Why Surge Pricing Is A Bad Idea For The Grocery Industry
The British grocery giant Tesco was in the news recently. They are planning on introducing surge pricing in their stores. The prices go up with the demand. Uber has calls it surge pricing.
Even though Uber does not publish the percentage of their profits from surge pricing, it surely is contributing positively to their bottom line. With surge pricing, a company can instantly change prices when the stores are busy. Superficially, it seems like an attractive option for any industry to undertake.
Technical innovations are changing the pricing labels in grocery stores. Shelf display price labels are going electronic.
Electronic labels do provide some advantages to businesses. Currently, every time there is a price change, employees need to go around and change all the paper price labels. Manually changing price labels is time-consuming and adds to the cost of doing business.
Tesco is replacing their paper labels with electronic labels. With new labeling technology, Tesco will save money because they will not need employees to go from shelf to shelf to change the prices. With electronic labels, the prices can not only be changed remotely but instantly. This technology will allow them an option to vary the prices at a moments notice.
Tesco’s senior management would see multiple advantages with this new technology. They will save on manpower hours and play with the prices at a moments notice. This makes implementing surge pricing possible. Tesco must be projecting that surge pricing will increase the total revenue and profits.
The idea doesn’t seem to have been well thought out. I see two major issues with the idea. Both bad for the company and industry overall.
On average, a consumer spends thirty to forty-five minutes in a grocery store. With surge pricing, the price at the time the purchaser picked up an item, to what cash register shows will be different. Unless this issue is resolved before implementation, the customer complaints will sky rocket.
To deal with this self-caused deluge in complaints, more customer service employees will be required. This extra expense will potentially exceed the manpower savings by using electronic labels. More importantly, this will adversely affect customer well being and retention.
When client’s grocery budgets start going through the roof, they will respond by ordering their groceries at online grocery stores like Amazon/Whole Foods.
Grocery patrons will visit brick and mortar grocery stores only for urgently needed items. The bulk of their groceries will be purchased online. This will turn the grocery stores into warehouse size convenience stores. By design, current grocery stores are not designed for this. Convenience stores exist because of their small size and proximity. Big grocery stores will be unable to compete on this front.
Tesco’s management seems to have missed out a critical fact. Surge pricing works for Uber because their product is an individual. A person needs to be transported now. Grocery shopping can be planned out unless there are small children at home and you have run out of milk. For an Uber passenger needs to travel, there is no other option available. A grocery shopper has multiple options.
The customers lost to surge pricing will not be coming back. Maybe, in the future bulk of the purchases are going to be done online. The introduction of surge pricing by the grocery industry is a quick road for brick and mortar businesses to an early demise.