Working Around A Vicious Pricing Cycle

Originally printed in the February 2019 issue of Produce Business.

As often happens in the third week of any month, management approaches you with the following request: “Sales are slow, profit isn’t reaching target goals, so we need additional profit from you.” You protest, asserting that would jeopardize the sales momentum built up during the first three weeks of the month. Management’s answer is often, “Don’t worry about the sales; we know you can generate the extra profit, as you’ve done it for us before.”

This response, as well as management’s attitude that the produce department can quickly generate profits, shows they just don’t get it. Their request sets in motion a set of circumstances that can do nothing but harm the results in both the produce department and throughout the store.

Simply raising prices in produce to generate additional profits sets a dangerous precedent. Management believes most produce items are not sensitive to price, therefore arbitrarily raising prices should have a minor effect on sales. The truth is, raising prices can have a profound effect — one that will multiply itself many times moving forward. Once prices have been raised and profits increased, there is strong resistance from management to return prices to previous levels.

As these prices endure, volume begins to slow, and many produce operations fall into an unsustainable cycle. Because of declining sales, the reaction is to raise prices to artificially inflate sales and maintain profit levels.

An innovative and progressive retailer bucks the trend of using the department as a “cash cow” to offset other operational difficulties, allowing the produce department to price in a manner that drives sales and ultimately, profit dollars.

Each time this is done, the cycle starts again and sales slow, requiring prices to increase as volume continues to decline. Eventually, prices reach such a level that too much volume has been lost in the produce department to sustain sales. Drastic action must be taken to lower prices to previous levels in order to regenerate the movement that has been lost. That leads to a substantial, dramatic drop of profits that can ruin a month or more of good results and is far more damaging than embracing a better pricing strategy to maintain momentum on the sales floor.

This vicious cycle is far too prevalent throughout the industry. Such erroneous thinking can mean reductions of service or cutting corners to reduce costs. And it can give off a negative impression to consumers, who may perceive the retailer as being high-priced.

The answer is to utilize a balanced approach to pricing. When management asks for additional profit and you are forced to raise prices to comply with the request, the best action is to reduce prices when the next accounting period begins so sales momentum is only minimally affected.

An innovative and progressive retailer bucks the trend of using the department as a “cash cow” to offset other operational difficulties, allowing the produce department to price in a manner that drives sales and ultimately, profit dollars. Too much emphasis today is placed on profit percentage and margin. A wise retailer once said, “You can’t take percentages to the bank.” The best operators set profit targets based on the dollars necessary to reach goals instead of percentages. That allows the produce department to aggressively price product and succeed.

This type of pricing program intuitively appeals to true produce merchants. However, with the present emphasis and use of pricing theories that were developed to benefit other departments, many retailers allow these overriding concerns for margin controls to outweigh sensible pricing.

It’s no secret most personnel with pricing responsibility have no produce department training and simply respond to percentage targets and cost, versus developing long-term retail relationships. Often, the only input from the produce department is the cost of the product … and that sometimes leads to unusual retail prices such as $.83 per pound or $.96 each and then needs to be changed to a more standard price ending in 0, 9, 8 or 7.

With the continued influence from price modeling developed for grocery and other departments, as well as the influx of non-produce-savvy personnel involved with price-switching, a sensible pricing strategy could become increasingly difficult and jeopardize one’s job. However, the smart produce operator can succeed by offering a convincing presentation of the effects in the long-term and short-term cycles of pricing for profit’s sake. This is a fight that needs to occur with management and is well worth the effort.

The key is to convince management of the benefits and/or the downfalls of present margin percentage pricing versus pricing for dollars of profit. If one is successful, the reward will be the ability to generate sales, move additional volume, deliver increasing profit dollars to the bottom line and create a sustainable, successful produce operation.

Don Harris is a 41-year veteran of the produce industry, with most of that time spent in retail. He worked in every aspect of the industry, from “field-to-fork” in both the conventional and organic arenas. Harris is presently consulting. Comments can be directed to [email protected].