The Beginning of Decoupling Discounts, and Why We’re Doing It
Jon Roesser, General Manager
A sign of the times: last month, for the first time ever, the Co-op purchased cyber security insurance.
Russian hackers might grab headlines by stealing data from government agencies or locking the servers of big corporations, but they are not beneath trying to disrupt smaller operations like Weavers Way. And while our cyber security is state of the art, an insur-ance policy gives us a bit more peace of mind.
I bring this up not just to inform you as member-owners that management is taking this new threat to our business seriously, but to also point out another example of increasing operational costs.
As if you haven’t noticed, these days almost everything costs more, and that’s as true for businesses as it is for households. Business-to-business costs, for everything from mop heads to mousetraps, are rising at a pace we haven’t seen in years.
And yes, this has meant higher prices at the Co-op. You’ve undoubtedly seen our shelf prices increas-ing in recent months. To be clear, the shelf price increases you see are entirely the result of increases we receive from our vendors.
The Co-op determines our shelf prices by apply-ing industry standard markups to the cost of goods we’re charged by our vendors. We use rounding rules to adjust prices to neat retail numbers – for example, if a standard markup calculates a retail price of $4.04, we’ll round down to $3.99 – and we also keep a close eye on what the marketplace will bear.
The result isn’t perfect, but it allows us to generate sufficient gross profit to cover our operating costs, including payroll, utilities, packaging costs, bank fees and all those mop heads and mousetraps. But with operating costs rising, finding ways to make even small improvements to our margins is essential.
To that end, we are planning to address a long-standing issue — the coupling of discounts with items that are already on sale or set at an everyday low price.
The Co-op’s discounts – 5% for working mem-bers, 10% for seniors; 10% for Food for All, etc. – are integral to our business model; they drive patron-wage (at least in theory). But when those discounts are stacked on top of a sale price or an everyday low price, the result can be a retail price that is lower than our cost of goods.
When we put an item on sale, we are taking a reduced markup, usually shared about 50/50 with the vendor. But when determining a sale price, we must factor in the discount stacking: many members will pay the sale price, plus 5% off or 10% off. The result can be a money loser.
As a result, we find ourselves in a position in which we are offering sale prices that are less robust than they could be otherwise. An item put on sale for, say, 30% off could, after stacking discounts, wind up costing us money. So we put the item on sale for less —20% off or whatever. This makes the sale less compelling and, ultimately, less successful.
The same is true for items in the Co-op’s everyday low-price program, those marked with the purple “Co-op Basics” tag. Everyday Low Price Programs (EDLPs, in industry parlance) are fairly common in the grocery biz. Co-op Basics, our EDLP, contains a few hundred items, scattered throughout the store, which have been marked up at a lower percentage than our standard.
Again, because of discount stacking, when some members buy items in the Co-op Basics program, they are paying not the everyday low price, but 5%, or even 15% less, resulting in a final retail price that is, in some cases, below our cost of goods.
It is one thing to take a reduced margin in order to drive sales, as the increased sales make up for the lower margin percentage through higher margin dollars. It’s a whole other thing to charge customers less for something than you paid for it.
So beginning this month, you will see us “decoupling” – that’s the inelegant word we’ve landed on – sale items and Co-op Basics items from discounts. Shelf tags will be updated to reflect this change.
As consumers, we are all accustomed to signage stating “Everyday Low Price — no further discounts apply” or “Sale Price —cannot be combined with any other discount” or something along those lines.
The result will be beneficial to all of us as member-owners, because it will help ensure our long-term sustainability. It will also benefit many of us as consumers, because we’ll be able to be more aggressive on sale prices and keep the shelf prices on Co-op Basics items lower than we otherwise could. If you have questions or comments about this change, please reach out. You know where to find me!
See you around the Co-op.