Food waste is becoming an increasingly large problem for grocery stores. Produce rots, milk expires, bakery goods get stale, and meat spoils. Ready-to-eat foods typically get tossed at the end of every day. Despite the growing need for food, the Food and Agriculture Organization of the United Nations estimates that 14% off all food is wasted, and while not all of that happens at the supermarket level, one industry expert estimated that the average supermarket discards over $2,300 worth of food every day.
It would be easy to dismiss these number as simply the cost of doing business, which is actually how many supermarkets view these losses. However, food waste coupled with a global pandemic and its accompanying recession has the attention of the United Nations. Last September, they introduced the observance of International Day of Awareness of Food Loss and Waste. The day is intended to act as a global wake-up call, and supermarkets have a role to play in reducing food waste.
Quicklizard has recently started working with grocers to use dynamic pricing as a weapon in the global battle against food waste.
Balancing Supply and Demand
Most supermarkets think about price as something that is fairly stable. A tin of coffee grounds, for example, doesn’t change while it’s sitting on the shelf. Traditionally, the price is determined based on the wholesale price using a formula that factors in expenses and profit targets.
However, there are a lot of grocery products that don’t fit that mold. They have limited shelf lives. Loaves of bread, rotisserie chickens, oranges, and milk, just to mention a few items, all move closer to the trash can with each passing minute. Consumers have no reason not to reach past the milk that is a week away from expiring and pick up the carton that has three weeks left.
At least, that’s how things work with static pricing.
Imagine a different scenario. Picture two cartons of milk, one expiring in three week that costs €2.39, and one expiring in one week that costs €1.99. Let’s add a third carton to the shelf which is one day away from its sell-by date and costs €1.19. If you’re the consumer, suddenly you are financially incentivized to purchase a product that is closer to its throw out date.
Using price, we’ve added a new wrinkle to demand, and made older products more attractive to some consumers. Some consumers will choose the more expensive carton of milk, but others, especially those who are either price sensitive or who will finish the carton quickly, will opt for the less expensive cartons.
Obviously, the profit level is different for each milk carton, but without addressing price and creating demand, in all likelihood the third carton was hours from going in the trash and the second carton wasn’t going to be purchased any time soon.
This model can be applied to food throughout the store. As the day gets later, prices can change, motivating consumers to buy food that is perfectly edible, but otherwise would have ended up in the trash.
Adding AI into the Pricing Equation
Dynamic pricing with machine learning and artificial intelligence is uniquely suited for this type of situation. Rather than having managers guess at ideal price points to move products as they age, an AI system can test multiple price points and evaluate how they perform.
It will recognize the level of discount needed to move different products. Baked goods might need a 10% reduction within three hours of closing time, and a 50% reduction in the last hour of the day. Meanwhile, rotisserie chickens might only need a 20% discount to get the last one out the door before closing time.
AI considers inventory levels, historical consumer behavior, sell-by dates, and other elements to recommend a price that will get the products off the shelves and into consumers’ shopping carts.
Making Dynamic Pricing Work in a Physical Supermarket
Physical stores have a disadvantage when it comes to price changes over their online rivals. Online price changes can take place easily with the click of button, but physical stores, with their physical price tags, need another element in their aisles.
Fortunately, electronic shelf labels (ESL) help balance the equation and enable dynamic pricing to work in physical stores. Prices on ESLs can be changed as needed, at any time. The pricing engine has the ability to adjust prices as needed motivate consumers and help prevent unnecessary food waste.