Walmart strategy- Everyday Low Pricing Model

We see a lot of supermarket chains around us. Big Bazaar, D-Mart, V-Mart are some names that have gone huge and later released their IPO. Supermarket chains have expanded from metro cities to now smaller towns. One thing that unequivocally attracts people to the Supermarkets stores is their low pricing. They buy and sell in huge volumes and thus can generate economies of scale that normal Kirana Stores cannot. This piece talks about how Wal-Mart’s famous revenue model works and has the retail sector been able to generate benefits for consumers through this model.

The Pricing

There are two kinds of pricing models broadly known in the retail business. One is the High-Low pricing model (also known as the H-Lo model). Supermarkets sell goods at a higher price, and then they call for a ‘Sale’. Customers get a promotional discount and they rush to the stores.

Another model is the Everyday Low Pricing (EDLP) model. Instead of selling some object for ₹100 in a normal season and ₹50 during ‘Sale’, a supermarket may choose to sell it at ₹80 throughout the year. Now, is this model profitable? Does it attract enough customers? We will dig a little deep.

The Customer Base

There are two kinds of customers. First are those who do prior research on their grocery. They know what they want to buy, where the price would be the least, other promotions and so on. These people take the most benefit of the ‘Sale’. These people stock when the prices are low. These are the people to whom even grocery shopping excites. 

Second, are those who do not take their groceries seriously. Except for a few things, they do not even plan what they should buy. They just reach out to the store and take the stuff. This crowd is the customer base of the EDLP supermarkets.  Everybody wants to pay less. However, they are ready to pay ₹80 for something that regularly fluctuates between ₹100 and ₹50 as long they have their peace of mind. The customer gets associated with the supermarket brand thinking they will not have to pay foolishly higher than the fair price. Therefore, they shop from a single chain with whom they have developed trust.

The Supermarket Profits

The High-Low pricing supermarkets make profits when goods are in demand and then sell them in the discount when demand falls flat. EDLP supermarkets are selling the same goods at lower prices throughout the year. How do they profit then? This is what Wal-Mart has taught the world. EDLP has proved to reduce fixed costs significantly. Less amount is spent on promotions or marketing. Instead, the focus is on the improving quality of service. Since these kinds of customers have a long-term association with the supermarket, a minimum cash inflow sustains irrespective of market factors. Besides, this association helps the stores to predict the demand and manage the inventory accordingly. The efforts are minimal and hence, they need minimum staffing for this purpose.

Also, they need not rethink the price repeatedly. Price changing is a cumbersome process. With every change in price, all the variables change. Each change has to be well quoted across the store. EDLP is devoid of such processes. Supermarkets like Wal-Mart are known to build over these advantages. They indeed sell at lower prices and hence their margin is lower. Yet, the volumes of sales have compensated the loss of margin.  

The Customer Advantage

The EDLP model has been famous amongst those who are not into shopping. They just want to buy things at a fair price. Hence, the customers develop a sense of trust with the brand. In India too, people have a clear choice when they go for buying. They know the set of products they would get and an estimated price they will have to pay. They need not screen every store, Monday to Saturday, to know when their product would be charged the least.

Since such customers shop less, they tend to buy most of their groceries at once. Hence, it reflects significantly in their bill. Their bills are mostly predictable. It can be easily understood that if High-Low pricing does not offer many variations, people would prefer to move to EDLP. So, do the customers benefit from the EDLP? Well, it is a trade-off. It would take more effort to reduce the bill if you are into buying stuff from ‘Sale’. On the other hand, you put less effort; you get an assured price that is somewhere in between the ‘High-Low’ price.

The Indian Market

Indian market is much divided when we discuss EDLP as a profitable and customer attracting strategy. Big Bazaar advocates the ‘High-Low’ strategy. It has ‘Sabse Sasta Budhwaar’ (Cheapest Wednesdays) offers. It is India’s biggest supermarket chain. Big Bazaar is part of the ‘Future Retail’ owned by Future Group. Future Retail has shown a consistent rise in the past 5 years with current annual revenue nearing $3 billion. Similarly, DMart keeps coming up with promotional offers on different products at different times.

On the other hand, we have Reliance Retail. Reliance Retail is an umbrella of various Reliance brands including Reliance Fresh, Reliance Smart, Reliance Digital, Ajio, and recently acquired Hamleys. Reliance Retail since its foundation in 2006 has chosen to use the EDLP pricing model. In its 14th year, it is generating $10 billion in revenue every year.

Each retail company has chosen its way to price, and it seems like each works in a way or the other. It is even more surprising because the Indian market is known to be more price-sensitive, and the one that is stereotyped to get lured by the promotional offers or ‘Sale’.

The Verdict

Is EDLP the best way to do business? No!

Not many retail chains have been able to switch to EDLP in the past. As pointed out above, EDLP is designed for a different customer base. Though this customer base is increasing, High-Low pricing is still very much in the game. There is a huge customer base that cherry-picks promotional offers and then tends to buy stuff. With much information now available online, this customer base is more informed. Moreover, the EDLP model needs to build a relationship with the customers over the years. The trust of pricing, the familiarity with products, and the approval for quality takes time to build.

On one side, EDLP stores have a loyal customer base. On the other side, it becomes tough for them to bring in new customers without offering any promotions. In fact, for markets like India, promotional offers have a proven record. Nonetheless, with people spending less time on grocery shopping, which is likely to reduce more in this busy world, the EDLP model stands tall. Wal-Mart and Reliance Retail have proved this. With time, we might see some other chains taking up this model. Until then, to each its own.