Randi
Priluck
|
The Authors |
Randi
Priluck, Randi Priluck is Assistant Professor of Marketing in the Department
of Marketing, Pace University, New York, USA.
Article
type:
Theoretical with application in practice, Case study.
Keywords:
Retailing, Grocery, Supermarkets, Internet.
Content
Indicators:
Research Implications** Practice Implications** Originality** Readability**
International
Journal of Retail & Distribution Management
Volume 29 Number 3 2001 pp. 127-134
Copyright © MCB University Press ISSN 0959-0552
Priceline.com was launched in early
1998 (Wingfield, 2000) with a unique concept, allowing consumers to name their
own prices for airline tickets and hotel rooms. Priceline negotiated a series of
deals with airlines and hotels, which typically have unused capacity, to sell
their surplus at a discount. In the third quarter of 1999 Priceline sold 624,000
airline tickets and 180,000 room nights, up significantly from the prior year
(Priceline, 1999). Priceline also sold new cars, financial services and
groceries.
In November 1999, Priceline expanded
its discount offerings to include grocery goods through an agreement with the
WebHouse Club, a privately held start-up to which Priceline licensed its
business method, trademark, technology and software. In return, Priceline
received royalties and a majority interest in WebHouse Club (Corral, 1999).
However, Priceline did not control the operations of the WebHouse.
The WebHouse Club service started in
the New York/New Jersey/Connecticut metropolitan area. By February 2000 it had
sold over 7.5 million groceries in New York, Philadelphia, Baltimore,
Washington, DC and Detroit. At that time, Priceline reported that most (85 per
cent) sales were from repeat customers.
Priceline had planned to continue to
grow its grocery business to expand nationally by the end of 2000 with predicted
sales of over 75 million grocery items. However, in September 2000, Priceline
announced that they would close their WebHouse Club service, which provided
groceries and gasoline to consumers.
On October 6, 2000 Priceline sent a
mass e-mail to consumers to explain that they would "wind down" their
operations within the next 90 days. They requested that customers cease using
their green WebHouse Club grocery card and Priceline refunded any outstanding
money owed to customers.
According to Priceline.com's Web site,
they were in the business of "collecting consumer demand (in the form of
individual consumer offers guaranteed by credit card) for a particular product
or service at a price set by the customer and communicating that demand directly
to participating sellers, or to their private databases." Priceline had
intended to present price offerings to partner manufacturers of national name
brand products, which they could either accept or reject. However, certain
manufacturers indicated that their products were available on the Priceline
site, but they had made no deals with Priceline. The plan was that Priceline
would aggregate consumer demand and then approach manufacturers to receive
discounts on behalf of those consumers. The suspicion was that Priceline would
later begin to demand a portion of the profit on the items. However, Priceline
would only have been successful with this business had manufacturers agreed to
deal with them.
Priceline.com sold groceries through
its WebHouse Club. The service required consumers to log on to the Web site to
bid for items before physically going to the store to pick up the items.
Priceline was not a delivery service. Consumers had to retrieve all items at
local stores, many of which had an arrangement with Priceline.
The service appealed to consumers who
wanted to save money on their grocery bills, but who did not have specific brand
preferences. Priceline's target market consisted of "the kind of online
consumer who wants to stretch a dollar as far as it can go" (Clark, 2000,
p. 167).
