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‘Everyday low pricing’ poses risks for retailers

By Ely Portillo, The Charlotte Observer –

CHARLOTTE, N.C. — Nothing draws shoppers quite like a sale. That’s what Mooresville, N.C.-based Lowe’s Cos. and some other major retailers have discovered, as they try to move away from promotion-based pricing strategies.

The shift has also tripped up J.C. Penney Co. this year, as the company tried to establish a simplified pricing structure and get away from frequent discounts and coupons. In both cases, customers shunned the stores that did away with deep sales, hurting profits.

“I think what happened was, quite frankly, in the spring we pulled back a little bit too much on promotions,” Lowe’s CEO Robert Niblock told the Charlotte Observer this week, discussing the company’s disappointing second quarter earnings. “We didn’t drive as much traffic to our stores.”

J.C. Penney’s problems with pricing pushed the company to a $147 million second-quarter loss, as revenue plunged about 23 percent compared to a year ago.

Lowe’s and J.C. Penney are both in the midst of a switch to “everyday low pricing,” a retail strategy favored by stores such as Wal-Mart. Instead of offering more highly marked-up merchandise mixed with deep discounts — a retail pricing strategy known as “high-low pricing” or “promotional pricing” — everyday low pricing offers all goods at a consistently lower price day-to-day.

Known as EDLP to retail executives, the strategy might seem like common sense. But switching to EDLP comes with risks, especially as many consumers have become used to discounts since the recession.

“They’re not used to seeing straightforward EDLP in certain retailers,” Carol Spieckerman, CEO of the retail consulting firm Newmarketbuilders, said of shoppers. “When it happens there’s going to be a period of adjustment. … For Lowe’s, right now they’re really having to shift the customer mind-set and wean them off those promotions.”

A study of grocers released in December by the Stanford Graduate School of Business found each strategy has pluses and minuses. EDLP cost retailers less, as they are able to simplify inventory and reduce variations in demand for specific goods caused by sales. Promotional strategies, while costlier, generated higher total revenues at the stores using them.

The study also found that it cost retailers about six times more to switch from a promotional strategy to an EDLP strategy than the other way around. There were costs related to advertising to educate customers about the new pricing strategies and convince them they’re still getting a good deal without constant sales, and internal costs such as re-working relationships with suppliers.

For its second quarter, Lowe’s this week reported profits of $747 million, down 10 percent, while revenue fell about 2 percent compared to the same quarter a year ago.

By contrast, Lowe’s main rival, Atlanta-based Home Depot, reported much stronger results. The company had a second-quarter profit of $1.5 billion, up 12 percent, while sales increased 1.7 percent, to $20.6 billion. Home Depot also raised its earnings forecast for the full year.

Retailers are still hoping to get away from promotions and price wars, which eat into profit margins. “Coming through the Great Recession, the whole industry probably got too promotional,” said Niblock.

But they’re also being driven by technology, which allows customers to compare prices at one retailer with rivals, instantly, on smartphones. That means that a high-low pricing strategy is less effective, because with more price transparency, consumers are more likely to seek out a better deal if an item isn’t discounted.

“The days of playing high-low with pricing, bringing things in with inflated price points and promo-ing from there are gone,” said Spieckerman. “They can’t play promotional games when customers are armed with pretty much complete transparency on pricing.”

After two disastrous quarters of steep losses and declining revenues, J.C. Penney has already backed off somewhat from its attempt to replace hundreds of yearly sales with a simplified, three-tier pricing system. The company recently announced it will drop one of the tiers and bring back “clearance” sales, a nod to customers who weren’t on board with the retailer’s new direction.

J.C. Penney said it will keep its normal prices 40 percent lower than they were before the retailer switched to EDLP.

“We thought simplifying 590 unique sale events into three types of pricing would be easier, but it turns out … customers and others found the pricing a little confusing,” said CEO Ron Johnson, according to media reports.

But other retailers have found success with EDLP revivals, especially Wal-Mart, one of the pricing strategy’s pioneers. Wal-Mart announced last year that it was renewing its commitment to EDLP, doing more competitive checks against other companies’ prices and wringing even more costs out of its supply chain. The mega-retailer also began a new advertising campaign and added thousands of items to stores.

Since then, the retailer has seen earnings and revenue grow. Earlier this month, Wal-Mart posted quarterly profits of $4 billion, up more than 5 percent compared to the same period a year ago.

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