In 1936 the U.S. Congress passed the Anti-Price Discrimination Act (more commonly referred to as the Robinson-Patman Act). The intent was to prevent unfair price discrimination by requiring that sellers of products offer the same price terms to customers at a given level of trade. Under the Act, it is illegal for the manufacturer of a product to sell to one retailer for a different price than that retailers similarly sized competitor.
Volume discount is one form of price discrimination that is allowed under the law. In fact, as far as I can ascertain, it is the only form of price discrimination allowed by the law – even though one could imagine other reasons a product manufacturer might desire to give a smaller retailer preferable pricing (better store position, positive brand associations, other?). When a retailer qualifies for the lowest (or among the lowest) price from the manufacturer, based on their volume, they can take those discounts and pass them along in the form of a lower price to their customer. (Note: These “volume discounts” are more commonly referred to as a retailer’s “trade budget” from a given manufacturer and are also often applied to co-marketing and other mutually beneficial applications…but for the point I’m trying to make here, I’m going to continue to refer to this money as a discount to the product price).
When a retailer is big enough to be the leading volume seller across many categories, and by a pretty significant margin, as Walmart has been for some time – we call their strategy for winning over price conscious consumers an Every Day Low Pricing Strategy (EDLP). Because of Walmart’s size, it has proven to be a sustainable competitive advantage – made possible primarily thanks to Robinson-Patman.
For the price-sensitive consumer, it is hard to beat an EDLP strategy – but combined with other positive attributes, such as a more pleasant shopping experience, supermarkets have had success over the years with the following alternatives:
- Hi-Lo– Retailer places some high interest items on deep discount and promotes them, enough to draw the consumer into the store, then makes up revenue and profit margin on the other items consumers may pick up in the same trip.
- All retailers do this to varying degrees, some better than others.
- BOGO – A form of “Hi-Lo”, BOGO stands for “Buy One Get One Free” and it has been around for a long time. Consumers love it, partially because it involves the word “FREE” (always gets people’s attention) – but also because the consumer value proposition of a BOGO strategy involves low work and high reward…almost as good as EDLP (no couponing, no special cards, few conditions to meet).
- BOGO as a strategy to lure savings-minded consumers is used with particular success at Publix. Publix does a great job making their weekly BOGO’s a predictable, fun and valuable event for shoppers – with an especially good mix of what the industry calls “expandable consumption” categories always included. Expandable consumption categories are those that feature items consumers will likely consumer more of, if they buy more (think cereal and peanut butter, for example).
- Couponing – Retailer funds significant quantities of untargeted coupons on high penetration, high frequency items or targeted coupons designed to give a consumer a great deal on their most important items without having to offer that same deal to everyone else (also known as “personalized pricing”).
- Couponing is done especially well by ShopRite (partly because they embrace it and their customers love and expect it), Kroger (via dunnhumby) and Safeway (via their Just4U program), and of course – my alma mater – Catalina Marketing. But it lacks the low work/high reward consumer value proposition of EDLP and so only a relatively small percentage of consumers will participate consistently (10-20% of a retailers customer base, on average).
So far, a consumer value proposition equivalent to the low work/high reward of EDLP – the most pervasively popular among price conscious consumers – has yet to arise outside of Wal-Mart’s volume stronghold. In this way, legislation that was designed to encourage competition has – in my opinion – discouraged it. Any truly disruptive solution in grocery will need to address this industry dynamic.
In our first blog post (Coupon Fatigue? Calling All Grocery Coupon Burnouts), we put out a call to action – hoping to encourage people think bigger about how to innovate in grocery. In my mind, the question is – how do you enable yield optimized pricing with a work/reward ratio for the consumer that is as easy as EDLP and funded by national (rather than trade) budget dollars?
I’ll be heading to (ACP Annual Coupon Conference) later this month to explore this question. If you would like to meet up and brainstorm, let me know!