I understand the concept of a loss leader. It bring people into the store. But it that item actually sold at a loss or just less of a profit.
For example, where I live we have a 7-11, Walgreens and a White Hen. The odd thing is one store almost always has milk for $1.99 a gallon. The other thing is two of the three or all three never have milk for a $1.99 at the same time. All three stores are within 4 blocks of each other.
So let’s use this example. I am guessing the milk brings the people in the store as a loss leader. But does is the milk LOSING the store money is the store just making less of a profit. Normally the mik in the stores sell from between $2.69 - $2.99 depending on th store.
On that item that you’re mentioning, it’s prbably just about break even. If they sell if for $2.89 they’re proabably paying $1.70 to $2.00 per gallon. As for a loss leader yea, sometimes we lose money on an item, sometimes we break even, sometimes we make just a little (which is still basically losing once you add in expenses). But I can tell you that at least once a day I see somebody walk by me with a full cart sarcastically complaining that they just came in for bananas.
In general, a loss leader can truly take a loss. Sometimes it is an item that is a dog anyway and they store can either take a small loss by selling it cheap, or a big loss by not selling at all, or like CompUSA, offer rebates all over the place. In other cases, it is an item that is low-priced in perpetuity. In the specific case you mention, I don’t know for sure. But IIRC 7-11 was owned by Southland which either was a dairy company or owned one, so there is some vertical integration there for a cost advantage on milk over other retailers. I worked in Towson, Md., for a regional competitor called Royal Farm Stores, also owned by a dairy. Dairy products were priced very competitively vs. retail grocery stores, even though everything else was priced much higher. But they certainly weren’t taking a loss on milk.
So there’s a spectrum of retail marketing strategies, some of which could actually result in offering a product at a gross loss (i.e., below cost).
One of the other thing to remember is market share, especially in the razor thin margin world of grocery stores.
Grocery stores regularly operate with very small profit margins so if the profit from the average customer is a couple dollars even on fairly large tickets, drawing in more customers on a regular basis is a huge deal. Also since much of what grocery stores sell is very perishable, volume drives additional variety, which means people do not have to shop elsewhere to get specialty items.
If you visit store A for $1.99 milk and you buy other things, even if those things have not been marked up you still spent your money at store A rather than Store B.
I could go on forever just with the details of stock forecasting and ordering for perishables but I have to go soon.
I know you mentioned grocers specifically in your thread title, but how about a car guys perspective?
A lot of the dealer advertisements you see are actual loss leaders (not the national advertisements). This is especially true in areas where there is a lot of competition, i.e. four Honda dealerships within a thirty minute drive. Not the same as the scenario Joey P gave, but pretty close to it (coming in for bananas, walking around with a full cart)…what is expected is someone comes in for the lower priced car advertised in the paper. However, it is a pretty bare bones model. What the dealer hopes is that you want a few options, add-ons, and you finance (interest). They turn their actual loss leader to a $2000 dollar profit or more.
Very rarely does a dealer actually lose money (with dealer fees, finance profit, etc.) but they actually do lose it once in a while. But while it gets people in, the benefits far outweigh the losses.
The dairy board here sets prices for groceries but not drugstores, so milk is often cheaper there. They can and do sell it below their cost.
The groceries are required to sell at a markup and can only charge “loss leader” pricing for 2 gallons at a time. Which they do, and they do lose money on that sale. Milk, being something bought often, is a price most people remember, while they may forget the price of less-frequent purchases.
I was referring to $1.99 a gallon. At our bigger supermarkets Albertsons and Safeway milk is about $2.99 a gallon regularly. I love to walk so I would just rather buy the milk one or two blocks then slep it two miles to one of the supermarkets
It just seems odd, because as I said, the three stores NEVER had the milk on sale at the same time. And they seem to rotate it. The stores must hate me, because I am one of those that just DOES do into get the milk and nothing else
