Relatively steady grocery store prices keep consumers coming back for milk and other dairy products. Grocers, then, must find another way to manage their inventories and margins to align with the changing tides of the prices they pay for these items. The answer, says Mike Brown of the Kroger Company, is sales.

“We rarely change list price. We try to balance with promotions,” explained Brown, Kroger’s dairy supply chain director, on the March 24 Hoard’s Dairyman DairyLivestream. Dairy provided two clear examples of this strategy in the wild price swings of 2020.

On the butter side, prices were the weakest they’d been in a long time. That allowed Brown’s stores to bring in more product, and then they ran promotions to move it.

“In most of our stores, butter is $2.99 to $3.29 a pound regular price. We ran a lot of sales at $1.99,” he shared. “Our sales were up far more than our revenue from butter, although our margins were actually stronger because the price was low.”

But on the other hand, Cheddar cheese prices shot up as millions of pounds were purchased for the Farmers to Families Food Box Program and supply tightened. Store promotions had to change in that situation, too.

Brown said that when cheese is in the $1.50 to $1.80 per pound range, Kroger often runs “10 for $10” sales on 8-ounce packages of shreds and bars of cheese. “That doesn’t even begin to cover the cost of cheese, on average, last year,” he remarked. Instead, “4 for $6” sales were used. People still buy the product, but cheese margins were lower than usual, he recognized.

Other considerations

Just like on the farm, grocery stores only have so much manpower to complete tasks — such as changing label prices. That’s also a factor in using promotions instead of adjusting prices to match supply costs.

“Think about how many cheese items are in the store. Think about the fact that we have 2,800 stores. Just the labeling changes are a huge job,” said Brown. “We actually allocate that based on labor. We can only change so many prices at a time, up or down, because of that.”

Promotions don’t necessarily require label changes since stores can use sales ads and signage instead. Those options are much simpler to do, Brown said. Also, customers like promotions, just as they like consistency in base prices. Together, these influences make sales an attractive tool for grocers to manage their margins.

Still, it is rare but not impossible that retail prices must change to fall more into line with product costs. Brown noted that if irregular price trends are really severe (such as when cheese was $1 per pound) or extended over a long period of time, they will adjust store prices.

An ongoing series of events

The next broadcast of DairyLivestream will be on Wednesday, April 7 at 11 a.m. CDT. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.

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(c) Hoard's Dairyman Intel 2021
March 29, 2021
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