Planet Money - Is dynamic pricing coming to a supermarket near you?

Episode Date: March 6, 2024

Dynamic pricing is an increasingly common phenomenon: You can see it when Uber prices surge during rainy weather, or when you're booking a flight at the last minute or buying tickets to your favorite superstar's concert. On an earnings call last week, Wendy's ignited a minor controversy by suggesting it would introduce dynamic pricing in its restaurants, but the company quickly clarified that it wasn't planning on using it for "surge pricing."One place you hardly ever see dynamic pricing? American supermarkets. Why is that? Why shouldn't the prices for meat or bread or produce go down as they get older? Why does all the milk in the store cost the same, even when the "sell by" dates are weeks apart? Wouldn't a little more flexibility around prices be better for customers and help reduce waste?Professors Robert Evan Sanders and Ioannis (Yannis) Stamatopoulus had similar questions. So they set out to discover what was keeping supermarkets from employing a more dynamic approach, and what might convince them it was time for a change ... in pricing.This episode was hosted by Amanda Aronczyk and Nick Fountain. It was produced by Willa Rubin and edited by Keith Romer. It was engineered by Valentina Rodríguez Sánchez and fact-checked by Sierra Juarez.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

On Bullseye, Jenny Slate reveals her favorite noises. I love, like, noises of tension. I love noises of embarrassment. I love noises of, like, pressure, pressure, pressure. You know, I just, like, I love that. All that and more on the Bullseye podcast from MaximumFun.org and NPR. Heads up, in this episode, we mention Amazon, Whole Foods, and Walmart, all companies that directly or indirectly sponsor NPR. This is Planet Money from NPR. The other day I got a call from my pal, Amanda Aronchik. Hello, Nick. How are you?

I'm good. Where are you? I am in my local supermarket. Okay. Why are you Face I am in my local supermarket. Okay. Why are you FaceTiming me from the supermarket? Good question. I came here not because I wanted to shop, but because I wanted to show you something that's been bothering me. Ooh, I love a supermarket mystery. Okay, this is a gallon of milk, and when's the sell-by date? That's tomorrow.

That is tomorrow. Okay, and look here. What's the sell-by date of this gallon of milk and when's the sell-by date? That's tomorrow. That is tomorrow. Okay. And look here, what's the sell-by date of this gallon of milk? Oh, that's, that's a gallon I would buy. That's two weeks from now. Two weeks from now. And you know what is going on with these two gallons of milk? Uh, no. They're the same price. Uh, that it's, it's how it works, but when you put it that way, that doesn't make very much sense. You're absolutely right. This makes no sense at all because one is very valuable. It's going to last me for two weeks. I'm going to be able to put in my coffee and my cereal.

The other one is going to go bad much sooner. Imminently. I don't understand why they would be the same price. There must be a better way. Hello and welcome to Planet Money. I'm Nick Fountain. And I'm Amanda Aronchik. We live in a world where all kinds of companies use data and AI to change their prices. And it changed them quickly. Think airlines and Uber and Amazon.

But when you go to the grocery store, it's just like little price tags and paper shelf labels and prices that don't necessarily make sense. And as fans of economics, we know there has to be a better way. Supermarkets should be competitive. They should reduce inefficiencies. They should avoid waste. Supermarkets should be good at being, you know, super markets. Today on the show, we look at how supermarkets price our groceries. And we visit the supermarket of the future. A future that might be coming soon to a supermarket near you. Every weekday, NPR's best political reporters come to you on the NPR Politics Podcast to explain the big news coming out of Washington, the campaign trail and beyond. They don't just tell you what happened. They tell you why it matters.

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The price of groceries has been top of mind for a lot of people lately. They're so expensive. Oh, it's awful. And what we have been wondering is how and when do supermarkets change those prices? And why does that decision-making process seem to be so stuck in the past? To get answers, we went to Robert Evan Sanders and Giannis Stamatopoulos. They both study supermarkets. And when they first met about five years ago at a conference about pricing, it was collaboration at first sight.

Almost immediately, we started brainstorming on things to work on together. And then how often have you written papers together? Pretty much ever since then. Oh, no kidding. Yeah. Giannis is a professor of operations management at UT Austin Austin and Robert teaches marketing and analytics at UC San Diego. Their interest in groceries is not from a how can we make the most profit vantage point, but as economists interested in how prices impact society, how prices change behavior. And in particular, they are interested in how changing food prices could help supermarkets waste less food. And they say people who sell food have been wrestling with how to price it for a long time.

