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Retail Strategy: Compete for Bargain Shoppers Without Seeing Red

The pandemic-driven boon in online shopping has brick and mortar stores searching for a successful retail strategy to stay competitive in the shifting landscape.

Mega-retailers like Walmart (famous for its “everyday low prices”) and Amazon (famous for next day shipping on reasonably priced staples) have reported a rise this year in sales of pandemic-related items, such as hand sanitizer, toilet paper, and other quarantine survival necessities. Meanwhile, online sales in general have skyrocketed as consumers stockpiled the essentials.

But the “panic buying” phenomenon of 2020 is not a windfall for most brick-and-mortar retailers. Not only are they seeing less foot traffic, they’re also experiencing higher operating expenses. From protective plexiglass to sick pay, unexpected expenses have sapped many retailers’ projected annual earnings.

Kroger Co.’s Chief Financial Officer, Gary Millerchip told the Wall Street Journal that the retailer expects Covid-related costs to continue beyond the first quarter as the grocer invests in associate and customer safety and adapts to increasing digital demand. For Amazon’s part, the online retailer said that the company’s pandemic-related operational costs had totaled $7.5 billion by October. 

Meanwhile, shoppers are limiting discretionary purchases. One-third of consumers report feeling “financially-squeezed, with less disposable income compared to before the crisis.” Nowadays, consumers shop from home instead of on foot, seek value and shun extravagance, and forego entire categories in favor of the staples.

Indeed, these behavioral changes have forced businesses to rethink their retail strategy, including pricing. Overcoming shoppers’ reluctance will require appealing to their sense of value. Retailers who make shoppers feel like they’re getting a bargain or an added benefit will net return visits.

Even with a vaccine on the horizon, social distancing requirements implemented to contain the virus may reimagine the retail landscape for years to come. To succeed, retailers will need to embrace artificial intelligence and move quicker than the competition. Here we’ll share three key strategies for making shoppers feel like they’re getting a deal while protecting the bottom line.  

 

Providing Value, Not Dropping Prices

Against the backdrop of Covid-19, writes McKinsey & Co., “retailers will need to be deliberate about influencing customers value perception.” But are your prices really the key factor in how valuable shoppers consider your brand?

In a 2017 study of 2,200 shoppers in Washington, DC and Atlanta, GA, “How Grocers Can Improve Shopper Price Perception,” Bain & Co. found that “best value” and “highest quality or freshest groceries” outranked “lowest prices” in terms of the most important factor influencing where customers shopped. And perception isn’t necessarily tied to shelf price. Bain & Co. found that grocers often can find better ways to improve price perception than lowering prices. In fact, shoppers may not even notice if you lower prices, your customers—all too often—won’t even notice.

So what is it that defines value in the eye of the consumer? In Kantar’s 2020 ranking of the most valuable global retail brands based on financial results and consumer sentiment, “innovative use of technology such as artificial intelligence and data analytics” was a recurring theme in terms of retail strategy for the top-performing retail brands. In the post-pandemic world, brands—like The Home Depot and Nike—that respond to shifts in consumer behavior while tackling business-critical changes to supply and demand came out ahead.

As for The Home Depot, the home improvement retailer acted quickly during the crises to cancel annual sales events and pull marked-down goods off shelves to draw crowds away from stores, according to The Wall Street Journal. Instead, customers were drawn to both the retailer’s physical and digital stores, investing in projects to improve stay-at-home lives. At the same time, The Home Depot’s Chief Information Officer, Matt Carey, quickly pushed out mobile appts for curbside pickup services and enlisted real-time inventory tracking to keep up.

Meanwhile, Nike quickly responded to the pandemic by quickly revamping its digital strategy for the “new normal”—without dropping prices. Although store closures caused Nike’s overall sales to fall 38%, changes made early crisis are helping the brand rebound. Nike’s digital apps and online sales grew 75%, cushioning the overall decline. The brand rolled out livestream workouts and digital fitness challenges to augment their already-robust digital ecosystem. These moves added value for home-bound consumers. These digital advances paid off in the end for both Nike’s across the board. According to WSJ,   direct sales made up $3.7 billion of revenue in the summer quarter, up 12% from last year.

 

Pricing Optimization

Although small fluctuations may go unnoticed by customers, creating the right price perception is critical. Pricing has long been critical to retail strategy,and the pandemic’s pressures have made it more crucial than ever. But trying to beat behemoths like Amazon and Walmart by competing on razor-thin margins is a guaranteed race into the red.