When consumers logged on to the site,
there were numerous products from which to choose, including: hotel rooms,
rental cars, home financing, new cars, yard sales, airline tickets and
groceries. Clicking on the "groceries" icon, which also read "up
to 1/2 off!" took consumers to a page that either
allowed them to obtain a Priceline card (which was needed for presentation to
the checkout clerk at the store for payment) or to select groceries. The page
had a list of grocery items divided by categories and sections for special
purchases, such as March Madness, an area containing snacks to be eaten during
the NCAA college basketball tournament. The left side of the page listed the
stores where Priceline was available. Consumers began by clicking on desired
items. For each item, consumers were asked to indicate two or more brands that
they would accept from a list of three to four brands. They could have chosen to
indicate "any of the above" as well. They were then asked to choose
from five prices, each of which was associated with an estimated chance of
having the price accepted by Priceline. For instance, a past visit to the site
offered three brands of canned solid white tuna: Bumble Bee, Chicken of the Sea,
and Starkist. The consumer was told the typical price range for the item
($1.09-$1.39 for tuna) and the four choices were 0.97 with an 85 per cent
chance, 0.90 with a 66 per cent chance, 0.85 with a 50 per cent chance, 0.80
with a 33 per cent chance, and an additional choice of 0.62 with a 98 per cent
chance. In most cases, the final choice was the most desirable, but in order to
partake of this option consumers had to use WebHouse tokens.
WebHouse tokens were accumulated
through Priceline's adaptive marketing process. Consumers were asked to try new
products and services and were rewarded with tokens. Some of the offers included
trial subscriptions to magazines and visits to partner Web sites. After trying
the new products, consumers were asked to fill out a short questionnaire
regarding their use and satisfaction with the trial.
Once all the grocery items had been
chosen, the consumer clicked on the checkout icon and a list of their choices
appeared. If they were returning customers they were asked to enter their e-mail
address and were asked a question to verify their account information, which had
been saved by Priceline. If they were new customers they were asked to provide
credit card information.
The site then asked the consumer to
wait while it processed the request and after about a minute returned with a
list of all the items and whether the prices were accepted or rejected.
Priceline provided the total price of the desired items and charged the
consumer's credit card for the items at the reduced prices. The consumer then
printed a shopping list and went to the grocery store at his or her convenience
to obtain the items on the list. The consumer had up to six months to redeem the
items. At the checkout, instead of paying cash, the consumer presented the
Priceline card. The cashier ran the card through the swiper and the consumer
entered a four-digit code (5555) to verify the purchase.
WebHouse Club did not distribute
grocery products; they simply made deals to offer consumers lower prices.
Consumers had to physically go to the store to retrieve the products in the
traditional manner. The only difference was at the checkout, when consumers paid
with the Priceline card instead of cash or other forms of currency.
Since Priceline had no warehouses or
inventory, it had been able to enter markets by partnering with local grocery
stores to provide the products. The lack of infrastructure also made it easy for
Priceline to grow quickly (Priceline, 2000).
The grocery industry has entered a
period of profound change, leading many firms to downsize or consolidate. The
factors influencing the grocery industry include increasing global competition,
the use of computers and information technology, disintermediation (Kahn and
McAlister, 1997) and consolidation (Harrison, 2000). Priceline.com entered the
market with an unprecedented business and wanted to grow demand for products by
capturing consumers before they entered the store. Priceline.com was an added
intermediary in the process and would have had to find a way to be profitable in
an industry with low margins in order to survive.
The structure of the grocery industry
may have contributed to Priceline's initial decision to enter the business.
Since the 1960s, the grocery industry in the USA had become highly inefficient
(Kahn and McAlister, 1997). A number of practices led to this situation. First,
after the price freeze in 1974, manufacturers artificially kept list prices high
in case of another freeze, but often used deep discounts to offset the higher
prices (Kahn and McAlister, 1997). When manufacturers used the system of high
list prices and deep discounts, buyers responded by stocking up when prices were
low. However, holding inventory was expensive, due to warehousing and damage
costs, and added waste to the system. Further, when deep discounts were offered
in one area of the country, diversion occurred. Diverters are businesses that
take advantage of price differentials by carting discounted product to
non-discounted markets (Kahn and McAlister, 1997). All of these expenses were
passed on to consumers in the form of higher prices. Additionally, consolidation
led to relatively few grocery chains in the industry, affording them an
increasing amount of power (Harrison, 2000).
