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Price has never been so elastic

AdobeStock_98947522BLast week, I had the pleasure of dining in one of Sydney’s newest restaurants and the chef explained how the menu changed daily depending on availability of produce.

The interesting point was it wasn’t about short supply, but the complete opposite; local produce suppliers would inform the restaurant and the chef would adjust the menu to accommodate, insuring that everyone in the supply chain was winning, and most importantly waste was minimised.

Now compare this to the retail sector, where over the last 12 months Nielsen’s suggested $51 billion of promoted sales took place in the Australian supermarkets and rather scarily they suggested 48 per cent of these products would have sold regardless, writing off $11.3 billion of value in the process.

This means realistically we are not even starting from zero. So, what is stopping the retailers and supply chains from recognising an opportunity and executing on these sorts of mechanisms in store quickly?

Yes, promotional calendars can take months to organise, availability and supply are very rarely considered in the same sentence, and as a supplier recently said to me “it’s a three month lead to enact any pricing or promotional strategy and by the time it’s all locked in we either have a new buyer or it’s the next year and we start again, before we even consider the art work and other costs to even do one”.

I believe technology is the answer.

As Adam Smith, once told us, market forces drive prices and the costs associated. That’s nothing too sophisticated, until you overlay 1,000 stores, 100,000 people and 25,000 SKU’s spread out over a landmass close to the size of the USA. Perhaps it is time to let the computers run this kind of calculation and find the combination where the outcome is maximal.

Nimble and responsive is the future, and technology and systems to execute successfully and quickly will be the competitive advantage.

Changes to pricing involves labelling changes on the shelf, at least until the right investments in technology are made. We see it with Uber when the surge hits and it’s four times more expensive to get home on a Friday night because there is a change in demand.

This is what we call “dynamic” pricing – when the cost of an item is dictated by demand. Common in the fast-moving tech smart sectors like hospitality and travel. At the Reserve Bar Stock Exchange in London the price of drinks changes on demand, yet the supermarket has generally stuck to the fixed-price model, where discounts are seen only at the end of shelf life or for a fixed promotion.

But now, digital displays combined with smart algorithms to analyse data could change the game. This means retailers could amend costs instantaneously and manage a sophisticated pricing model in real time that attracts a specific type of customer. Furthermore, this could be programmed to target different customers at precise times during the day whilst running promotions instantaneously with a change in availability or price connected to raw material.

Store demand should drive straight back to factory orders and product should flow through a supply chain with ease, yet the lack of information sharing and the complexity of human overlays normally means the bullwhip effect only grows.

Sales on most items in a supermarket are predictable; working on the belief that a fully stocked shelf makes the sale, minimum levels are set by SKU (not traded categories) meaning waste levels are higher than needed. Tech and computer processing power exists to resolve this but it requires a paradigm shift. For instance, if I were buying a sandwich, the filling would be a live choice of what is available, it’s not necessary to have ten options if the demand is only for five popular fillings – at the end of the day I’m happy to trade a ham and cheese sandwich for my preferred tuna mayo.

This is likely to have the biggest impact in the Fresh space however, with suppliers also thinking responsively and flexibly, there are more options available.
One example is the meal kit businesses, with recipes changing weekly, maybe they are smart enough to run a similar process to the chef in the Sydney restaurant, or at least explore an opportunity to change, but what about the manufacturers?

Sophisticated smart factories have the technological horsepower to run complex system changes quickly, such as providing real-time yield updates or live price balancing of an animal carcass to on-shelf demand, using these insights to change ingredient declarations, pricing or even the product name through inline technology print in a live production environment.

Rapid NPD can also be tested on the shelf or a special product run for a couple of weeks, presuming the manufacturers and retailers can be smart about delists, the systems to get productions on shelf automated and add connectivity to supplier systems in areas like quality.

There is no doubt Amazon will be using algorithms and technology in the background of Whole Foods operations, meaning the power of technology will change the game not only in the home delivery space or the store, but for supply chain and factories.

Paul Eastwood, Chief Executive Officer, Pollen Consulting Group.

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