Good business...

... or sheer folly?

In a May 3, 2011 Chicago Tribune article Wallin Wong reported that Jewel-Osco “...is continuing to cut prices while tailoring its stores for individual neighborhoods...to reverse sagging sales.”  For those of you who may not be familiar with the name, Jewel-Osco and Save-A-Lot are both part of the Supervalu family of discount grocers.

According to the article, CEO Craig Herkert told an investors conference “We know we must get our everyday base pricing in line with our competition."  Will this strategy accomplish that goal?

Adding Value

There’s little doubt that stocking their shelves with products their customers buy most often adds value in the form of time savings for those customers.  Having said that, their customers don’t place as much value on their time as those frequenting higher priced grocers.  How do we know that?  

Their customers bag their own groceries.  It’s a seemingly small thing, but by choosing to bag their own groceries in exchange for lower prices, these customers have given us a sense for how much value they place on their time.

The other question that begs an answer is “Will tailoring its stores for individual neighborhoods result in increased sales?”  The short answer is “No.”  The fact that the stores are tailored to the customer’s buying habits in no way influences the volume of purchases they make.  Whatever your family size, you’re only going to drink so much milk or eat so much bread each week.

In essence, Jewel-Osco’s strategy is to going to provide buyers with some time saving which they don’t value very highly while tailoring offerings to what they already buy with little hope of increasing the volume of purchases and, simultaneously, reducing prices.

But wait, there’s more bad news!

Adding Cost

In order to achieve this customization for each local store, Jewel-Osco is going to have to invest in its data collection, data mining capabilities.  

In fairness, there may be some cost savings in their distribution network by shipping only those items that turn quickly in their stores.  Will the magnitude of those savings be enough to offset the customization cost?  I don’t have enough information to answer that question, but even if it is does it achieve the Jewel-Osco’s real goal - “to reverse sagging sales?”

The Answer

We need only simple math to be able to answer this question.  How does Jewel-Osco expect sales to go up when their strategy:

Mandates prices declines (sales automatically decline as well).

Only offers what their customers are already buying (no new sales).

Does nothing to entice lost customers to return (no new sales).

Once again we see the sheer folly of lowering prices to staunch declining sales.  Not to mention the fact that there’s a better than even chance Jewel-Osco’s costs will be rising.  

If you’re experiencing declining sales your problem isn’t pricing, it’s a failure to deliver what the customer wants.  Explore that avenue for rejuvenating sales you’re likely to find a way to generate additional sales and raise prices as well.