The difference in what manufacturers
make on a product and what consumers pay represents an opportunity for
intermediaries that can eliminate waste in the system or find a way to profit
operating within that margin. In effect what Priceline did was to eliminate the
need for heavy promotion of items by offering the products at a price that was
acceptable to both manufacturers and consumers.
Though consumers are increasingly
pressed for time and desire convenience, some were willing to take the time to
log on to command significantly lower prices at checkout. However, the value of
the discount had to be sufficiently high to make that time commitment
worthwhile. Though US firms spend over $65 billion annually on coupons (Krishna
and Zhang, 1999), consumers rarely redeem them. The 1998 coupon redemption rate
was 4.8 per cent, down from 4.9 per cent in 1997 (Supermarket Business,
1999). NCH NuWorld marketing blames the low redemption rate on low value coupon
offers (Supermarket Business, 1999). In spite of this, the use of
coupons by manufacturers has grown steadily since 1984 (Kahn and McAlister,
1997).
A number of firms have experimented
with no-coupon marketing, such as Procter & Gamble. Initially, they were
faced with heavy competition and retailers stopped promoting them heavily (Kahn
and McAlister, 1997). However, other manufacturers began to follow suit.
Priceline.com eliminated the need for coupons and offered one-to-one marketing,
which also let consumers pay lower prices without clipping coupons.
The grocery business in the USA is
regional and consolidation in the industry has led to relatively few firms
controlling the business. In the grocery industry the top ten accounts control
40 per cent of the grocery business and independents represent only 16 per cent
of grocery sales (Industry Surveys, 2000). For example, Kroger is the leader in
the US grocery business with 2,300 stores in 31 states (Lewis, 2000). Number 2,
Albertson's, has 1,703 stores and Safeway operates 1,445 stores in the USA
(Industry Surveys, 2000). Consolidation gives supermarkets the power to
negotiate for more favorable prices with manufacturers. Additionally, the wide
adoption of scanner technology by grocery stores has given stores significant
power in dealing with manufacturers. One example of retailer power is their
ability to charge manufacturers for shelf space, a practice known as slotting
fees. Slotting fees for a single SKU can be as high as $50,000 for new product
introductions (Merli, 2000). Slotting fees represent a significant cost to
grocery manufacturers and it is now estimated that slotting fees represent $9
billion in annual promotional expenditures, or 16 per cent of all new product
introduction costs (Bloom et al., 2000). These fees have led to
increasingly adversarial relationships between manufacturers and retailers and
have led to high prices for consumers.
Priceline began to alter the
relationship that consumers had with retailers. With Priceline, consumers no
longer had a one-to-one relationship with retailers that retailers could
control. Although consumers still went to the store, retailers were no longer
able to influence their choices with in-store promotions and deals.
Retailers who charged slotting fees for
shelf space may have become more limited in their ability to do so. Imagine what
would have happened if Priceline had decided to expand their business and begun
to deliver products directly to consumers, thus bypassing retail stores. They
could have made deals directly with the manufacturers and guaranteed sales of
products at prices acceptable to manufacturers. If they did not charge fees for
this service, they could have dominated the grocery industry, making retailers
obsolete. Though this scenario seems far-fetched and likely would not have led
to the elimination of retailers, it certainly could have made huge inroads into
the non-perishable portion of the grocery business. Grocery stores would have
been more limited in their product offerings.
Retailers embraced Priceline because it
offered them a way to compete against warehouse clubs, which typically steal
away grocery stores' most important customers, those in the 25-49 group with
multiple children (Kahn and McAlister, 1997). Originally the warehouse clubs
catered to small business, but increasingly added consumers to their target
market. Further, warehouse clubs compete most heavily in packaged goods
products, the kind of items offered by Priceline. Therefore, Priceline was
attractive to retailers who wanted to compete more effectively with warehouse
clubs.
