We often hear the term Every Day Low Price (EDLP) used in the food and beverage industry. It is fair in these days of food inflation to question if we really should be using the term. When you go to the shelf there isn’t too much that seems low. Google and dictionaries can provide definitions, but they do not always help you understand the importance of the term or perhaps even a specific meaning in our industry. We are going to share some food and beverage industry terms and explain how they can benefit or impact your business.
Every Day Low Price (EDLP) is a pricing strategy that limits or eliminates temporary price reductions to bring stability to retail pricing. Retailers believe consumers will be able to compare prices more effectively in an EDLP environment and make a more informed decision on where the lowest prices are found. This is also a more efficient pricing strategy as the labour to change signage and update prices in the system is reduced significantly.
Every Day Low Price is different from Every Day Low Cost
When we hear EDLP in the food and beverage industry retailers are referring to the retail pricing strategy. This is not to be confused with Every Day Low Cost (EDLC), which are the prices they pay suppliers for products. If you are a supplier talking to a retailer, if you are referring to your selling price, you should not refer to it as an EDLP. The retailer will think you are talking about retail pricing. We will explore EDLC next week.
The EDLP concept
Although many people talk EDLP, there are very few real examples of it. The concept, as we explained earlier, is to limit the promotional activity and offer a consistently low retail price to consumers.
It sounds great in theory…
1. Reduce complexity,
2. Reduce costs maintaining price changes and invest some back in price,
3. Reduce costs changing signs and invest some back in price,
4. Reduce costs changing displays and invest some back in price,
5. Focus on selling, not manipulating prices,
6. Stable retail prices consumers understand so they can compare
7. Deliver the overall lowest shopping bill
8. Develop a loyal clientele who stay shopping at the store because they have the confidence it will be the best value every week.
Unfortunately, reality is different than theory. It is very difficult to find any true EDLP retailers. The closest we have in Canada would be Costco, discount formats like No Frills, Maxi, FreshCo, Price Chopper, Food Basics and Walmart. These retailers do not rely on their advertised specials as much as conventional food retailers, like Loblaw, Zehrs, Fortinos, Sobeys, Safeway and Metro.
When Walmart launched their stores in Canada during the late ‘90’s they planned to use an EDLP strategy. They had success with this in the U.S. and it seemed to be the plan in Canada. They learned quickly the competition used a lot of price changes to portray value to shoppers and it was much more difficult for Walmart to establish their low price image. After some months of EDLP, Walmart adopted more weekly specials and Rollbacks in Canada, which are their version of in-store specials. Walmart do not like to invest in changing prices, but they had to adopt some of this to develop their price image.
What consumers really know about price
If you were to ask consumers about retail pricing, many of them would tell you they are knowledgeable and some even claim they know several prices. When I was at Loblaw, we would ask consumers and when you give them a pen and paper and ask them to write down a number of prices, it is not that easy. They think they know but they really are not that knowledgeable. In fairness it is not easy and even working in the industry I would have to study pricing to have a good sense of what I would be looking at in competitor’s stores. With flyers, in store specials, loyalty programs, multi buys, rollbacks and several other pricing programs it is difficult for anyone in a store a couple of times a week to really know pricing.
What consumers are better at is the total grocery bill. They have a sense for what that number at the bottom of the receipt should be, based on what they buy each week and their expectation.
When I was at Loblaw we would focus on our overall pricing gap, relative to competitors. We identified the competitor we believed was lowest in the market. We would compare our prices on a list comprised of top selling and slower selling items that reflected a ‘basket’ of goods. If our prices were within 5% of the competitor, we believed consumers would not notice any difference. In other words, we would not lose shoppers for price with this level of pricing. If our prices were between 5-10% higher there was a chance consumers would notice but if our quality perishables, service and other attributes were better we would not lose shoppers. If our prices got to be 10% higher we would see erosion of our shoppers for better prices across the street.
There are exceptions to every rule and some people have their favourite items or brands and they will drive a mile to save a nickel. One other complication in pricing is brands. Some retailers will have a national brand they work with. French fries are a good example of this. Can you really tell the difference between McCain and Cavendish frozen French fries. Obviously, the brands would say yes and some consumers would as well. Most consumers could not tell the difference so one strategy some retailers pursue is to be comparable on ‘their’ leading national brand. In our French fry example McCain might be 3.99 at Walmart and Cavendish 3.99 at Loblaw, where their McCain are 4.49.
Food inflation will put more emphasis on EDLP
The low in EDLP is relative to the market. There is no doubt the low right now is higher than it was a few months ago. Prices are increasing everywhere and even the EDLP retailers like discount and Walmart are having to increase prices. Believe it or not, they do not want to do it. It is difficult to say you are low priced when prices continue to increase. Consumers know prices are going up so in the near future the discount formats will win more shoppers as they believe it is the location where they will see the lowest overall grocery bill.
What does it mean for suppliers?
During the pandemic we saw consumers shift to conventional food stores because they felt safer and could get everything they wanted. With this period of rapid inflation and more mobility, we will see sales grow in discount and EDLP formats. Suppliers want to ensure their products are on the right shelf to grow with the market.
If you have any questions or require help understanding EDLP, you can always send me an email peter@skufood.com or call me at (902) 489-2900.
Peter
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