(Sept. 2) As supermarket competition continues to heat up, retailers are exploring ways to make their stores stand out and help them grab a larger piece of the grocery — and produce — pie.

Offering everyday low prices is one way to do that.
What passes for EDLP today usually is a hybrid between an everyday-low-prices concept and a high-low program that features regular ad specials, says Dick Spezzano, president of Spezzano Consulting Services, Monrovia, Calif.

The high-low pricing format is more effective in enticing shoppers to make more frequent trips to the store, but it generates lower revenue per product category, according to authors Christopher S. Tang of UCLA and Teck-Hua Ho and David R. Bell of the Wharton School of the University of Pennsylvania in a paper titled “Rational Shopping Behavior and the Option Value of Variable Pricing.” EDLP, on the other hand, does the opposite.

“A true EDLP operator is Wal-Mart (Stores Inc., Bentonville, Ark.),” Spezzano says. Wal-Mart keeps prices consistent and uses ads that say “we have low prices” instead of outlining specific price points each week. “They’re not advertising bananas at 29 cents a pound,” he says.

Most EDLP operators today don’t fit the definition in the truest sense, Spezzano says, because, while positioning themselves as offering the lowest prices, they generally offer ad specials, as well. And EDLP operators usually stipulate in fine print that their price comparisons are with conventional supermarkets, not club stores or warehouse stores.

To determine if the EDLP strategy is right for your operation, study how others have implemented the concept and examine your niche in the marketplace.

HOW TO DO IT

How can your chain become a low-price leader?

The most obvious way is to lower your markup, and that may not be as difficult as you think. “You’re not spending as much of your gross dollars (competing with) hot ads,” Spezzano says, “so you can afford to have lower prices than other stores.”

That’s certainly the case at Crest Discount Foods, a group of four stores based in Edmond, Okla. The chain went to a low-price format about 15 years ago.

Arthur Webb, produce director, marks up product 30% to 35%, while competitors operate on a 35% to 40% margin. The stores don’t advertise, but they do offer in-store specials good for two weeks.

In Billings, Mont., the six Evergreen IGA Plus stores advertise heavily, says John Cuchine, produce manager, but the chain still manages to keep its prices low. His store may not make the same money the big chain location does, but then Evergreen IGA doesn’t have a corporate headquarters to operate, layers of supervisors to pay and a fleet of trucks to maintain, Cuchine says.

He is not limited to a single source for his produce, either. Cuchine can buy from six or seven suppliers to find the best price.

Trader Joe’s, a 200-store chain based in Monrovia, Calif., offers gourmet products at bargain-basement prices.

The chain’s Web site summarizes its price policy: “Whenever possible we buy direct from manufacturers, in large volume. We bargain hard and manage our costs carefully. We pay in cash and on time, so our suppliers like to do business with us.”

The stores don’t warehouse product, either.

The chain has no scales in its produce departments and sells all its product overwrapped or in bags.

The packaging adds to the cost of the product, but the stores save on labor because the displays are easy to set up and maintain and don’t require workers to handle them.

EYE ON LABOR

Keeping a close eye on labor costs is another way to help keep prices down.

Cuchine of Evergreen IGA says labor is his No. 1 expense. He schedules 100 man-hours per week and, though the store is open 24 hours, the produce department is staffed only from 7 a.m. to 9 p.m..

Webb of Crest Discount Foods says produce department labor is 4.5% of produce sales compared to 6% to 6.5% storewide and 8% to 10% at other stores. The stores are open 24 hours, but only one of the 12 produce employees is on duty during the early-morning hours.

Another way some stores lower costs is by reducing size or grade requirements, Spezzano says.

For example, U.S. Department of Agriculture Fancy grade oranges may go for $16 a box, but Choice grade, which offers the same internal sweetness, may cost only $10, which enables a store to offer decent quality at lower price.

UP AND DOWN

Business at Cuchine’s store dropped 10% to 15% when a major discount retailer opened up nearby, he says. But shoppers soon realized Crest’s prices were lower and quality was better, Cuchine says. Business is back to normal, and the chain is contemplating adding at least two new stores.

Other techniques Cuchine uses to ensure low prices include going direct to suppliers when possible, encouraging shippers to call when they’ve got an oversupply they want to sell cheap and, once he gets the product, letting shoppers know about it by creating large displays.

“Stack it high and sell it cheap,” Cuchine advises.

Consultant Spezzano says other ways to save costs including limiting the varieties you offer to reduce shrink, save merchandising costs and tie up fewer inventory dollars. Or reduce your hours from 6 a.m. to midnight to, say, 8 a.m. to 10 p.m.

“Those four hours of not being open are the slowest four hours of the day anyway, but they cut down their costs,” he says.
Finally, Spezzano says, if you have a large chain and EDLPs are not practical for all the stores, consider dividing the company into two or more smaller groups to serve different demographics.

“You can operate a group of stores in (urban areas) under one name, and as you move out into the suburbs into a higher-cost location, you can use a different name on the front of the store,” he says.