An advantage to the retailer of the
WebHouse Club was that consumers might have purchased additional items that were
not for sale at the WebHouse Club and paid for them separately. Stores that
offered the Priceline service would be better positioned to compete against
other entities because they would be offering special deals. This allowed
grocery chains to compete more effectively with mom and pop stores, specialty
grocery stores and warehouse clubs, which did not offer the WebHouse Club
service. Most mom and pop stores and specialty grocers did not have the
infrastructure in place to participate in the Webhouse Club offering because
they did not carry sufficient inventory in all product categories nor did they
carry multiple brands. Warehouse clubs had the infrastructure, but sold large
sizes, which were not available on Priceline.
Retailers should have also been more
aware of potential abuses in the system. Consumers chose the items that they
wanted and there was no one policing the procedure. If a consumer wanted to buy
a larger size or took two instead of one, the Priceline card did not stop
processing the order at checkout and retailers may have been losing sales to
this type of theft. Though the scanner system could likely indicate an error,
retailers were not checking for such discrepancies. Without the scanner,
cashiers were not capable of knowing which items had been authorized through the
Priceline process and accepted the items the consumer brought to the check-out
counter.
Originally, when Priceline began
operations, they told consumers that, if the item was not in the store, they
could ask the retailer if another brand could be substituted. However, on a past
shopping trip, the brand of cat litter allowed by Priceline was not available
and a second brand was substituted. The next day an e-mail was sent by Priceline
requesting that the customer purchase the correct brand in the future.
Therefore, Priceline was able to police the procedure, even if the retailer was
not.
Another danger to supermarkets was in
the potential expansion of the Priceline service to competing retailers such as
warehouse clubs and mom and pop stores. However, that expansion was never
realized, since Priceline suspended operations in September2000.
Typically, consumers who spend more
time in the grocery store spend more money (Kahn and McAlister, 1997). Consumers
who shopped, Priceline had to search the store to find the items on their list.
This process took time and kept them in the store. If retailers had scattered
the Priceline items throughout the store, consumers would have had to spend even
more time searching for those items, providing a benefit to the retailer.
Store brands are a significant source
of revenue for supermarkets because retail margins on these items are between 35
and 40 per cent compared to 27 per cent for national brands (Industry Surveys,
2000). A strategy for retailers to combat the consumer's choice of national
brands on Priceline would have been to place store brands to the right of
Priceline items and highlight the price savings over the savings offered on
Priceline. However, it would also have been important to emphasize the quality
of the private label brand relative to the national competitor because US
consumers will continue to choose national brands if the price is low. A total
of 54 percent of shoppers say that price is important in determining the brand
to buy (Industry Surveys, 2000).
Retailers could have also boosted
revenue by placing complimentary items next to Priceline items. Not every
product category was represented on Priceline. For instance, while some cleaners
could be purchased on Priceline, sponges were not available. Private label
sponges could have been featured with the cleaners at retail.
Priceline.com appears to have been a
boon to manufacturers competing in the grocery industry. They had the
opportunity to sell unused surplus to consumers who were aggregated by
Priceline.com. Priceline allowed manufacturers to accept or reject a consumer's
offer.
In the short run, Priceline.com allowed
manufacturers to compete more effectively against private label brands, which
were not represented on the Priceline site. Private label brands have grown
significantly in the USA. According to Kahn and McAlister (1997) the growth of
private label brands can be attributed to packaged goods price increases
significantly above raw materials costs that occurred between 1981 and 1991.
During that time consumers appeared to be willing to pay higher prices, but an
opportunity for private label brands to enter the market was also created. For
example, by 1993 national cereal brands were priced at around $5 a box, compared
to private label brands at $3.50 a box. Therefore, private label cereals' share
grew from 5.4 per cent to 9.7 per cent from 1990 to 1995 (Kahn and McAlister,
1997). Private label brands now appear in the top five in a number of categories
including: analgesics, facial tissues and diapers (Superbrands, 1997).
