Deep discounts work for supermarkets

For grocery retailers, the tried-and-true strategy of deep discount promotions is a successful one, according to a new study from the School of Management.

Published in the latest issue of the Journal of Retailing, the study found that significantly marking down prices on items at supermarkets does bring more people into stores, and increases profits and sales — especially when the items are the kind that most people buy, such as milk and eggs. In addition, promotions of name-brand items are more effective than those of generic or store-brand items.

“Deep discount promotions have continued to be popular, despite the lack of research evidence about their impact,” says study co-author Debabrata Talukdar, professor of marketing in the School of Management. “Most studies analyzed how price promotions affected a particular brand or product category, but we looked at how these discounts impacted the amount of traffic to the store, amount of sales per transaction and overall profit margin.”

The authors analyzed transaction data from 55 weeks across 27 product categories in 24 stores of a large regional U.S. supermarket chain. They supplemented the transaction data with information from the stores’ weekly flyers and advertising, as well as those of their competitors.

Talukdar warns that while these promotions work, grocers shouldn’t go overboard, particularly within the same category of items.

“Discounting more items in a category actually leads to lower store margins,” says Talukdar. “This suggests that the costs of the discounts is not offset by the profits generated from the sale.”

In addition, the study authors recommend restricting deep discounts to items that aren’t frequently put on sale by nearby competitors.

“Retailers run the risk of entering into a destructive, prisoner’s dilemma type of price war if they promote the same items in the same weeks,” says Talukdar.

Talukdar collaborated on the study with lead author Dinesh Gauri, professor and Walmart Chair in Marketing, University of Arkansas Sam M. Walton College of Business; Joseph Pancras, associate professor of marketing, University of Connecticut School of Business; and Brian Ratchford, Charles and Nancy Davidson Chair in Marketing, University of Texas at Dallas Javeen Jindal School of Management.