That’s why many businesses are eager to explore the benefits of artificial intelligence and learn how to create effective, AI-based pricing practices. Proper pricing canhelp shoppers feel that they’re getting a bargain while streamlining store operations and ensuring the best return on investment. With Amazon reportedly driving 25% of profits based on dynamic pricing leadership, brick-and-mortar retailers should take notice. 

It’s clear that the advent of dynamic pricing and price optimization is transforming the online shopping experience. With a real-time understanding of supply and demand, these tools can help retailers quickly respond to changes in competitors’ pricing and fluctuations in consumer demand whether in store or online.

Electronic shelf labels—commonly called ESLs—deliver instantaneous pricing and promotional actions to individual stores. Already widespread in Europe, American retails companies have been slow to incorporate ESLs into their retail strategy due to concerns over return on investment. But as operating (read: labor) costs continue to rise and the technology continues to advance, more and more US-based retailers are taking note.

Kroger, another retailer noted on Kantar’s top 75 list, partnered with Microsoft in 2018 to create proprietary technology called EDGE (Enhanced Display for Grocery Shelf.) Kroger’s IoT sensors bean real-time information from everywhere in a store, changing prices as needed and communicating promotions with dynamic advertising. As an added benefit, the system syncs with Kroger’s Scan, Bag, Go frictionless checkout program.

But multichannel retailers especially must ensure that their prices align in-store, online and at checkout. Changing prices too often or inconsistently can erode consumers’ trust and loyalty. As one RetailWire analyst noted, “If your competitor can change prices every day of the week and you only change them weekly, you will lose an entire week of price perception before you can react.

 

Loyalty Programs

Retailers can use AI for more than monitoring and adjusting pricing. A winning retail strategy also makes use of software that gives granular insight into shoppers’ preferences and habits to customize incentives.The most effective loyalty programs provide a mix of benefits to drive visits, repeat purchases and increased engagement. Smart retailers strive to cultivate loyalty; according to the 80/20 principle, 80% of a store’s sales come from 20% of its customers.

Consider 7-Eleven, the world’s largest convenience retailer. The Dallas-based Slurpee behemoth introduced its app-based 7Rewards program in 2015, offering members one complimentary beverage for every six cups purchased.

“We have customers who come in every morning, like clockwork, for a fresh-brewed cup of 7-Eleven coffee, while others regularly treat themselves to a Slurpee or Big Gulp drink,” said Laura Gordon, then 7-Eleven’s vice president of marketing and brand innovation. “If you come in every day, scan your 7Rewards app barcode, you can get one free drink a week or even more, and that’s our way of saying ‘thanks’ to our customers and letting them get more of what they want at 7-Eleven.”

The app was an immediate success because it was easy to use and provided customers a clear benefit. 7Rewards soon expanded to include free Slurpees for repeat purchases and deals on snacks, hot food and household supplies. The 7-Eleven’s program tripled its user base to 25 million members within the first year, resulting in a significant rise in store visits and repeat purchases.

Meanwhile, premium, fee-based loyalty programs from Amazon, Barnes & Noble, and Restoration Hardware are also enjoying a boon. The nominal fee customers pay up front to join the program renders them likelier to return, buy more, and engage with the brand.

 

Last thoughts: Covid Complicates Retail Strategies

In less than one year, the arrival and spread of COVID-19 has changed the way consumers live, work, and shop. Even with an effective vaccine in place, the virus’s legacy in retail is likely to endure. Has the importance of the all-mighty bargain changed in the pandemic age? To the extent that it fosters a sense of victory in the shopper, the perception of a bargain remains crucial to winning in this new world.  

The most successful retailers will look to pricing software to make small, strategic shifts quicker and more frequently than competitors. They’ll also implement loyalty programs that provide hyper-personalized promotions and incentivize shoppers to accrue benefits, whether it’s a cup of coffee from 7-Eleven or early access to a design event at Restoration Hardware. On a deeper level, they’ll check in with their customers more often to understand what they want and when so that customers perceive their products as more valuable than that of their competitors.

Ongoing public health measures to contain the virus will cement these new retail habits in a permanent way, and the brick and mortar retailers now starting to use AI to streamline operations will be best positioned to thrive.  

Learn how CB4’s proprietary machine learning algorithms helps brick-and-mortar retailers rise to the increasingly complex demands of shoppers at each store in their chain.

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