Brand names earn a premium because
consumers are willing to pay more to obtain them. In the Priceline system,
consumers were forced to accept more than their one favorite brand. They were
not permitted to specify a particular brand. In essence, what Priceline.com did
was to train the consumer to be disloyal. Consumers, who were very loyal to a
brand, may have been willing to accept another brand because of the significant
price savings in using the Priceline system. If they did so, they would have
exposed themselves to new brands, and may have become indifferent between
alternative brands, particularly since there do not seem to be large differences
among brands in many categories. Consumers would then have had the power to
respond to price discounts because they could have engaged in active brand
switching. In the long run manufacturers would have lost their hold on consumers
who had been exposed to newoptions.
Priceline.com also limited the
marketer's promotional efforts. Specifically, coupons were not used with
Priceline.com and consumers were not likely to care, given the large savings
offered by Priceline.com. Consumers would have absorbed other types of
promotions, such as bonus packs, without affecting their choice, since the
choice was already made on the Priceline system. For instance, Baked Ruffles
were offered on Priceline and, on a shopping trip, the store carried the bonus
pack. This was an added bonus for the buyer, but not a factor that influenced
their brand decision or their willingness to pay the retail price for the item.
Priceline was only available on items
that had competing brands in the marketplace. The site did not include deli or
dairy products, which do not have competing manufacturers (Corral, 1999). Since
fruits and vegetables tend not to have many competing brands, they did not
follow the same system as the other grocery items. Specifically, in order to
purchase cherry tomatoes, the consumer had to use WebHouse tokens that he or she
earned by participating in Priceline's adaptive marketing programs.
Research suggests that consumers make
2.2 visits to a supermarket a week, shop at more than one supermarket and choose
a supermarket based on location (Industry Surveys, 2000). Consumers make two
types of trips: regular trips on a weekly basis and quick trips to pick up
additional items. The weekly trip is usually at the consumer's preferred store
and the consumer spends more money on this trip (Kahn and McAlister, 1997).
Price may be more important in a regular trip than in a quick trip.
When shopping, consumers make both
planned and unplanned purchases. Priceline.com required that consumers plan
before they walked into the supermarket. Planning limits the likelihood that
consumers would indulge in significant amounts of impulse buying, which may
limit the dollar amount spent in the store. Retailers prefer unplanned purchases
because they have more opportunity to influence that decision at the store
level.
Consumers are not well aware of prices
in supermarkets (Dickson and Sawyer, 1990). In one study, supermarket shoppers,
asked to identify prices immediately following putting the items in their carts,
were able to identify exact prices only 50 per cent of the time and only 56.6
per cent of the time were they able to do so within 5 per cent of the actual
price (Dickson and Sawyer, 1990).
Priceline indicated the typical
category price for the item. However, they could have decided to eliminate that
information and force the consumer to deduce the true prices on their own. They
could have then used this information to raise prices above their prior levels,
perhaps even to the store's price or higher.
Consumers do not pay attention to
price. Dickson and Sawyer (1990) found that only 60 per cent even looked at the
price of the item before placing it in their cart. This is likely because small
differences in prices will not affect consumer behavior, as consumers generally
have a range of acceptable prices for a brand (Kahn and McAlister, 1997).
However, since Priceline offered discounts of 50 per cent, it was significant
enough to attract the attention of consumers.
There is a target market of consumers
who are highly sensitive to prices in supermarkets. Demographically they tend to
be consumers from large families, African-American and Hispanic consumers.
However, minority consumers are also less likely to have Internet access. While,
40.8 per cent of white households have computers, only 19.3 per cent of
African-American households and 19.4 per cent of Hispanic households have
computers (Hall, 1998). Though PC ownership is growing among minority consumers,
the growth is occurring among higher income segments, those less likely to be
highly price conscious.
