Randalls Departmental Store

8/10/2019 Randalls Departmental Store

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EDLP versus Hi-Lo

Randalls Departmental Store


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Randalls departmental store?

Issues

Why did EDLP/EDFP (more level pricing) fail in

Randalls? Why was it successful in the Childrens

category?

So is Hi-Lo pricing the only way out for Randall? If

it wants to continue with EDLP what modifications

should it do?


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So, basic questions.

What is EDLP?

How well does EDLP work?

What does it take to make EDLP work? When and how should EDLP be employed?


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Prototypical definition of EDLP & Hi-Lo

EDLP: The retailer charges a constant, lower

everyday price with no temporary price

reductions (TPRs)

Hi-Lo: The retailer charges higher prices on an

everyday basis, but runs frequent promotions

where prices are reduced to below EDLP level


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EDLP

This strategy stresses continuity of retail prices at a levelsomewhere between the regular nonsale price and thedeep discount sale price of the retailers competitors.

EDLP does not necessarily mean the lowest price in themarket.

A more accurate description of this strategy is everydaysame prices because the prices dont have significantfluctuations.

Some retailers have adopted a lowpriceguaranteepolicyin which they guarantee that they will have the lowest

possible price for a product or group of products. Theguarantee usually promises to match or better any lowerprice found the local market, and includes a provision torefund the difference between the sellers offer price andthe lower price.


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Why EDLP?

Brings credibility to prices! Frequent sales leads tocustomers getting to have a lower reservation price.

More level demand: Crowding during sales avoided Easier sales forecasting and operations management Lower promotion costs: Money can now be used for Brand

Building rather than sales promotion; Just see exhibit 10.Randalls out-of-pocket ad. Exp. was $14.6 million,representing $4/capita/year (3.7 million inhabitants, 1stpara)implies a national budget of 1 billion!

More level service: Crowding out is avoided Stable prices mean comparison Shopping reduced leading to

loyalty???

Focus shifts from sales to merchandise management. Frequent promotions can lead to customer dissatisfaction Employee pricing errors get hidden if products are frequently

promoted


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Hi-Lo

With this strategy, retailers offer prices that

are sometimes above their competitors EDLP

but they use advertising to promote frequent

sales.


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Advantages of Hi-Lo

Discriminatory pricing possible and therefore samemerchandise can be sold to multiple segments atdifferent times.

Powerful tool in the hands of sales people.

Motivating customers as well. Sign of Quality: The retailer can use the Hi price as

an anchor. Just because a sale is on for Louis Phillipshirts, does not make it a poor quality shirt. So the

initial impression of quality given by the higher priceon the merchandise continues even when the priceare lowered leading to perceptions of bargain. Inother words, higher transactional utility.


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The problem of Price (s)

1. Full Price

2. Full price with discount taken at checkout (price reduced on

Extra Value Days & Billingsville Saturdays etc.)

3. Clearance merchandise priced as re-marked hung on specialracks (see page 7)

4. Value PricePage 6

5. Value price on sale

6. EDLPPage 67. EDLP on sale

So, what is the problem?


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Why did EDLP fail in Jewelry

Jewelry is Fashion oriented. Fashion pricing

has two problems

It is tough to set a fair price for fashion!

Therefore, anchors given by the seller is crucial

It is also difficult to predict fashion merchandise

inventory to the last dot. There will be some

merchandise that misses the fashion peak!


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With EDLP, one cannot move the merchandisethat has missed the fashion peak to the offseason sales!

So this limits the Open to buy options fornewer fashions.

What is the correct price for fashion? It is

tough. EDLP talks of Fairness. The only way acustomer can think of this as Fair if the pricefalls in the off season.


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However, check exhibit 11..

If we base our sales increase on 1986, there was an increase of 41%sales in 1987 due to heavy promotions

In 1988 EDLP was introduced in this category The sales dropped by 16% in 1988 and further 12% during 1989.

However, if we compare 1989 sales to 1986, there was a 5% growth.

This is what EDLP is supposed to do. It is supposed to level off sales This begs the question, Do the Randall Managers even understand

what EDLP is all about? Is it fair to compare sales of a HI-Lo pricingpolicy with EDLP?

So, did EDLP really fail for jewelry? It is not so evident from thedata!

So, what would make EDLP a success in Jwellry? The EDLP products have to be branded (like Tiffany heart)

A guaranteed ceiling on Markups together with an offer to meetcompetitors prices


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Why did EDLP fail in Mens Suits

EDLP was tried in Mens suits for 5 months.Two interesting departures from jewelry.

Firstly, Mens suits were branded..EDLP works for

branded products. Randall guaranteed price matching of that of the

competitorAgain, essential for EDLP to succeed.

So, why did EDLP fail in Mens suits?


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When there was a Hi-Lo Price the markup was 54% (i.e.Wholesale Price/ 0.46) = 2.17 * WP

When there was an EDLP price the markup was 49%(i.e. Wholesale price/ 0.51) = 1.96*WP

Thus, there was a reduction of only around 10% {(2.17-1.96)/2.17)}. Is this enough to make customersperceive a decrease, when the decrease on a sale ismore than this amount?

Bigger QuestionYou want to change peoplesperception on prices just in 5 months? Feasible?

Image of EDLP being associated with poor qualitySome brands refuse to be associated with it.


