Page 76 - February2019
P. 76

retail perspective
BY DON HARRIS
Working Around
A Vicious Pricing Cycle
As often happens in the third week of any month, manage- ment approaches you with the following request: “Sales are slow, pro t isn’t reaching target goals, so we need additional pro t from you.” You protest, asserting that would jeopardize the sales momentum built up during the  rst three weeks of the month. Management’s answer is often, “Don’t worry about the sales; we know you can generate the extra pro t, as you’ve done it for us before.”
This response, as well as management’s attitude that the produce department can quickly generate pro ts, 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 pro ts 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 pro ts increased, there is strong resistance from manage- ment to return prices to previous levels.
As these prices endure, volume begins to slow, and many produce operations fall into an unsus- tainable cycle. Because of declining sales, the reaction is to raise prices to arti cially in ate sales and maintain pro t levels.
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 pro ts 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  oor.
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 pro t 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.
76 / FEBRUARY 2018 / PRODUCE BUSINESS
An innovative and progressive retailer bucks the trend of using the department as a “cash cow” to offset other operational dif culties, allowing the produce department to price in a manner that drives sales and ultimately, pro t dollars. Too much emphasis today is placed on pro t percentage and margin. A wise retailer once said, “You can’t take percentages to the bank.” The best operators set pro t 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 bene t 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 rela- tionships. 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 depart- ments, as well as the in ux of non-produce-savvy personnel involved with price-switching, a sensible pricing strategy could become increasingly dif - cult 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 pro t’s sake. This is a  ght that needs to occur with management and is well worth the effort.
The key is to convince management of the bene ts and/or the downfalls of present margin percentage pricing versus pricing for dollars of pro t. If one is successful, the reward will be the ability to generate sales, move additional volume, deliver increasing pro t dollars to the bottom line and create a sustainable, successful produce operation. pb
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 indus- try, from “ eld-to-fork” in both the conventional and organic arenas. Harris is presently consulting. Comments can be directed to editor@ producebusiness.com.
An innovative and progressive retailer bucks the trend of using the department as a “cash cow” to offset other operational dif culties, allowing the produce department to price in a manner that drives sales and ultimately, pro t dollars.


































































































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