By: A T Kearney
www.atkearney.com

A smarter approach to winning back value-conscious retail customers

Savvy shoppers know how to get the best deals and savvy retailers know how to create these deals while still turning a healthy profit. But the relentless push by value retailers such as Wal-Mart and Costco means the days of straightforward pricing and promotions tactics are gone. Instead, retailers must begin crafting strategies that build on existing pricing techniques and focus more on meeting customers� needs and desires. The potential reward�regaining lost customers and attracting new ones�is well worth the effort.

Much has been written about today�s value-conscious shoppers and how they are flocking to value retailers such as Wal-Mart and Costco. Penetration and market share of superstores and club stores have increased significantly across most segments�electronics, toys and especially grocery. Over the past several years, superstores saw their annual sales rise by more than 20 percent in the grocery, consumables and pharmacy categories; over the same period, traditional supermarkets saw only a minimal annual increase.1 Supermarkets are rapidly losing customers, especially for stockup items and products generally located in middle aisles. More than 95 percent of consumers shop four or more store formats annually, and for some categories, more than 70 percent say they regularly shop two or more formats.2

While these numbers clearly denote discount-seeking behavior, are they a symptom of a fundamental shift in shopping needs? We don�t think so. Consumers have always been value conscious; shoppers crave the excitement of bargains and periodic promotions. From department stores to supermarkets, the entire retail industry thrives on �sale� events, especially during the holidays. Supermarkets have long used weekly ads to lure customers into stores, enticing them with promotions on select brands and counting on them to fill their baskets with non-promotional items as well. Sale prices were, in fact, a key driver of a supermarket�s favorable price image, making the weekly circular the cornerstone of a competitive strategy.

However, faced with price competition from Wal-Mart and other value retailers, traditional mass marketing and �high-low� promotions strategies have not been successful�even with a more aggressive focus on price. In fact, retailers� aggressive price responses turned into a vicious cycle in which ever-lower promotional prices fail to improve market share, with base prices rising to allow for the promotional losses.

Some retailers abandoned their high-low strategies and instead embraced an everyday low-price strategy, only to realize that lowering base prices didn�t lead to a large enough increase in volume, at least not enough to offset the lost margin.

Having little success with these traditional strategies, retailers are struggling to understand how, if at all, they can use everyday pricing and promotions to improve their price image and competitive position in each product category.

This paper discusses A.T. Kearney�s approach to pricing and promotion. We offer a customer-focused approach in which retailers identify and exploit the items most important to customers�items that will help build and sustain a positive price image. It is a rigorous strategy that builds on retailers� experience and historic perspective on pricing and offers help in making better, fact-based and timely pricing decisions. It also acknowledges that shoppers know how get to the best deal; shying from slick promotional activities, this is the �no-insult� approach to pricing.


1 A.T. Kearney research
2 Information Resources, Inc. and A.T. Kearney analysis


Sidebar: Building Loyalty at the Store Level
Despite the many discussions about identifying individual shoppers or micro-segments of customers and then devising targeting strategies to meet their needs, very few success stories exist in retail. The retailers that have succeeded in generating sales have not always driven bottom-line results or sustained loyalty. Up to 70 percent of chains offer loyalty cards and collect valuable information, but most of it isn�t used�cards have simply become discount vehicles, with an average consumer owning two or more competitors� cards.

Fortunately, things are changing. A recent analysis of shoppers at a large U.S.-based retailer found that of the top 30 percent of shoppers (those who spend up to US$5,000 per year and visit at least once a week), 15 percent did not buy anything in the paper aisle (bath tissue, paper towels), and more than 50 percent spent less than the average in this category (see figure). Through this analysis, the retailer obtained a quick, yet powerful, opportunity to target these shoppers with special promotions. In doing so, it increased share in the category, improved store loyalty and discouraged the purchase of at least one item from a competitor club store.

The following are four ways to increase loyalty at the store level:

Identify and target loyal consumers. Evaluate shopper baskets for gaps and affinities that can be quickly filled. Find the 20 to 30 percent of unprofitable shoppers who typically fill 80 percent or more of their basket with price deals.

Take a cross-category, total-store view. Most of the so-called targeted promotions focus on a brand manufacturer�s coupon. While this benefits a brand in the short term, loyalty to a retailer is solidified through category or store-level promotions.

Incorporate all aspects of merchandising and marketing, not just discounts. Make targeted promotions and pricing a part of an overall loyalty marketing program that includes tailored assortments, services and other rewards. Identifying shoppers by spend level can be effective in building loyalty, but only when rewards are significant and tailored to meet their needs.

Empower managers and associates at the store level. The store is where it all comes together. Associates should be trained to serve the desirable shoppers and build trust and loyalty. For example, Best Buy trains its associates to identify desirable customers through observation and a quick interview. The target customers then receive shopping assistance and services that are not available to everyone.