Is surge pricing worth the gamble for supermarkets?

It’s about as popular as ebola, wasps and neo-Nazis. But after years of speculation, dynamic pricing, aka surge pricing, is coming to a supermarket near you.

Or is it? Thanks to the dynamic pricing hardware and software available today, and the plunging cost of installation, a supermarket can charge precisely what it knows customers are prepared to pay for a particular item depending on factors like the time of day, footfall, expiry dates and more. By combining the age-old theories of ‘knowledge is power’ and supply and demand it can shift optimum volume at optimum margin. Any supermarket would want to do that.

But just because you can, doesn’t mean you should. And the negative perception of surge pricing among consumers makes it a tricky prospect for a supermarket.

Electronic shelf labels (ESLs) have been touted as the next big thing since 1995, when Swedish tech company Pricer installed the first ESL system in a cash & carry. Seven years later, to much industry excitement in the UK, Safeway announced it was rolling out ESLs across its estate following a trial in two stores in 2002.

That rollout never happened. But trials have never really stopped. In August, Morrisons began a three-month trial of colour video screens in Bradford. It’s not the only one. Following an abortive trial of ESLs in 2013, Tesco tried again in 2017. Asked how the trial performed, a Tesco spokesman says there is “nothing new to say” and the ESL trial remains limited to part of a single store with “no plans to roll out” a wider trial.

Customers’ experience

In February, Waitrose ran the first “full colour LCD video shelf edge ticketing” trial in a UK supermarket. Screens designed to both “inspire and inform shoppers” were used across four fixtures at its Trumpington store in Cambridge for 12 weeks. It says the “feedback we received suggests it was well received and that it improved our customers’ experience. We are still evaluating the results and are yet to decide on next steps.”

It all points to progress for ESLs, but there is one big difference to what the supermarkets are doing now compared with what Safeway did in 2002. Safeway was solely interested in adjusting prices. Chief information officer Ric Francis said at the time that “when we have the technology in all our stores we can start making electronic labels more interesting, but we are not looking at using them for any promotional activity in the short term”.

Today it’s the other way around, and supermarkets are reluctant to even talk about their newfound ability to fluctuate prices in real time. “Dynamic, or surge pricing, when the cost of an item changes on demand, is not part of the trial,” says Tesco. “It never has been and there are no plans to introduce it.” And Waitrose is “not considering” using ESL for “price surging”.

The reticence is understandable. “Today’s supermarket shoppers like the certainty of knowing they are able to buy the food they need for a set price,” says Trefor Griffith, head of food and beverage at Grant Thornton. “It’s a change from the bogof deal-mania of a few years ago and given the ongoing economic uncertainty it’s likely to remain a key priority for customers. Supermarkets will have to be careful.”

Just because Uber does it, doesn’t mean supermarkets should too, adds Catherine Shuttleworth, CEO at Savvy. “Many consumers don’t like surge pricing models that already exist, they feel disadvantaged. Uber users complain about surge pricing whenever they are presented with it and look for alternative taxis or methods of transport. So it would be a brave supermarket that decides to sell ice cream at a higher price point on a summer’s day.”

Still, it works both ways. What might happen to the fortunes of a supermarket that sends the price of ice cream plummeting on a sunny day?

“If an item is shown as less than it should be, shoppers will be attracted to it,” says commercial psychologist Phillip Adcock. “The shopper reaction will be classic behavioural economics, specifically loss aversion-related. As a species, we value losing what we already have, or in this case could have had, much more than gaining something new.”

“It would be a brave supermarket that decides to sell ice cream at a higher price point on a summer’s day”

In that sense, dynamic pricing could be a “great marketing tool. You only have to see the shoppers crowding around the person applying the yellow special offer labels to items in categories like fresh meat.”

But he warns “typically neither retailers nor brands really understand the psychology of pricing and the behavioural economics relating to it”. Supermarkets would “rightly” deploy dynamic pricing from the perspective of their spreadsheet-obsessed accounts team, but that would simultaneously make it “wrongly” deployed from a shopper perspective, leading to “yet more disconnect between shoppers and bricks-and-mortar supermarkets”.

Worse, it could just lead to a “further intensification of the price war” that will drive everyone’s margins down even more, adds Griffith. “The price wars and the growth of the discounters has put financial pressure on the big four.” So while surge pricing would “allow supermarkets to react in real time to each other’s pricing”, it also risks “reigniting this intense competition and causing further financial damage.”

Risks

Despite these risks, there are obvious upsides, though, like not relying on under-pressure shop floor staff to ensure thousands of paper-based prices and promotions are up to date (and avoiding customer complaints or a fine from Trading Standards if they aren’t). Most obvious is the ability to automatically reduce the price of products as they approach their sell-by date. A relatively new player in the ESL field is Wasteless, a dynamic pricing system that combines ESL with RFID tags and software that uses 43 nuggets of information about a particular product to generate a unique price for it. So in practice, in a supermarket using Wasteless ESLs, a shopper could buy a yoghurt with a normal shelf life for a normal price, but get it significantly cheaper if it was set to go off the next day.

