Given the rising grocery prices consumers have coped with in 2022, it’s hard to believe that this holiday season some shoppers have seen turkey prices as low as 29 cents a pound.
Welcome to loss-leader pricing. Stores will sell popular items at a loss to draw in shoppers who hopefully will fill their carts with other goods that will turn profits for the stores. Think Costco and its famous rotisserie chicken, which still sells for $4.99, even amid inflation and supply chain issues.
Loss leaders, even in tough economic times, are here to stay, consumer experts say.
“In the current climate, it seems many stores are sticking with the loss-leader strategy, especially for groceries and everyday items,” said Ryan Turner, the founder of Ecommerce Intelligence. “With daily expenses increasing due to inflation and other factors, stores want to give customers a reason to shop with them over the competition more than ever.”
What Qualifies as a Loss Leader?
Stores will designate staples, seasonal goods and other items as loss leaders to drive traffic.
“Traditionally, eggs, milk and rice are some of the key loss leaders that grocers often promote and price to attract customers,” said Hilding Anderson, head of retail strategy/North America at digital consultancy Publicis Sapient. “A competitive price on these items can attract customers’ attention, especially during difficult economic times when consumers are paying more attention to pricing across their basket.
“By strategically placing these SKUs at the corner of the store, customers have to walk through the store and are more likely to find other items they sell. Normally, grocers will focus on products that are common in larger baskets and that are rarely sold alone.”
But eggs, milk and rice are just the start. The loss-leader concept extends to more than just grocery staples, said Mark Chrystal, the co-founder and CEO of Netail, which uses its technology to provide analytics for retailers.
“While Costco chicken may be the most famous loss leader, there are thousands of others in the world of retail today,” Chrystal said. “Since the first competitive marketplaces, retailers have used the strategy of promoting popular items at a loss to attract customers who will ultimately also purchase higher margin products.
“David’s Bridal is famous for its $99 wedding dress sale, which attracts brides on a budget who end up spending closer to $1,000 once they see other dresses in the store. Best Buy will inevitably lead their Black Friday deals with cheap TVs. Turkeys around the holiday season become a substantial traffic driver for grocery stores, as do hot dog buns around the Fourth of July.”
As Grocery Prices Rise, Will Stores Cut Loss Leaders?
No, Chrystal said.
“We are seeing a trend where everyday loss leaders are becoming more common, not just at key seasonal events,” he said. “This is because retail competition has increased exponentially via the web, with more than two-thirds of customers now starting their purchases online. This means that most customers won’t now visit stores unless they find compelling products and prices online. This is leading to increased price competition in order to attract customers on a day-to-day basis.
“While prices have clearly risen, so has competition,” Chrystal added. “At Netail, we are seeing that retailers are pushing the biggest price increases into the higher-priced premium brands, while trying to minimize price hikes in opening price point items.
“We expect to see that grocery stores will continue to use loss leaders to drive traffic to their locations, but will merchandise them with higher margin and premium brand items to offset the loss. Grocery stores who don’t follow this strategy or fail to maintain good value-based pricing are destined to fail in the current economic climate; consumers are increasingly disloyal and have more shopping options than ever before.”
What Are the Hidden Loss Leaders?
Some goods are less obvious loss leaders. Turner said stores might sell specific items using a loss-leader strategy because it will lead to “future purchases of related products.”
“This is common with products such as razors, where the razor itself will be sold at or below break-even because brands know that customers will need to continue buying the blades very regularly into the future,” he said. “Money is made on the blade purchases. This is why we see such elaborate advertising for simple everyday products such as razors. Manufacturers know that if a consumer chooses to use their razor, then there is money to be made on blade purchases for months and even years into the future.”
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