Every Day Low Price (EDLP) or Promotion?
The price-related question we hear most in 2018 is “Should my brand go Everyday Low Price (EDLP)?” This question is being raised against a backdrop of falling promotions and retailers’ increased focus on ‘everyday low price’ approaches. The annual percentage of grocery purchases sold on promotion in September was 32.4% - the lowest since June 2009. In the same week, Tesco announced the launch of its new discount chain Jack’s – which it claims will offer base prices cheaper than Aldi or Lidl. The talk is all about low base prices, not temporary promotions.
The retailers who appear to be winning in grocery over recent years offer various forms of EDLP. In particular Aldi and Lidl have grown significantly in the last five years and now have 13% share of the market. B&M Bargain and Home Bargains have also seen significant growth, and they too follow an everyday low-price strategy. The offer is an attractive one for shoppers, based on a simple message and a price promise of continuous low prices all of the time, as opposed to on or off promotional prices which change continually.
The current drive for EDLP shows the discounters’ ability to influence others. The big four retailers have traditionally relied on frequent promotions to incentivise shoppers, known as the ‘HiLo’ model. Increasingly, retailers now look to offer a greater number of products at everyday low prices -especially commonly bought items. Value simplicity, everyday low prices, and the emphasis on prices staying down are forming an increasing part of retailers’ messaging.
For retailers it is evident that perceived low prices can be a great way to attract shoppers and retain them. It offers a practical benefit for manufacturers too – it is far easier to predict demand when a continuous price is offered, compared with the constant peaks and troughs of volume that we see when a brand does frequent promotions. It makes forecasting and production easier, so makes sense operationally.
A sure thing? Or reasons to be sceptical
Considering EDLP’s apparent momentum, it is worth asking why manufacturers and retailers should be sceptical at all before going headlong to EDLP and abandoning promotions.
The first obvious argument against using an EDLP approach in an attempt to match the pace of the discounters, is that whilst the discounters are growing, they are still smaller than the big four grocers. The latter still promote extensively, so while the momentum is with EDLP, HiLo accounts for more sales in value terms.
A second reason to be sceptical is that promotions are good for retailers and brands. Kantar Worldpanel’s models show that more often than not, a promotion benefits a retailer. The volume-generating benefits of promotions are well known, but retailers express concerns that they may simply switch sales to a promoted item, with no real benefit to the retailer. In reality, our research shows that two out of three promotions grow a retailer’s incremental sales value - the extra sales more than offsetting any switching within the portfolio.
For brands, promotions are even more vital. Kantar Worldpanel’s models on promotional effectiveness show that 99% of deals generate incremental sales value for the promoting brand. Whilst it may be operationally simpler to do EDLP, the peaks and troughs of promotions are a fail-safe way of growing your sales value. For brands in the top four grocers, 55% of sales are made on promotion, so there is a lot at stake.
The third reason is what we call the Sensodyne effect; when higher-priced, and in perception, higher quality brands are on promotion, this encourages shoppers to trade-up. Effectively the promotion encourages shoppers to buy something more expensive than their usual purchase. In the toothpaste category, our models show that Sensodyne does this effectively. The retailer benefits from this effect as the sales value of the purchase is higher. Abandoning promotions in favour of EDLP means losing your trade-up potential. If you are a brand like Sensodyne, which benefits from shoppers trading up like this, then EDLP does not seem to be a logical strategy. And logically, if your product commands a higher price than the category average, you should be even more sceptical.
Finally there are two much simpler reasons why you might want to be an EDLP-sceptic. For a retailer, it is not possible for everybody to be the cheapest. If a top four retailer attempts an EDLP strategy, should they aim to be cheaper than the discounters, or just cheaper than they used to be on full price items? If the latter, they run the risk of actually achieving a neither here nor there strategy; not as cheap as the cheapest discounter, but with fewer eye-catching promotions to encourage more spending from shoppers accustomed to them.
Adopting EDLP as a brand means never changing your price, whilst your competitors can add promotional events at will. On average, a quarter of a brand’s sales on promotion are stolen directly from competitors. The worst-case scenario is that the novelty of EDLP wears out, competitors offer promotions which steal from you, and brand owners have little flexibility to react quickly. Unlike a HiLo plan, where potentially the depth and frequency of discounts can be flexed, classic EDLP means never changing. The tactical plan is fixed and if it’s not working the options are limited.
Will it work for me?
Without research, we don’t know.
Our clients often approach us for possible proof, or at least evidence, that EDLP will work. But any price change involves risk. The best way to minimise your risk is to have a measure of price sensitivity through modelling and simulation of price scenarios. There could be benefits but without some form of informed price modelling it is not possible to quantify if you will be an EDLP winner or a loser, and what strategy is open to you. So the key advice would be to conduct research, look to minimize your risk, and retain a healthy dose of scepticism.