A can of tuna fish. A box of laundry detergent. A fresh muffin. All three items are sold in a supermarket, so all three require the same pricing strategy, right? Wrong.
Pricing products in supermarket bakeries is no mystery. The cost of ingredients, labor, packaging and shrink are among the variables that factor into in-store prices. However, too often in-stores are not applying pricing strategies that tap the full potential of their bakeries. Effective pricing results in benefits beyond those of improved profitability, including the capacity to enhance product quality; to develop loyal, frequent customers; and to build sales. All of which require rethinking the pricing process, beginning with purchasing procedures.
Work the "sell"
"It is far easier to demonstrate savings by relating to reduction of costs than it is to show profit improvement through improved execution and delivery," says Bob Beckerman, former corporate wholesale director for deli-bakery-foodservice at SuperValu Inc.
The propensity to operate in-stores similarly to how the grocery and general merchandise departments are operated remains a key challenge. Those departments seek to make money on the "buy," not the "sell." For example, competing supermarket chains that offer the same branded tuna fish have only one opportunity to compete: price. Therefore, they negotiate the best possible purchase prices to generate profits.
In contrast, in-stores buy ingredients and semi-finished products and add value to them, which affords the opportunity to offer high-quality products and distinguish their bakeries from competing in-stores.
"If (supermarket bakery) retailers paid as much attention to how they manage their production and how they deliver product to the consumer, they would make far more profit dollars than having a focus on the buy," Beckerman says. "Buying is an important ingredient, but it takes a commitment to both sides of the equation."
Focusing on quality in the ingredient purchasing stage is the first step towards meeting customer expectations in the bakery. Consumers continually rank quality as the most important factor for selecting an in-store bakery. Ninety six percent of in-store customers rated product quality as "very or extremely important" in choosing an in-store bakery, according to a 1996 national survey of consumer attitudes toward in-store bakeries. The study, commissioned by Modern Baking and RBA-The Retailer's Bakery Association, was conducted by the University of Maryland Business School and National Family Opinion Inc. "Shopping convenience" ranked second at 76 percent, and "price" stood at third with 72 percent.
"...top management wants to talk about positioning themselves on having strong perishables. At the same time, they are reluctant to go a dime higher than the competition."
Those numbers today likely would prove even more dramatic. In-store bakeries are losing their bases of loyal customers. According to Modern Baking's Supermarket Bakery Research, the percentage of store customers who frequently shop in-store bakeries declined to 16 percent in 2002 from 20 percent two years earlier. In addition, instore bakery operators reported that the average sale per customer was down to $2.89, which was lower than in 2000 and 1998.
"People are looking for a better product. They just don't know where to get it," says an in-store bakery distributor and former in-store director for an East Coast chain.
Challenges to profitable pricing
Corporate managements' apathetic attitudes toward bakery, inconsistent bakery performance and undervaluing bakery's true worth are among the bumps in the road to profitable in-store pricing.
"If the (supermarket bakery) retailer paid as much attention to how they manage their production and how they deliver product to the consumer, they would make far more profit dollars"
"We are all too price sensitive," says an in-store director for a Midwest supermarket chain. "Top management wants to talk about positioning themselves on having strong perishables. At the same time, they are reluctant to go a dime higher than the competition."
This disconnect between upper management and their in-store bakery departments is not uncommon, industry observers say. In-store directors, bakery supply manufacturers and bakery distributors agree. One bakery distributor gauges upper management's commitment to bakery by asking them about their in-stores' strengths.
Often what upper management believes to be true in their bakeries is not reality, he says. To demonstrate their skewed perception, he takes them through their in-stores and asks them, "If you were having company tonight, what would you take from the bakery." More often than not, the executive has difficulty selecting an item. "How can you expect your customers to purchase these products if you wouldn't?" the distributor asks.
Supermarket companies' lack of commitment to bakery training contributes to, and is arguably the primary source for, poor bakery performance, sources say.
"In the in-store bakery, we give the customer every opportunity to tell us 'no' because of our operations," says the former East Coast in-store director. When products are damaged or packaged poorly and sales associates lack the knowledge to assist customers, everything adds up to customers choosing not to buy, he adds.
Prices fail to reflect quality
Even when all the pieces are in place, supermarket instores still tend to undervalue their products. Price elasticity in the bakery is great, especially when selling a quality product. Some bakery products have greater price elasticity than others, but in-stores continually sell their products well below customers' expectations.
For example, according to the consumer attitudes study, the highest price a customer would agree to pay for a donut in 1996 was $1.22 (1996 dollars). The " cheapest" price, or the price at which the customer would doubt the quality of the item, was $0.41. Today, nearly a decade later, in-stores commonly price their donuts at $0.50 or less.
Buy one, get one free sales (B.O.G.O.s) and other price promotions also are often mandated by corporate store marketing policies. Some in-store directors view price promotions as a way to get more customers to try their products. Others see price promotions as a direct hit to their bottom lines.
"An independent baker wouldn't do it," the Midwest bakery director says. "In their mind, we are diminishing the value of the those goods. And, they are probably right, but I have little latitude when it is part of an overall marketing program store wide."
One in-store bakery director Modern Baking recently visited refuses to display the company's mandated "sale croissants" in the in-store bakery department because he does not want the inferior croissants to be associated with his in-store bakeries.
The upshot to pricing promotions, sources say, is that bakery employees get behind "weekly specials," and put extra effort into producing, merchandising, promoting and selling the items. Ideally, that enthusiasm behind working the sell would carry over to bakery products not on price promotion.
Front-line employees can be the first step of many toward developing successful in-store pricing strategies:
"In-stores have failed to educate the consumer on the quality of the product they make," Beckerman says. "They've also failed in not delivering that quality consistently."
Not delivering on their promises is arguably the key hurdle to overcome to improve profitability. Unfortunately, customers have been groomed to expect inconsistency from their in-stores. High labor costs, inflexible executives and inadequate bakery training are a few examples on the list of challenges in-store bakery directors and merchandisers face. But, rethinking how products are priced may be a step toward developing in-stores that make money. More profitable in-stores can support better bakery training and have a striking advantage against other challenges.
Have your in-store prices caught up to the times?
IN-STORES CONTINUE TO PRICE many bakery foods categories at levels where consumers begin questioning product quality. In 1996, Modern Baking and RBA-The Retailer's Bakery Association commissioned a shopping attitudes survey of more than 1,400 in-store bakery customers. Conducted by the University of Maryland College of Business and National Family Opinion Inc., the study shows the retail price elasticity of in-store bakery products. Even more revealing, customers' price acceptance levels for in-store bakery products show that in-store operators today continue to price their products in the "cheap" to "sale" range by 1996 standards. Where do your in-store prices rank?
In-store prices prompt customers to doubt quality
(average price a customer would pay for an in-store bakery product: 1996 dollars)