The history goes like way, way back. It depends how far back you want to go, to be honest. We'll go back really far. Let's go far back. So if we go far enough back, what you're going to find there is mostly bargaining. So back in the day, a customer would go to the butcher and haggle over the price of, you know, a lamb shank. But the next customer in line is in a rush. They don't have time to haggle. These two customers would end up paying very different prices for their lamb shanks. And haggling happens at the butchers, at the bakeries, at food markets for thousands of years. So like this happens in Greece, this happens in Turkey, this happens in India, this happens

everywhere. But over time, there are more and more items to buy in bigger stores, and shopkeepers don't have time to haggle over every price on every item. And so around 1870, prices start to get standardized as stores replace all that haggling with the price tag. The price tag! Then you move forward to when price tags become standard, and pricing in grocery, at least, gets a little bit more difficult. Because now that stores are locking down prices, they are the same for all of their customers,

regardless of how sensitive to prices the customers are. Then someone also invents the coupon to allow for a little bit of price discrimination. But this world of price tags has pretty much been the same in brick-and-mortar retail ever since. And setting the right price for, say, a package of blueberries, this is actually a wildly complicated process. The supermarket buys the blueberries from a vendor, and then they get to add their markup. Exactly how to set that markup is very difficult to determine, right? Exactly how much are people willing to spend to buy blueberries?

And do you care about just the customer's next purchase? Or do you care about keeping this customer forever, right? And do you care about them not only buying blueberries, but buying other products as well? So even just setting a static price is tricky business. And Yana says the other complication is that blueberries go bad in a week, maybe two. Imagine you want to sell a different item. Imagine you want to sell a couch or something.

If you have a year to sell it, right, you can start with a very high price that you're demanding and be like, somebody's going to come that's going to be willing to pay this price. But modern supermarkets aren't selling a few pieces of furniture. They're selling tens of thousands of different items. Some of their items are more like a couch. There's no rush to sell it. I'm looking at you, salt.

Oh, I'm looking at the Twinkies. And some items last a few months and some things go bad in days. I'm looking at you, Lettuce. The product is getting worse, right? So it's a worse product as time goes by. And then finally, the customer has fewer days to consume the item once they buy it. So it's also worse, less to them. So there's all kinds of forces all pointing to the same direction that the price should go down. But supermarkets use more or less the same pricing strategy for the lettuce as they do for the salt. And the Twinkies.

They set a price, put a price tag on it, stick a shelf label under it. And that Beyonce stick a shelf label on it world is pretty much the system we have today. But Giannis and Robert, again, they are economists. They're like, a price shouldn't just be whatever the label underneath the quart of milk happens to say. It should be this beautiful expression of market forces coming into balance. Like, why not make the price more dynamic? Have it change as the value of the milk drops. Yes, dynamic pricing. This is what those airlines are doing when they want to sell leftover seats,

what hotels do to fill rooms, what Uber does during rush hour. But it's not usually what supermarkets do. They're not. And that is a puzzle in theory, right? Why? Why aren't they changing the price? Sure, supermarkets lower the price on nearly bad meat, or they'll have one of those racks of discounted products set up inexplicably near the bathroom. But still, according to some estimates, supermarkets are responsible for 10% of this country's food waste. Something like $50 billion worth of food goes bad every year.

And most of that just rots in landfills, which creates all this methane gas, which we know is a major cause of climate change. Now, Robert and Yanis, they went looking for the reason that stores don't change their prices more often. And the conventional wisdom was that it was really expensive to make all of those changes. There's some kind of cost here that's preventing businesses from pricing optimally. Let's call these menu costs. And this term comes from restaurants having to print new menus to show you the new prices, right? In grocery stores, it's not menus, of course, but means the same thing.

Costs a lot of money to physically change all those little price tags and the shelf labels and all those thousands of things that they're selling. But Giannis and Robert did some research, little price tags and the shelf labels and all those thousands of things that they're selling. But Giannis and Robert did some research, and they found that the cost of swapping out price tags, that cost is less than what supermarkets would stand to make if they switched to more dynamic pricing. So then they're like, well, what is it? Why are supermarkets still so slow to change their prices? Finally, they learned this one thing that changes everything they understand about how supermarkets do pricing. It's told to them while they're talking to this industry bigwig, a CEO.

