Natural Foods Merchandiser

Product Discounts: Survival or Self-Destruction?

The time has finally arrived and you have been delaying your decision. But in order to stay competitive with the new mega chain store that just moved into town, you feel you must make a decision about what products to discount, and how much of a discount you should be offering.

But will your decision help your business to survive, or are you about to commit retail suicide? "Family Nutrition Center has decided not to join the deep-discounting game," says Steve Lankford, president of the company located in Suamico, Wis. "This has clearly put us at a pricing disadvantage, relative to the other stores in our area. We had to make some serious adjustments to our business in order to maintain our business. We experienced a loss in revenue, and that is always difficult."

If you have considered discounting many of your products when a new, larger competitor has set up camp nearby, you're not alone. According to Marty Baird, president of Nutritional Marketing in Phoeniz, Ariz., many small retailers think they must respond by cutting their prices to stay competitive. But cutting prices is not something to consider lightly. "When a major retailer discounts its products, it is important for other retailers in the area to understand how that affects them," Baird says.

"If they decide to try to match the major retailer's prices, they are promoting a price war that most small retailers do not have a chance of winning. It is very hard to match prices with people who are buying products literally by the truckload or even larger." Baird believes that retailers will do better as soon as they learn that education is the great equalizer.

"If the smaller retailers educate their customers about all of the benefits they offer, they are less likely to lose customers to a discounter. Once consumers are educated, they realize that a product that costs a few dollars more this week is worth it," Baird says. "The average consumer doesn't always understand that not all vitamins are the same. They may assume that all vitamin C is the same, and that is simply not true. Studies show that price is not the No. 1 reason people purchase a product. But if retailers do not educate their customers, the consumer will make decisions based on price."

Retailers must look for ways to compete, says John L. Stanton, Ph.D., professor of Food Marketing at Saint Joseph's University in Philadelphia. As the co-author of Success Leaves Clues: Practical Tools for Effective Sales and Marketing, (Silver Lake, 1999) Stanton never hesitates to tell the small independents the same thing. "You can't compete on price against the giants. This means that instead, you must find some other basis to compete. Some stores will focus on service, or providing a knowledgeable sales force, something that the giants can't afford to train as extensively as a small-store operation can," Stanton says.

Small retailers need to determine what makes them stand out from their competition. Because of the size of their marketing budgets, larger retailers can make more of an advertising splash and reach more customers. But big doesn't always mean better, and small retailers can compete by making their advertising dollars work harder by targeting messages suited to the lifestyles of naturals customers.

Small retailers usually have an advantage in customer service. Richard Jones, vitamin and herbal supplements buyer and department manager for Country Sun Natural Foods in Palo Alto, Calif., believes that small retailers can succeed very well by getting to know their customers. "Learn their names, and greet them on a first-name basis every time they visit your store," Jones advises. "Make it easy for them to shop, and always have what they are looking for in stock."

Paris Gogos, senior vice president for Efficient Market Services of Deerfield, Ill., a firm that works with retailers on promotional and marketing solutions, agrees that smaller retailers should take the time to develop a more intimate relationship with their customer base. "This can lead to a better understanding of their customers' past and future purchasing behaviors," Gogos says. "Smaller retailers have fewer resources and budget dollars to work with compared to larger retailers, so they need to concentrate on areas which they can control."

Nancy Kemble, owner of The Squirrel's Nest, an all-natural candy store in Middletown, Del., has been developing relationships with her customers for the past few years, and she tries to make each shopping trip as pleasant as possible for everyone who walks through the door. "People lead very busy lives these days, so they may not find everything they are looking for," says Kemble. "I can help them make each shopping visit an enjoyable experience by having special displays that feature items they may not normally purchase. Many customers have thanked me for giving them the extra-special attention," she says. Kemble also saw a 30 percent increase in sales when she launched a Web site for the Squirrel's Nest,, last year. "By having a Web site, I can stay competitive and reach more customers," she says.

In the end, the decision on whether to focus on product discounts should be made with hard numbers. "Most retailers don't understand the implications of discounting, but I think if you do the math, you will quickly see the folly of a deep-discounting policy," says Lankford of Family Nutrition. "For example, we purchase approximately $100,000 worth of product from a major supplements company. And the suggested retail price for that product is $200,000, representing $100,000 in gross profit.

"But with a 40 percent discount, the product will sell for $120,000, representing only a $20,000 gross profit," he says. Lankford says that they would have to sell 500 percent more product in order to make that same gross profit of $100,000. "Do the math," he says. "It doesn't always work."

Lankford's core philosophy, which he has used for the last 10 years, comes from Tom Peters. "In the book In Search of Excellence, [Warner Books, 1988], the author said that we shouldn't do one thing 100 percent better, but instead, do 100 things 1 percent better. This has caused us to look at all areas of our business and to pursue many small and ongoing improvements that when added up equal big differences. And that helps us to stay competitive," he says.

John Riddle is a freelance writer living in Bear, Del.

Three More Voices On Discounts

At last June's National Nutritional Foods Association conference in Las Vegas, two natural products industry experts had different ideas about product discounts. NFM also asked another industry expert what he thought about them.

During an NNFA education session, Don Buel, retail-store owner and president of Independent Nutrition Centers, a 400-member national buying organization headquartered in Eugene, Ore., said: "It's all about moving volume, becoming established as the place to go for whatever products you carry. I did very poorly until I started discounting. At the same time, I started focusing in on a narrow segment of our industry, and that was the sports segment. You need to know what the competition is doing; you need to focus and have an expertise and a strength in your community. If you are going to discount, you need to work with distributors, manufacturers and a buying group so you can be loyal to that, so you can pass on the discounts [to customers]."

Danny Wells, president of Danny Wells and Associates Inc., a natural products consultancy in Martinez, Calif., said during the same session: "If you are not a master of variable discounting, then you shoot yourself in the foot and give away an awful lot of margin. Wal-Mart doesn't have the lowest prices in town [but] they are masters at variable pricing. You can go in and buy a stack of their shoes, and yes, it's the best price in town. But if you're going to buy shoelaces, you're going to pay full POP. Because we are not good marketers, and we don't know how to advertise in the industry, we assume the only way to make a sale is by giving away the product at a lower price. [I] feel strongly the industry was built on telling a story, and we have lost that over the years. You can tell the story of our products and the products will sell at full price without having to discount. There is a place for monthly promotions—everybody likes a deal and you want to have endcaps with good prices—but [don't] give away the store with straight-line discounts."

In addition, NFM asked Jay Jacobowitz, president of Retail Insights of Brattleboro, Vt., his thoughts about discounts. He said: "Generally, I do not advise retailers to get into this sort of game. If a large chain does move into your market area, chances are they have a lower cost to market than you do. Therefore, if you decide to go head-to-head on price, you are starting a battle you have no chance of winning. The independent retailer must base his/her strategy on the relationship with the customer. Fortunately, most natural products consumers are interested in a relationship with their retailer. They are on a journey toward wellness, and it is an evolutionary process whereby they gain increasing amounts of knowledge about the products. The independent retailer plays the role of friend and mentor and acts as a destination for this sort of wisdom and authenticity. It is not a price model."

Natural Foods Merchandiser volume XXII/number 9/p. 21-22

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