A Lesson in Price Perception

How New Zealand’s supermarkets found themselves in a price image mess, and how retailers can avoid the same mistakes

Back in February I wrote an article in response to a survey that showed three supermarkets in Australia were among the top ‘most trusted’ retailers in the country. When the exact opposite news recently started coming out of our nearby neighbors across the Tasman, it was a bit of a surprise. New Zealand’s supermarkets appear to have a price perception problem, and with some knowledge of the market and pricing best practices, I thought I would provide a few thoughts.

Recent articles from Inside Retail NZ* covering a preliminary report from the Commerce Commission state that New Zealand’s consumers display confusion and distrust around grocery retail pricing.

As you may be aware, the New Zealand grocery retailing market is essentially a duopoly with Woolworths NZ (Countdown) and Foodstuffs as the two major operators.

Interestingly, Woolworths AU was the number one most trusted brand in Australia in the previously mentioned survey from 2020. So, while the company is winning favour with Australian consumers, there is clearly a disconnect with New Zealand shoppers.

Another interesting note is that Foodstuffs uses electronic shelf labels (ESLs) for their shelf pricing. In general, ESLs help retailers respond faster to competitive pricing changes or consumer demand trends, while also enabling them to take price changes on more items. This means Foodstuffs has the infrastructure in place to be a price leader and improve their price image, but we see that’s not happening.

So, what is happening with New Zealand supermarkets?

Possible causes

First, there is the question of how these retailers found themselves in such a situation. As the articles point out, part of the blame falls on the nature of a duopoly: with only two major players, the pressure to keep prices competitive is limited.

And with other grocery retailers facing additional barriers to entry or expansion, there is little threat of outside competitors coming in to steal share from Countdown and Foodstuffs.  Being in a comfortable position typically isn’t a driver of innovation and improvement.

That said, Foodstuffs has invested in innovation and improvement with the use of ESLs.  As mentioned, when used correctly, ESLs are a powerful tool for retailers to streamline pricing processes and deliver more competitive prices, particularly when paired with a price optimisation solution. But when certain best practices around ESLs are not put into place, retailers can find themselves hurting their price image.

For example, say a customer puts an item in their cart and the ESL price tag says $2.04. While they continue the rest of their shopping, price changes go into effect and the item is now priced at $2.26. When they get to the till, the price is now higher than they were expecting, and they feel mislead or taken advantage of.  They may not even remember the exact price that was on the shelf (though if it is a Key Value Item or KVI they might), but at a minimum they “feel” like something is not right – and not in a good way.  That’s not a shopping experience retailers want to give their customers.

For this exact reason, one European supermarket retailer who Revionics works with has careful parameters around how and when they take pricing changes with their ESLs. While they shop competitor prices and take price changes during the day, they have rules set within the Revionics solution to prevent price increases during store operating hours.

Another big factor at play here is that New Zealand’s consumers are trained to expect promotions. New Zealand’s percentage of overall sales that are sold on promotion is much higher than other markets. And the problem is that there are so many promotions and items are promoted so frequently that consumers expect a product to be on sale or they don't buy it. Or, they don't believe that the promotion is a good deal because the item is always on promotion. This over-abundance of promotions sows distrust with consumers.

As a result of this, we now see the New Zealand Commerce Commission stepping in, with the retailers possibly facing fines, stricter regulation, and government intervention to increase competition. And while both retailers are surely working to improve price fairness and transparency, losing operational freedom would call for some heavy adjustments.

How to fix (or avoid) price perception pitfalls

Clearly there is a need for more effective promotions. Retraining the consumer mindset is a lengthy process, and certainly one that should be founded on solid data analysis. A Promotional Performance Analysis looks at past promotional results to determine which items, vehicles and tactics are most effective at achieving the intended goals.

Without diving into the data, it’s difficult to determine which promotions are actually meeting customer needs. Not to mention the complex nature of promotions makes it extremely difficult to understand affinity, cannibalisation, and all other impacts to forecast outcomes and determine success. That’s where an AI-powered promotions solution like Revionics can help fill in those gaps and provide a strategy for gradually weaning customers off a dependence on promotions.

My guess is that this heavy reliance on promotions was less driven by consumer demand than by supplier influence. Suppliers naturally want to push more sales, so they provide vendor funding for the supermarkets to run promotions. Perhaps the vendors have more sway in New Zealand than in Australia, and that’s why we see such an excess of promotions as well as promotions that may benefit the supplier more than the retailer.

That’s another advantage a data-driven Promotional Performance Analysis can offer. Retailers have a lot more leverage at the vendor negotiation table when armed with sound data around which promotions work, and which don’t. With these analytics, retailers and vendors can work together to run promotions that maximise vendor fund utilisation and drive better results, instead of just running the same promotions over and over.

Another critical aspect of reducing promotional dependence and improving price perception is to have favourable base pricing. Consumers won’t wait around for a promotion if they feel they are getting fair everyday prices. And then when an item does go on promotion, they will trust that it actually is a good deal.

Because that’s what it really comes down to – fair pricing. Customers want to feel they are receiving good value for their money. An AI pricing solution can not only help retailers understand their customers’ pricing preferences on a more granular level, but also provide the optimal prices for supporting both consumer needs and desired business outcomes.

Protect your price image

Pricing continues to be an important component of overall consumer price perception and whether or not consumers choose to shop at your store. And if you aren’t paying attention to what your customers are saying, then you risk them walking away. But retailers that get pricing right put themselves in a strong position to improve price image and increase market share.

For more information on protecting your price perception, download our ebook Price Perception: How to Win Customers and Influence Perception. If you are curious about how Revionics and our AI-powered solutions can help you get pricing right for both your customers and your business goals, reach out to speak to one of our pricing experts.

*Referenced articles from Inside Retail NZ:

Grocery retailing duopoly “not serving” New Zealanders

Supermarkets targeted for misleading pricing

Online grocer welcomes ‘duopoly’ finding, calls for Government support