This CEO told me, well, Yanis, have you ever looked at inventory data? Inventory data. Inventory data is basically, you know, garbage. Garbage. In a perfect world, a supermarket's inventory data, the big list of what's on the shelves, this data would be accurate. It would let stores know when they had too many potatoes, not enough tomatoes, and then they could change the prices of those items accordingly. But in reality, this is not always how it works. And there are a whole bunch

of reasons why. Trucks show up with new items all day long. Someone breaks a bottle of pasta sauce on aisle five. Clean up on aisle five. Someone steals some chocolates. And just because an item is scanned, that doesn't necessarily mean that is reflected in the inventory data. Let's say you had two different flavors of yogurt. You had like a strawberry one and a vanilla one.

And they're the same price. So then the cashier scanned the vanilla one twice. Right, because why would you bother? It's just time consuming. It's time consuming, but now the record's messed up. Plus, that little barcode

that's on most items, that doesn't say much aside from what the product is. This is a pack of blueberries. That's it. It doesn't reveal any info about when the blueberries will go soft and mushy and gross. It doesn't tell stores when it makes sense to lower the price on those blueberries. That's it. It doesn't reveal any info about when the blueberries will go soft and mushy and gross. It doesn't tell stores when it makes sense to lower the price on those blueberries.

Put it all together, if a supermarket doesn't know if it has too much vanilla yogurt or too little vanilla yogurt, it is not going to know how to change the price of that yogurt. All of Giannis and Robert's research was pointing to the same thing. There has to be a better way, a way for supermarkets to be less wasteful and also maybe a little more profitable. Robert and Yannis told me there are places already headed in this direction. Places like Norway. You know, Amanda, if I had a kroner for every time an economist told me that the future of whatever was good, Scandinavia. After the break, we will take you to Norway to see how things work in a supermarket from the future. Ever feel like you missed the big point of the last movie you watched? At Pop Culture Happy Hour, a podcast by and for pop culture addicts,

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Okay, so Jessica, where are we? So we're in the Rema, the Rema Tusen in Oslo, Norway. Rema is a big chain with 675 locations across Norway, and they've been dynamically pricing their items for more than a decade. In fact, dynamic pricing is happening now all over Europe. So Jessica is showing us around the supermarket via video call. Somewhere in this, oh, there it is. And she really wants to show us something that we do not see in the U.S.

Here, the tubed foods. Oh, tube foods. These are toothpaste-like tubes filled with sometimes cheese or sometimes creatures from the sea. So here we have caviar in a tube. What? Mackerel. Okay. In a tube.

So does toothpaste come in a tube or no? Yes, but it's a different type of tube. Do you ever confuse your tubes? You shouldn't. Ooh, yeah. But the real reason we're visiting the supermarket is because of what Rema has just underneath all those different tubes of food. Turn the camera down a little bit. Yeah, it's just so I can see. Oh, there we go. Okay, there's the price. So this is an electronic label. This electronic shelf label,

this is what we are here to see. It's a lot like the paper labels that we're used to. Pretty much the same size, same kind of lettering, same location on the shelf. But it is actually a little screen that can be updated wirelessly with a new price. You may have actually seen an electronic shelf label before. They're already in Kohl's and Amazon Fresh and some locations of Whole Foods. And these labels are what allow brick and mortar stores to dynamically price more like online retailers. They make the supermarket of the future possible. To see how an electronic shelf label works and how it impacts the price of, say, you know, your tube of mackerel, we've made an appointment upstairs at

Rema headquarters with Partap Sandhu. Partap is the company's head of pricing and employee of the year 2019. I live in Oslo. I actually live right across the street from our head office. Oh, no kidding. So you can work all the time if you want to. I can work all the time. And if I go to the corner of my kitchen,

I'll have the office internet on my PC. So that's quite convenient as well. I'm a little worried about Partap's work-life balance. But anyway, he says that they've been using these kinds of electronic labels for over a decade. In 2012, we started with the electronic shelf labels. And how they work are like, we do a price change from our head office

and then it rolls automatically into the stores. He says that labor costs are really high in Norway, so it was really expensive to have someone changing labels all the time. But the electronic shelf labels, or ESLs, they solved that problem. We couldn't have, like, franchisees or store owners running around swapping paper labels every hour. That would be, like, it would totally destroy the operations in stores. So I think it just became a necessity in order to stay competitive in the market.

just became a necessity in order to stay competitive in the market. Now, one of the wild things about these electronic labels is that Rema could, in theory, change the price of an item as often as six times a minute. That would be like a price-changing frenzy, so they don't do that. But when you look at all the items across their store, they do change prices way more often than they used to. In certain times of year, we can have up to 2,000 price changes a day. Like take, for example, during Easter time. This is a big thing in Norway.

