Grocer Safeway to Increase Sales Lift During Promotion

Case Type: increase sales; operations strategy, optimization; organizational behavior.
Consulting Firm: ZS Associates first round full time job interview.
Industry Coverage: retail.

Case Interview Question #00879: Our client Safeway, Inc. is a national grocery and supermarket chain headquartered in Pleasanton, California, United States. Safeway’s primary base of operations is in the western and central United States, with some stores located in the Mid-Atlantic region of the Eastern Seaboard. Based on 2009 revenue, Safeway is the 11th largest retailer in the United States.

The client Safeway has been steadily losing market share to its competitors. Safeway utilizes a high-low pricing strategy, in which regular prices are typically slightly higher than those of an everyday low price retailer such as Walmart. However, periodically high-low retailers drop prices significantly. During the time period in which a product’s price is decreased, the product is also promoted through print and in-store advertising. Our client Safeway expects a significant lift in sales during the periods in which a product is promoted. However, benchmarks against industry averages indicate that our client Safeway does not experience as large of a lift in sales as its competitors do during promotion. What would be your approach to increase sales lift when an item is promoted?

Additional Information:

1. Everyday Low Pricing vs. High-Low Pricing

Shifting pricing strategy to an everyday low pricing model is not an option for the client Safeway. The client has made the decision to focus on being the industry leading high-low pricing grocer. They think they can compete with everyday low price retailers once this goal is achieved.

2. Competition

There are 1-2 major high-low pricing competitors in each of the local regions in which the client Safeway operates. Our client’s everyday prices, timing of promotional cycle, and percent discounts are virtually identical to their competitor in each market.

3. Promotion Planning at the Stores

Timing: Store managers place orders with their distribution center for promoted products several weeks before the promotion takes place.

Predicting Promotion Volume: Typically, store managers base the size of their promotional orders on the quantities ordered in the past on a similar promotion and more subjective factors like length of time since the item was last promoted and the store manager’s gut feel based on his years of experience. Most store managers have at least 10 years experience in the grocery industry.

Unexpected Promotion Volume: If an employee notices the shelves are running low or out of stock on a promoted item, the store manager will place an order for additional product. Orders must be placed by mid-afternoon and are delivered the next morning. On occasion, the store will not know that they are out of stock on a particular item until a customer complains.

Distribution Center Ordering Process: Buyers at the distribution center do not receive enough lead-time on incorporate store orders into the orders placed with suppliers for promotions. However, buyers have access to the quantity of product sold during similar promotions in the past. Buyers typically use this data when determining how much product to purchase for a given promotion.

Customer Experience: Safeway’s customers routinely complain that promoted products are not on the client store shelves during promotions. Customers are typically loyal to a particular grocery store, provided that it stocks the products they consume at a reasonable price.

Possible Answer:

I. Determine the Source of Disappointing Sales Lift

A good candidate will peel back the onion to understand the source of the disappointing sales lift on promoted items one layer at a time:

1. Our client’s promotions generate less volume than competitors’: Our client’s regular and promotional pricing is virtually identical to their competitors’ pricing. Therefore, we are generating less volume on any given promotion compared with our competitors.

2. Promoted items not in-stock: The primary driver behind this lack of sales volume is the client’s inability to keep promoted items stocked on its shelves

a. We can’t sell it if we don’t have it on the shelf.
b. Customers may not come back if they experience repeated shortages on promoted items.

3. Ineffective promotion planning and execution causing missed sales opportunities: Store managers plan volumes for promotions based on gut feel and quantities ordered in the past for similar promotions — not based on quantities sold.

II. Lay out Plan to Improve Process

A strong candidate should recognize that we need to devise a way to utilize data on quantities sold during past similar promotions.

A good answer will lay-out a strategy to include past sales on similar promotions in the planning process as detailed above. A great answer will also note that stores must have better visibility on the inventory of promoted items on their shelves.

Access to data that illustrates real-time movement of promoted items would give stores more lead-time in the event that items are selling faster than expected. A simpler non-technical solution, which could be implemented immediately, is to institute scheduled stock updates throughout the day, especially just before the daily store order deadline. This would help avoid products being out of stock for multiple days.