Pricing gets personal

August 23, 2012

The price squeeze on supermarkets is tightening. New personalized offers to frequent shoppers may improve spending.

How can supermarkets win price-leadership battles in their markets without giving away the store? 

They have little room for error calculating where they could gain an edge, with margins so thin. Industry net profits have narrowed from nearly 2% in 2010 to about 1% over the past 12 months, according to a Sageworks analysis of private supermarkets and specialty food stores reported in Forbes.

By contrast, net profits for specialty food stores that can command premium prices have approximately doubled to nearly 6% in the same period, the data show.

Two more squeezes on conventional supermarkets:

  • Effects of the Midwest drought will pressure them with higher cost of goods later this year and in 2013. The U.S. Department of Agriculture predicts food-at-home inflation of 2.5% to 3.5% in 2012, and a potentially higher rate in 2013 due to the recent weather. 
  • Also, Walmart and Target are aggressively pushing their low prices. Citi Research analyst Deborah Weinswig believes “supermarkets in our coverage universe are focused on keeping pace with Walmart’s price investments as they…fight for share…while Target works to gain its footing on price in food. We expect price competition to continue to heat up in 2012.”

Chains that operate more efficiently—say by no longer double couponing, as Ralphs and Vons have done this year, or installing self-checkouts—may have room to lower prices.

Yet corporate parents Kroger and Safeway also aim to encourage purchases in different ways, one-to-one. Kroger, for instance, sends specialized coupons to its frequent cardholders. The outcome: 70% of customers who receive them have redeemed at least one, a chain spokesman told The New York Times.  “It comes down to understanding elasticity at a household level,” Stuart Aitken, dunnhumbyUSA CEO, told the paper.

Meanwhile, the Safeway Just For U program offers personalized prices for specific products, along with digital coupons, based on shoppers’ purchase histories. People can download offers onto smartphones while shopping in the stores, and actually pay less than neighbors with the same items in their baskets.

Using better metrics and shopper insights, supermarkets can price-differentiate from competitors and align with customers, says The Lempert Report. Enough customers will trade off information for deals if chains respect their privacy, we believe, and that warrants the effort.