According to Wasteless, dynamic pricing could solve two top challenges in retail, food waste and inventory inefficiency (it says US supermarkets lose out on $57bn of potential sales annually by allowing food to go past its use by date). “Dynamic pricing is something used daily when booking a flight and there is no reason groceries should be different,” says COO Ben Biron. “It means lower prices for the consumer and more revenue for the supermarket.”

It’s why, despite the potential for things to go awry, dynamic pricing is a “realistic prospect”, says Sam Knights, director at shopper media agency Threefold. “It’s a natural evolution of what we’re seeing online and we can expect to see more of it in-store. Dynamic pricing could significantly benefit convenience retailers who experience fluctuations in footfall and minimise waste, particularly produce with a short shelf life.”

And dynamic supermarket pricing is increasingly common on the Continent. “We know that varying price via ESL works,” says Ray Fowler, director at digital specialists Transform. “European grocers have adopted price strategies based on electronic shelf labelling for over 10 years. Implementing the tech to make this work is a relatively simple process, so I see no reason why dynamic pricing couldn’t take off in stores UK-wide.”

But there are several reasons ESLs has struggled to gain traction until now. Its inherent complexity is one, says James Brown, head of consumer and retail at pricing specialists Simon-Kucher. “Simple dynamic pricing to respond to ups and downs in supply and demand, coupled with digital shelf pricing, sounds straightforward enough, but other sectors have shown it’s essential to get the underlying strategy and the detailed rules worked out first, otherwise the technology just allows bad decisions to be made.”

And whatever the resulting savings, it requires serious investment to get going, says Matt Beech, business director at SMP. “When you take into consideration the tens of thousands of products listed in a store and the sheer number of stores that a retailer like Tesco has, it quickly becomes a huge financial investment for a retailer. It simply won’t happen overnight.”

But the price is coming down, says Andrew Blatherwick, chairman of Relex Solutions. Previously ESLs have always needed to be hardwired, making it “prohibitively expensive” for most retailers. But “quite a lot of ESLs are coming on to the market which can be controlled centrally, and this is becoming an enabler for retailers to be able to do dynamic pricing at the shelf edge.”

In 2002, each label was thought to cost about £20. Multiply that by the thousands of SKUs in each store, multiplied by the amount of stores, plus the cost of installation and operating the system, and it’s unsurprising 2002 was the first of a number of false dawns.

“I’d say £20 was an optimistic figure even in 2002,” says Andrew Dark, CEO of Displaydata, which installed trials of ESLs in Tesco and Morrisons stores earlier this year. “In 2002 ROI was probably five years, now it’s 12 months. So it more than justifies the capital cost when you compare it to the printing, the cost of labour, the ink, it’s heavily stacked against the old process. It’s still a material investment, but it’s not like it was.”

It was non-viable ROI that scuppered Safeway’s early attempt. Dark was involved in the deal while working for computer hardware specialists NCR, and says the trial was aborted before the chain was acquired by Sir Ken Morrison (whose thoughts on ESLs would probably have been even less enthusiastic).

“There is no opportunity for a retailer to up-price in such a competitive market. It’s a ludicrous and spurious idea”

“The ROI didn’t stack up due to the amount of activity that was still required, you were only eliminating the price at that point. You still had to print paper to talk about promotions or provenance. So the payback simply wasn’t there. Now we can control all of that remotely from HQ, nobody ever has to print anything. This is a revolution. Colleagues in the store hate the job so it doesn’t get done properly. It’s an appalling, difficult, manual process that’s prone to error. Talk to anybody in a store with ESL and they love it.”

Ironically, now that ESLs are no longer just about price, price is the least of a supermarket’s concerns, or so it seems. “There was a poor piece about ESL in the newspapers in June that connected it to Uber surge pricing, which is baloney,” says Dark. “There is no opportunity for a retailer to up-price in such a competitive market. It’s a ludicrous and spurious idea.” He says the “impracticalities of uplifting prices during the trading day, the legal implications of doing it, and the customer reaction says it’s a non-starter. It doesn’t sit with any of the supermarket’s values.”

The reverse is true, he adds. “If you have an oversupply of strawberries and you have the ability to entice customers with a lower price, or start discounting earlier in the day, that’s got tremendous benefits for everyone. That will happen and it could be a great thing. But putting prices up through ESL won’t happen.”

So vertical surge pricing is a no-go, but a widespread rollout of ESL for discounting and promotional purposes is finally going to happen? “Yes,” says Dark. “Feedback from retailers is consistently good, and 70% to 80% of customers don’t even notice it isn’t paper. The remainder are saying ‘fantastic, it’s about time’.”

That’s been said before. This time it might be true. But don’t hold your breath.