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Grocers re-examine dynamic pricing as Amazon/Whole Foods deal looms

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Grocers re-examine dynamic pricing as Amazon/Whole Foods deal looms

If some grocers have their way, shoppers could see the prices of ground beef or fresh vegetables vary the same way airline tickets do.

Roughly two months after Amazon.com Inc. announced plans to acquire Whole Foods Market Inc. for $13.7 billion, an increasing number of grocery stores in the U.S. are expanding their ability to gather data about customer shopping habits and adjust prices by the hour. The practice, often called "price optimization" or "dynamic pricing," has been a hallmark of Amazon's website. It can take a number of forms, from adjusting the price of an item based on broad sales trends to emailing special offers to a select group of shoppers.

Ahold USA, the American arm of Koninklijke Ahold Delhaize NV, which operates supermarkets under banners such as Food Lion, Giant and Stop & Shop, said in a July 25 press release that it hired software developer Revionics, which develops price optimization tools for retailers. Revionics' other clients include Home Depot Inc. and Tractor Supply Co. Ahold declined to comment for this story.

On its own, the concept of dynamic pricing is not new. Kroger Co. has been testing digital shelf technology for about 16 years, the company said at a March 2016 conference hosted by Barclays. Meanwhile, the broader concept of adjusting prices according to market factors is as old as the market itself.

But Amazon's impending entry into the grocery business through Whole Foods means grocers will be going head-to-head with the e-commerce giant, which has fine-tuned its ability to find the price that consumers will pay for an item online using data on consumer habits. That ability is far beyond what even the most tech-savvy grocers can do, industry experts say, meaning that the food retailers could struggle to compete, even with initiatives such as Ahold's.

"There's no easy solution for them to fight back," said Ron Lunde, a former executive at SuperValu Inc. who has consulted food retailers on pricing. While Ahold's contract with Revionics might be a step in the right direction, the system the company uses to price items would likely need a much broader upgrade in order to acquire Amazon-like precision, Lunde told S&P Global Market Intelligence in a telephone interview.

Pricing evolution

Until the mid-2000s, many grocers adjusted prices on goods by keeping tabs on what their geographically proximate competitors were charging for similar items. Those adjustments typically occurred a few times a week and focused on a small fraction of the stores' items, Lunde said.

The goal for management, he said, was to find the combination of price and the number of sales made that would result in the widest profit margin.

Meanwhile, Amazon's prices for some items can vary within a single day — a much more agile system than any grocer has right now, Lunde said, and one that gives the company considerable insight into when to change a price.

"It doesn't take much of a tick to make much money or lose much money," he told S&P Global.

While many retailers are experimenting with technology that could lead to dynamic pricing, few have implemented it extensively in physical stores. Department store Kohl's Corp. uses LCD shelf tags in place of paper ones to sell items such as apparel.

Kroger's experiment with digital price tags aims to take the technology a step further by using information customers provide — a shopping list, for instance — to guide them around the store and highlight products that meet dietary requirements, for instance.

Challenges remain

But in a variety of retail subsectors, including grocery, retailers have yet to figure out how to gather customer data that can tell them how to adjust prices, said Peter Fader, a professor at the University of Pennsylvania's Wharton School.

In order to take full advantage of dynamic pricing, grocers will have to understand individual customers as well as Amazon does, Fader told S&P Global in a telephone interview, adding that software, such as the kind Ahold is buying from Revionics, is useless without an app or other system that keeps statistics on what customers buy or when they buy it.

That contrasts with using data only from large groups of customers to adjust prices, he said.

Another challenge for grocers interested in implementing dynamic pricing in stores is that many customers are used to seeing prices fluctuate when they shop online, but they look for more certainty about how much they will spend when they go grocery shopping, according to Fader.

"They expect some degree of stability," he said, adding that consumers may turn away from retailers whose prices change too frequently. "It will be interesting to see how Amazon navigates that."

But if dynamic pricing catches on in the grocery industry, there may be more scrutiny of how retailers use information about customers to price products.

In the short term, customer outrage is likely to be the most severe consequence should a combined Amazon-Whole Foods grocery business or its competitors implement dynamic pricing, said Daniel Birk, a partner at Eimer Stahl LLP in Chicago.

Although technically a form of price discrimination, the practice is unlikely to encounter legal friction under today's laws, Birk told S&P Global in a telephone interview. But a company such as Amazon using dynamic pricing to dominate the grocery market could prompt a re-evaluation of current antitrust laws, he said.

"Eventually, I think that's going to be a big issue," Birk said. "You could see the legal doctrine shifting."