You have to go skiing. So that's one of the big things that you do. You have to go skiing? Yeah, and if you don't do it, I mean, you're not in the region. So, and you have to have quick lunch. Quick lunch. So Norwegian will probably go after me saying this, but it's kind of like a Norwegian version of Kit Kat.

It's just the chocolates are much better. So it tastes better than Kit Kat. So every Easter, Norwegians go to the supermarket and fill their backpacks with quick lunch and go skiing. And this is an opportunity for Rema to flex its dynamic pricing. Our strategy would be to sell it 10 cents cheaper than our competitor, and the competitor will have the same strategy. So it kind of gets like a race to the bottom.

And this happens every Easter. Rema drops the price of quick lunch like 10 cents. Competitor does the same. Then Rema has to drop it another 10 cents. Then the competitor another. There's even a name for this phenomenon. And we call it price war. And does everyone yell price war?

And then like the price just drops, drops, drops. Yeah, the journalists and newspapers are using it. Put it on Facebook, put it on TikTok, put it on Instagram. Everything. Another way Rema uses dynamic pricing is to deal with the old food problem. Every night at 10 p.m., the price of freshly baked bread is automatically reduced by 50 percent in all of Rema's stores. Another example, because Rema has a pretty good handle on its inventory, if one store has too much milk getting close to that sell-by date, then,

has too much milk, getting close to that sell-by date, then, whoop, they lower the price on that too. This has been helpful. Partep says Rema has reduced its food waste by almost 40%. And sure, Rema can have Easter sales and price wars and price-to-move perishables, but dynamic pricing also introduces new problems. Like, sure, customers are fine and good with prices going down, but they do not want to wonder if the price of their tube food is going to go up in the time that it takes them to get from the aisle to the checkout.

So the supermarket instituted a pricing rule. While the store is open, prices shall only go down. While you're shopping at Rema, you will not see the price of mackerel in a tube jump from 35 kroner to 38 kroner. Any price increases they do, those happen overnight. Another problem, dynamic pricing can also amplify risks that have always been there for stores. Set your prices too high, no one wants to buy your stuff. If you set them too low, you're losing money. When you're doing dynamic pricing, you need to understand that you're disrupting the demand.

So at one point, you'll have a quick lunch in our example, flying out of the store. If they set the prices too low, it could lead to what's known in the industry as pantry loading. Think of like paper towels. If the supermarket drops the price of paper towels by a lot, then people are going to load up their pantry with it. But that doesn't mean they bought more paper towels that year, just that they bought a whole bunch at the same time. People bulk up. They buy a lot and you'll just end up selling to just one or two, three, four customers that buys the whole shelf from you. Right, and customers don't want to hear about a sale only to discover that the shelves are bare.

That is not good. And being able to drop prices so quickly could make the pantry loading problem way worse. All right, the time has come for us to see all of this in practice. Yes! Bartap has arranged for us to see a price change in real time. I'm together here with Jonas. He's one of my pricing analysts. Jonas is sitting at a laptop ready to make it happen.

A call has just come in from a price hunter. Just now, yeah. The price hunter works for Rema, and their job is to go to competing supermarkets, wander the aisles, and see how much they're charging for their items. Rema employs a bunch of these people. Partap says the price hunters make 150,000 price observations a day. And this particular price hunter spotted something concerning at another supermarket.

A canned good selling for 13 kroner and 70 cents. 20 cents less than at Rema. The item in question, whole canned mushrooms in liquid. How do you say mushroom in Norwegian? Champignon hele 400 gram. But there's no time for me to learn how to say all of that. I'm going to stick with the English. The price of the whole canned mushrooms in liquid must change now.

Of course, we don't want to stay more expensive than them. So we will also be changing the price whenever Jonas presses the button here. Are you going to match the price? Are you going to go lower? We'll match the price this time. Once Jonas has executed the price, it's going to flow all the way down to the electronic shelf labels in Rema stores across Norway. How long is that going to flow all the way down to the electronic shelf labels in Rema stores across Norway. How long is that going to take? It will take about five, ten minutes maximum. Okay, so is this the big moment? Are we ready?