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Why did EDLP succeed with Childrens

First the Markup on EDLP was 30% as compared to 49%on Hi-Lo. Therefore the price reduction was 27%(compare it with 10% on mens suits)

EDLP was offered on 12 strong brands and they were

following the leader Kids R Us which was following EDLP. But is it an unqualified success? One thing to note is that

the % merchandise for children offered on EDLP hasreduced from 45% to 30%. Why? Because, even

childrens clothing is becoming more fashion orientedand same problem as with Jewelry.


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So, Wither EDLP?

What is EDLP? Technically, EDLP means that a retailer charges a constant

lower everyday price without any possibility of TPRs.Mostly retailers have introduced this concept, howevernon-retailers like Low Cost Airlines and some cars (likeSaturn) have introduced it.

Why? Reduces Uncertainty

Increases consumer confidence on shelf prices and therefore easyto communicate

Lowers Operating Cost Decreases Service and Assortment

Decreases Advertisement Costs

Decreases inventory & warehouse and handling due to predictable demand


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Why Not?

Price Discrimination Not Possible

Category Expansion is not possible

Problem of profitability Is EDLP profitable at all?

To answer this we need to ask ourselves two questions

a.What would make EDLP work?

b.Is it proper to have EDLP i.e. is it viable?


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What would make EDLP work?

For EDLP to work, the firm must create sufficient image of low

prices for consumer to switch

Pure Price Effect

Pure Ad Effect

Interaction between the Ad and Price.

Therefore, mere setting up of EDLP will not help, it needs to

be communicated and communicated effectively

Sears and Roebuck could not

Wal-Mart could

Imp: Product Selective EDLP is a horrible idea


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Second Point..

The Retailer lowers prices in the hope of

attracting more customers , but what is the

issue? Unless the new customers are far higher than the installed base,

EDLP is a horrible idea. Why?

Profits go up or down with increase/decrease in prices. However

the range of increase/ decrease is asymmetric. Retailers lose more

in case of price decrease than gain on price increase.

For every 10% decrease in price to keep the margins same, there

has to be an increase on 39% on volumes the other hand an

increase in price needs only 15% drop in customer base for same

margins!


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So, for EDLP to work

EDLP makes sense when you apply the strategy for

the retailer rather than few product categories

EDLP will work only

if your installed base is small. Number of loyal customer are low

So, if you are a big retailer practicing a hi-lo strategy,

and have a substantial market share, EDLP is a strict

no-no, no matter how well you communicate.


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Ultimate Question

Does Shopping Behavior Change with respect

to stores pricing format?

Depends on the Transaction Utility a customer

gets out of the purchase transaction Fixed costs and benefits

Variable Costs and Benefits


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Drivers of shopping utility

Type of

Cost/Ben

efit

Utility

Compone

nt

Drivers

Fixed Benefits 1. Habitual Shopping Experience (store loyalty, familiarity)

2. Service Quality (parking, employees, waiting time)

3. Assortment (Breadth and depth of assortment, exclusivelabels)

4. Purchase Flexibility

Costs 1. Store Location (Distance and Time to reach the store)

Variable Benefits 1. Store Specific Discounts (coupons, loyalty rewards)

2. Habitual Category Purchase Experience (Category Specificprice discounts coupons)

Costs 1. Expected Price of items on the shopping list


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HI-Lo have a higher Fixed Utility than EDLP

EDLP have a higher variable utility than Hi-Lo


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TotalUtilityfromS

hopping

Basket Size

Fixed Utility of Store A

Unit Variable Utility of Store A

Fixed Utility of Store B

Unit Variable Utility of Store B

Shop at Store A Shop at Store BThreshold


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So,

Two ways of improving perceived shopping

utility

Either increase fixed utility

Location

Assortment

Loyalty Programmes etc.

Or Increase Variable Utility Prices


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Store Positioning map

Service Based

Stores (Hi-Lo)Winner

Volume-Based

Store (EDLP)Loser

High

HighLow

Low

ShopperPerceived

Fixed

Utili

ty

Shopper Perceived Variable Utility


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Question of Strategy

What makes sense for a Hi-Lo and EDLP store?

Increase Fixed Utility?

Increase Variable Utility?

Depends on the segment of customers you want totap

More specifically, your fixed utility (or disutility) must be

traded off with your variable utility (or disutility).

This is the issue that was discussed in retail as the Huffs

Law


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So, back to Randall

What should Randall do? Can individual departments be on EDLP and Hi-Lo? Or

should EDLP and Hi-Lo should be a store strategy?

Therefore can Departmental stores that sell acrosscategories and each category having huge assortment ever

achieve EDLP?

Or in other words, does EDLP restrict assortment? And

therefore lowering of costs? i.e. it is not EDLP that reduces

costs, but assortment?Understand the causality here.


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Back to Randall..

What is the impact of EDLP?

How much should the sales be higher to offset

price decrease by EDLP? Is this possible?

How much decrease be by so that customersperceive this to be the change in price?


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Proctor & Gamble

This case focuses on Back Door EDLP or

EDLPP (Every Day Low Purchase Price)

This policy would (according to P&G)

Smooth out production process-i.e. thwart

forward buying by retailers

Reduce warehousing, handling and inventory

costs for both retailer and manufacturer This coupled with ECR and EDI will take huge costs

out of the channel.

But Did it work?

Documents

Randalls Departmental Store