structure to insure that their prices fall in line with the industry, yet meet their margin goals in each department. Popular goods which help define the store's price image carry a low margin, while other less price sensitive items have a higher margin to help the department meet margin goals. Using this system enables price sensitive items to carry a lower margin without bringing a loss in profits. In fact, a variable pricing system can generate greater profits. Increased sales of price sensitive items will bring a higher margin contribution. Higher margins on the less price sensitive products will increase department profits. Overall, the store will compete better in the market because of the improved price image.

A store does not have to be large to price competitively. Nor is a big advertising budget necessary. To create a positive price image for your co-op, the following steps can be taken:

1. Conduct a price survey. Include your competition. This comparison can include items from every department and be thorough enough to see how your store competes on basic staples and on less price sensitive items.

2. Determine your weak areas. Are your prices high on every item? Which prices are too high? Which are too low? How do the price comparisons correspond to customer complaints?

3. Identify the products and prices that have high visibility. Find out what prices the competition emphasizes and advertises and which prices your customers complain most about. Also, identify the products which are special which are special to your store and on which you have no competition.

At this point you will have an Idea on what products your prices are out of line. If currently one markup is used for each department, you may find that some Items are priced high while others are underpriced. This may also help you Identify price sensitive Items. For example, your price survey might show that your raisins are 10 cents a pound higher than the competition's, but you are killing the competition with your price on banana chips -- they are 60 cents a pound cheaper. But which prices are your customers most aware of and concerned with?

Margin Structure Guidelines

The following margins are average for co-ops and are designed to yield, after shrink, etc., a 28 to 32 percent gross margin. Bear in mind, however, that these figures are meant as guidelines; your particular margin structure will depend on the variables of your operations.

Dairy23%
Milk12-15%
Eggs12-15%
Yogurt25-30%
Soymilk23-27%

Grocery30%
Peanut butter25-30%
Canned tomato paste22-26%
Juices, sodas30-35%
Prepack dinner mixes28-32%
Cereals26-30%
Cookies, crackers28%

Produce32% (+ 5% shrink factor)
Standard power items22-26%
Esoteric30-35%
Organic: depends on market and shrink

Bulk31%
Rice28-32%
Cous cous32-36%
Wh. wheat flour28-32%
Dried fruits36-40%

Deli:Cost of ingredients
X 3, less shrink

cheese32%
Jack, cheddar24-28%
Brie, bleu32-26%

HBA37%
Vitamins33% and up
Bodycare33% and up
Herbs36% and up

Baked Goods26%
Vendor breads18-22%
Specialty30-35%

Variable pricing could be utilized In this situation to Improve the price image. Using the formulas we discussed in the previous column, let's use this example to show how we can price more competitively and maintain our gross margin. We will pretend our dried fruit department contains only two Items: raisins and banana chips. We currently mark up all of our dried fruits 35 percent to achieve an overall gross margin of 26 percent.

ProductSelling PriceGross MarginPercent of SalesMargin ContributionCompetition's Price
Raisins$1.09/1b.26%60%15.6%$0.99/lb.
Banana chips$2.19/lb.26%40%10.4%$2.79/lb.
   ____________  
   100%26% 

Our price comparison shows us our prices are out of line. To price our goods more competitively and maintain our 26 percent gross margin, we will use variable pricing. Before we reprice our gods, we should assume the price restructure will increase sales of raisins, so we figure out the margin contribution with an Increase In the sale of raisins at a lower price:

ProductSelling PriceGross MarginPercent of Sales Margin Contribution
Raisins$0.99/lb.18%65% 11.7%
Banana chips$2.75/lb.41%35% 14.3%
   ______ ______
   100% 26% =
department margin

By lowering the price of raisins, we have come into line with our competition on this price sensitive Item. We have been pricing our banana chips too low, since our surveys have showed our competition has a much higher price on them. To balance the margin, we have to raise the price of the less price sensitive banana chips to offset lowering the price of raisins in order to compete with the other market. Factoring In the Increase In sales of the lower priced gods wil help compensate for some of the margin dollars lost by lowering the price of raisins. The higher the volume, the higher the gross margin dollars contributed to the department.

In this example, we are left with some options. We matched the price of the competition's raisins, but priced our banana chips below their price. We could raise the price of our banana chips to meet the competltion's and obtain a higher department margin, or offset a higher percentage of raisin sales. Another option Is to lower the price of raisins further and raise the price of banana chips, offering the best price on the more popular item. Variable pricing allows flexibility In your pricing, so you can compete In the market and at the same time control your margins.