We're ready. Jonas presses the button. Now, part tap, and remember our reporter Jessica? The two of them spring into action. We've asked them to run from the conference room in Rema's headquarters downstairs to the canned food aisle so we can be there to see the price change. Okay, here we go. Here we go. Yes, let's go. Gotta get to the whole canned mushrooms in liquid. The price is going to all of our stores now, and then we'll see if we're faster than the price. Okay, so now I see you guys are like hustling downstairs. Yeah, and we're taking a shortcut actually.

Plus, they don't want to go outside. It's the middle of winter in Norway. Okay, we're in the back. Oh my gosh, they've entered the store. They're in the supermarket. Yeah, we're in the back of the store, yeah. It's like an all-access backstage pass to the supermarket. Yeah.

Exclusive VIP section. They go past the food in tubes. So we'll go find the mushrooms now. And finally, okay, we have the mushroom in front of us now. And any minute now, we will change price. We stare at it. I hope this goes well. Doesn't happen right away.

So any second now. Hopefully. So, in the meantime, while we wait for this grocery pricing miracle to happen, we're going to spend a quick minute looking at a couple of things that might temper your excitement. First of all, remember, all this dynamic pricing means

a supermarket can not only very precisely lower its prices, it can also very precisely raise its prices. There's actually an investigation underway in Norway right now looking at the period between 2011 and 2018 to see whether the data that Rema and two of its competitors were getting from those price hunters were causing the stores to basically collude with each other to keep prices high.

Partap wasn't working in pricing at Rem at the time, but he says Rem and its competitors, they disagree. They say having price hunters promotes competition and ultimately leads to lower prices for consumers. Another worry with dynamic pricing is that stores might get really good at tracking and keeping data on their customers and using that to start individually targeting them. Like Nick, let's say you're walking down the condiment aisle

and the electronic shelf label says a jar of pickles costs $4. But then I walk down the same aisle, label blinks, switches to $6 because the supermarket knows me and I barely look at prices. They know you're a sucker. Rude. Sorry. But Partop says they do not do this.

They do not use the electronic shelf labels to charge different customers different prices. So you can see how this whole dynamic pricing thing could all go very wrong. Okay, so we're waiting for some blinking. But right now at Rema, things are about to go very right. So any second now,

the price is going to change in theory, if this works. If the technical gods are with us today. And then? Oh, it just did it. Did you see it? It just bleeped. Look at that.

13.78. Amazing. 20 cents cheaper. 20 cents cheaper. It's a steal. Nine minutes and 30 seconds after pressing the price change button upstairs, ta-da, dynamic pricing change in action. And this future could be coming soon to a grocery store near you.

Amazon Fresh already uses electronic shelf labels, and now supermarkets like Schnucks are trying them. So is Hy-Vee, Kroger, Loblaws in Canada, and the biggie, Walmart. Once all of these stores have the technology to quickly change their prices to price dynamically, it seems pretty likely that they will. So maybe the milk that needs to be sold by tomorrow will get cheaper. But who knows? Maybe the supermarket will also find a way to make a few extra bucks

off me every time I go grocery shopping. Coming up next time on Planet Money, it is campaign season. Do you ever think of yourself as a kind of campaign reporter? Oh, all the time. I am a campaign reporter for the entertainment industry. We try to make sense of the wild and expensive world of Oscar movie campaigns. When you watch the Oscars, you are watching the end result of an eight to 10 month strategic and very expensive political campaign. Plain and simple. We hit the Oscars campaign trail to try to figure out how and why Hollywood juggernauts spend tens of millions of dollars chasing those cute little gold statues.

That's next time on this show, Planet Money. Today's episode was produced by Willa Rubin and edited by Keith Romer. It was engineered by Valentina Rodriguez Sanchez and was Rubin and edited by Keith Romer. It was engineered by Valentina Rodriguez-Sanchez and was fact-checked by Sierra Juarez. Special thanks to Julia Angwin, founder of Proof News, to Matt Pavich at Revionics, and to Planet Money listener Matthew Hanneman, who wrote in to suggest we do this story. I'm Nick Fountain. And I'm Amanda Aranchik.

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