Imagine yourself strolling through the aisles of your favorite grocery store. As you reach the bread section, a choice presents itself: two loaves of bread, identical in appearance, but with one key difference. One loaf is a day older and comes at half the price of its fresher counterpart. What do you choose?
In the produce section, a similar decision awaits. Two baskets of avocados beckon your attention. The ones at the front are ripe and must be consumed today, offering a 75-cent discount. Behind them, you spot avocados that will stay fresh for a few days but come at a slightly higher price. Which option do you pick?
This intriguing scenario is a glimpse into the world of dynamic pricing, a business practice that could soon become commonplace in your local supermarket.
Dynamic pricing, while not a new concept, is finding its way into new industries, including grocery retail. It involves making incremental adjustments to prices based on factors such as inventory levels, demand, and supply. This practice has already proven successful in sectors like airlines, fashion, and hospitality, where it has helped companies minimize waste and maximize profits.
For example, in 1988, American Airlines observed a significant drop in the proportion of empty seats on its planes when it adjusted ticket prices closer to the departure date. In the 1990s, Marriott Hotels successfully utilized strategic pricing that varied with the length of stay and time of year to fill rooms on less popular days of the week.
The question now arises: can dynamic pricing be the answer to the alarming problem of food waste in grocery stores, where an estimated 119 billion pounds of food go to waste each year?
A recent study from U.C. San Diego's Rady School of Management, led by Robert Sanders, delved into this very question. Using economic models, the study explored the potential impact of dynamic pricing on reducing food waste in grocery retail. Sanders's research revealed that if grocery retailers adopted dynamic pricing for perishable foods, adjusting prices based on their shelf life, it could substantially curb food waste.
Sanders emphasizes that this isn't about last-minute clearance sales; rather, it involves gradual discounts throughout the product's shelf life. Prices evolve over time, reflecting the changing condition of the product.
The study sought to answer a critical question: what is more effective in preventing food waste—dynamic pricing or food waste diversion systems? The results underscored the importance of stopping waste at the source, emphasizing the need to find a home for food before it reaches its "sell by" date.
Having fixed prices for foods with varying freshness levels is a concept that defies logic, according to Sanders. It is not only inefficient but also contributes significantly to food waste and, consequently, climate change. Food waste releases methane into the atmosphere, exacerbating environmental issues.
The study's findings indicate that dynamic pricing could reduce food waste in grocery retail by a substantial 21 percent. In a world where the cost of groceries, particularly fresh produce, continues to rise, lower prices can help meet the economic needs of consumers.
Food waste is a colossal problem in the United States. Approximately 130 billion meals, equivalent to $408 billion in food, are discarded annually. Meanwhile, around 25 percent of adults faced food insecurity in 2022. The consequences of this waste are dire, contributing to greenhouse gas emissions akin to those of 42 coal-fired power plants.
While several states have implemented strategies to divert food waste from landfills, there is also growing emphasis on prevention. Clear labeling and education efforts are underway to help consumers interpret "sell by," "use by," and "best by" dates, which often confuse shoppers and lead to unnecessary food waste.
Implementing dynamic pricing in grocery stores is not without its challenges. It requires real-time tracking of inventory, demanding coordination between retailers, manufacturers, and point-of-sales systems. Technology plays a pivotal role in managing inventory data, although it can be labor-intensive and inconsistent.
Barcodes, essential for dynamic pricing, do not always include information about expiration dates. Still, technology exists, such as extended barcodes (GS1), which can track expiration dates and guide pricing adjustments.
Companies like Wasteless, using artificial intelligence, have helped stores in Europe integrate technology that captures data on how products move within stores, adjusting prices based on specific expiration dates encoded in barcodes. Such efforts have led to a reduction in food waste by 39 percent in partner stores.
While transitioning to dynamic pricing may seem challenging, industry experts believe it is achievable with the right commitment. It's a step toward not only minimizing waste but also educating consumers about the benefits of sustainable discounts.