The example we used was very simple. We did not include shrink and had very little information to evaluate. You will need to analyze each department in the store, determining shrink and margin contributions, with the overall goal of lowering prices on the high visibility "image" items while compensating with higher margins on your specialty or noncompetitive products.

Another analysis that can be done at the same time Is of your product line. What items can you add that will increase your overall gross margin and give you the ability to lower prices on your staple goods? A review of industry trends and analysis of the market can help to determine what goods your market can carry.

After adapting the variable pricing system, other steps can be taken to promote a positive price image. The first step is informing the public of your improved prices. Publishing a price comparison in your newsletter or a flyer and posting it in the window will inform your current customers. If your local newspaper prints price surveys of local markets, ask them to include your co-op. Advertise everyday low prices, including key Items which customers may have complained about In the past.

Running promotions which highlight key price items can also draw attention to your new price image and enable your store to better compete with the weekly spedals that larger markets generally run. Your co-op can use a similar advertising strategy. Weekly specials can be used to inform your customers of new products, educate them about the products you carry and most importantly, create a positive price image for the store. A weekly specials flyer can be stuffed in customer's bags, posted in the store and used in print advertising.

The following criteria can be used to help determine what products to run on special:

  1. Investigate deals from suppliers.
  2. Determine what products will sell well on special.
  3. Use the promotion to enhance the store's price image.

The items you run a promotion on should include high visibility items. Generally, a minimum 15 percent discount should be offered if you aim to significantly increase sales. In order to give a 15 percent discount, you may need to give up some of your margin. However, the increased volume will be a fair tradeoff, generating more profits through increased sales.

For example, our supplier is offering a 10 percent discount if we buy 10 or more cases of apple juice. We usually sell about two cases a week at $1.18. Our margin in 31 percent. We decide to kick in an extra discount and sell the apple juice at 99 cents a quart. At this price, our gross margin is 24 percent, but we sell all 10 cases in one week. We bought the 10 cases at 74 cents per quart (12 in a case) and sold them at 99 cents, netting $30 on the promotion. Usually, we sell two cases at $1.18 per bottle, On those sales, our cost is 82 cents and we make a profit of $8.64.

The trade of volume for margin paid off in this case because we had two important factors in our favor. We promoted a high visibility item and offered a great price. As a result, the promotion helped our price image and our cash flow.

 

*    *    *    *

When a customer asks,

"Why is it that the competitor
has more good buys and
nearly the same overall prices
as a non-profit co-op?"

  1. The co-op is not a non-profit organization. You are correct in that we are not in business primarily to make a profit, but to provide quality foods at a good value. All benefit from operations is for the owners (members) of the co-op. In our case, we reinvest any surplus into the store to provide more products and services for our members. We must make a profit to continue and to improve our business.
  2. The grocery industry Is highly competitive. The name of the game is volume. Many expenses are fixed (rent, utilities, cleaning, trash pickup, etc.) and so they don't change with sales. So the more food that is sold, less is needed from each sale to cover these expenses. Stores with higher sales can make less on each Item to cover basic expenses. Stores that have more than one location can further spread some of their overhead expenses (advertising, purchasing, bookkeeping) over a very large sales volume. Chain operations also get better prices because they are buying huge quantities to sell from sometimes 50 or more stores. The wholesaler could offer them a better price because of their combined volume.
  3. The average profit in the grocery business Is less than two percent of sales, usually closer to one percent. So even without a strong profit motive, there isn't much "profit" to use to reduce
  4. prices.

Most stores offer "loss leaders" in order to create a better price image and get you to their store and hope that you will buy regularly priced items while you are there. These loss leaders are sold below the cost of the Item. The stores have a large enough volume to cover what they lose on this item. Our co-op is not large enough to sell items below their cost. We often negotiate deals, take a lower percentage to cover expenses and put items on sale. But since we must make back at least what we Invested In any single product the price may not compare to that of a store running loss leaders... We are lower on many Items, particularly items that we have a large volume on or on perishable foods. We work hard to stay as competitive as we can on all items...

We also try to offer a consistendy high quality product, organic options, and a mix of products you just don't find elsewhere. Only at the co-op can you be involved in the process of obtaining your food. All of this is made possible because the shoppers and the staff have more at stake. They own the store.

Marilyn Scholl, General Manager
-from March, 1987 Wheatsville Breeze
Wheatsville Food Co-op, 3101 Guadalupe, Austin, TX 78705

See other articles from this issue: #010 April - May - 1987