How does a grocery store know what to set the price for apples or garlic or what not? Obviously the cost of item from the wholesaler is a part of it, but do they know what other near by stores are charging? Do they just mark everything up a certain percent?
For larger supermarkets it’s a very dynamic and sophisticated, system and doesn’t rely on a fixed markup. Massive computer databases track wholesale costs, supply and demand trends, stock levels. the competition’s pricing and lots and lots of other variables.
When I had a grocery store, the wholesaler we bought our produce from sent a rep to check our competitors pricing for us. Average markup in produce is around 50%. (and our produce dept. STILL lost money). Basically the wholesaler provides a SRP based on the competitive nature of the market and then sends a rep out to tweak the percentages.
(Man I am incoherent this morning)
joew
I don’t know how groceries do it but the chain drug store that my wife worked for set prices based on the competition in the area and whatever the traffic would bear.
It goes without saying that they have to cover costs with a reasonable return on investment. Otherwise they would stop selling grocieries and invest elsewhere.
I used to work for the headquarters of a prominent Boston area supermarket chain. Like astro says, it is a pretty complicated thing. The supermarkets figure out exactly what it costs to get the goods to the shelf and make sure they don’t go below that (although there is such a thing as loss leaders). We had a whole pricing department. They did price checks at competitors and that data was referenced when setting prices. There is also this concept called “focal items”. These are items like bread milk and some stuff that you wouldn’t thing of that need to be kept at low margins. The reason is that customers tend to only keep the prices of certain items in their head and reference those when determining how fair a store’s pricing is. Another factor taken into account was demographics. Stores in upscale towns charged more for many items. Certain categories of items had much higher margins than others. There is myth floating around that supermarkets only charge 1% - 5% above costs because the business is so competitive. While that may be true for focal items, it is false for a huge percentage of the 50,000 or so products that a larger supermarket carriers. Markups of 25% - 100% are common with goods like batteries, candy, deli items, and many more.
There are a lot of people involved in setting prices at a supermarket chain. Besides the pricing department, the merchandising department also gets involved. The merchandising department chooses what product to carry and developes strategy for categories of goods. They are also the ones that put items on sale and decide how much to charge for sale items. Sale items are somewhat of an art but they are set through experience and by monitoring competitors sales. Merchandising jobs require a lot of experience and are high pressure. Our merchandisers made well over 100k just by figuring these things out.
There are really many types of pricing – initial pricing (new products), regular pricing, promo pricing, and markdowns (promos at the end of a product’s life cycle). Even regular pricing will depend on whether an EDLP or a Hi-Lo strategy is used. Yes, some science is involved in all of this, and there are companies that will sell software to retailers to help them do it. But, take it from me, you’d be surprised about how unsophisticated most retailers are in their pricing practices. How do they know how competitors are pricing things? Two ways are to check their competitors’ ads and to walk their competitors’ store aisles.