In the short run consumers saved money
by using Priceline.com. The savings were often 50 per cent off the regular price
of the items. However, Priceline.com limited consumer choices by forcing
consumers to accept a number of different brands, whether they chose to do so or
not. In the long run, Priceline could have become the portal through which a
majority of grocery purchases were made. In that instance, consumers may have
been further limited because Priceline only dealt with certain manufacturers.
The smaller, less known brands may have had to drop out of the marketplace,
further limiting choices.
Another danger was that Priceline.com
would begin to charge fees for the service. If the fees grew significantly, they
could have represented the savings that consumers were receiving using
Priceline.
Priceline collected a significant
amount of information about a particular consumer's grocery shopping, which
could have been used to influence their future purchases. For instance, if
Priceline knew that the consumer often bought a particular product category, it
could fail to offer that product category at a lower price, forcing the price on
that item upwards.
When consumers logged on to the site
for the first time and did their Priceline grocery shopping, Priceline gave them
their requests at the lowest price they requested. However, Priceline was able
to monitor their buying behavior and after consumers became loyal to Priceline
the prices increased. In essence Priceline was able to determine the maximum
prices individual consumers were willing to pay for items and charge them those
prices. Priceline gathered a tremendous amount of useful information about
individual consumers that would have been highly valuable to manufacturers. As
long as consumers perceived that Priceline's prices were better than store
prices and that the effort it took to command those prices was not excessive,
they would continue to use the service. However, the price savings were likely
to erode as Priceline learned the consumer's tolerance level.
Priceline was positioned to dominate
the grocery industry and would have been able to control choices. Already, it
had gained significant brand awareness with an advertising campaign featuring
William Shatner. Priceline spent $25,475,900 on advertising in 1999, up 154.6
per cent over 1998 levels (MC Technology Marketing Intelligence, 2000).
Priceline would have been in an
enviable position if, before consumers did their grocery shopping, they first
logged on to Priceline.com. There they would be a captive audience for
advertising and marketing of a variety of products and services.
Priceline may have altered the grocery
business in another significant way, by eliminating waste. Out of the
approximately 30,000 SKUs in the supermarket, only 500 sell more than one case a
week. The worst 7,000 performers sell less than one unit a week (Kahn and
McAlister, 1997). Priceline could have added efficiencies by only offering high
volume products and brands. The flip side was that the poorer performers would
not be offered, thus limiting variety.
Priceline.com also had to be aware of
consumer behavior when it used its demand pricing methods. Consumers typically
have a stronger aversion to price increases than pleasure at price decreases
(Kahn and McAlister, 1997). Anecdotal evidence suggests that, when Priceline
initially offered consumers prices on their first visit, the lowest prices were
accepted. However, on subsequent visits the prices began to rise. This could
have led to consumer backlash.
One of the biggest opportunities for
Priceline in this market lay in controlling manufacturers. Priceline could have
begun to offer manufacturers a chance to always come up as the winning brand in
exchange for a premium fee. This would have allowed a manufacturer to have
current non-users of the brand try the brand and possibly convert them.
It was difficult to understand how
Priceline was making money with the WebHouse Club. They were offering deep
discounts on grocery items, but reimbursing the stores for the full value of the
items. Though the plan was to get manufacturers to pay the difference, Priceline
was struggling to make deals with manufacturers and only began to have some luck
immediately prior to suspending the service. The adaptive marketing program was
likely not generating enough revenue to cover the large savings offered to
consumers. However, if Priceline had been able to dominate the business as
suggested in this paper, they may have been able to survive and have significant
control over manufacturers and retailers.
Clark,
B.L, 2000, "We put groceries at Priceline to the test",
Money, 29, 3, 167-70.
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Kahn, B.E, McAlister, L, 1997, The
Grocery Revolution, Addison-Wesley, Reading, MA.
MC
Technology Marketing Intelligence, 2000, "Money matters", 20,
4, 53-66.
Merli,
R, 2000, "Slotting fees just about killed us", Frozen Food
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Priceline, 1999, "Press
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