Avanza marketing strategy backfires

  • Article by: THOMAS LEE , Star Tribune
  • Updated: November 24, 2008 - 11:22 PM

'Shelf Plus 10' percent promotion translates into legal trouble for Nash Finch.

At a then-new Denver Avenza market in 2003: Recently, the store has faced intense competition from other Hispanic-themed groceries.

Photo: Jerry Cleveland, Denver Post

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Nash Finch Co. wanted to boost sales at its two Hispanic-themed Avanza stores in Denver. So last summer the Edina-based grocery wholesaler and retailer decided to lower prices on certain products and then charge customers 10 percent more at the register.

¿Qué?

What began as an opaque pricing program to woo local vendors has erupted into a public relations headache for Nash Finch. The company faces two lawsuits in Colorado that accuse the Avanza stores of misleading customers with false advertising. The suits, spurred by a Denver television station's investigative report, charges the company unfairly added a 10 percent surcharge on groceries without customer knowledge.

Even more damaging, the KUSA Channel 9 report, which has since rerun in local newspapers, Supermarket News and CNN Money.com, seems to imply Nash Finch was deliberately trying to hoodwink non-English-speaking Hispanic shoppers.

In an interview, Nash Finch CEO Alec Covington hotly denied any intention to mislead customers.

The report "was devastating to us, absolutely devastating," Covington said. "Frankly, we ask ourselves 'is this even worth our while?'"

That's not just a hypothetical question. After years of slumping sales, management turmoil and financial scandals, Nash Finch has finally turned the corner. The company reported strong third-quarter sales and profit growth across all of its business segments. Nash Finch stock closed Monday at $43.39, a nearly 21 percent jump from late September.

Under Covington, Nash Finch has also invested millions of dollars in marketing and retooling retail stores, especially Avanza, a once-floundering Hispanic retail format that shows signs of promise.

The disputed advertising is apparently confusing to some. Consumers are told, in English and Spanish, that a charge of 10 percent will be added at the register.

Nash Finch introduced Shelf Plus 10 pricing in late July. At the time, the two Avanza stores were facing intense competition from Safeway, Wal-Mart and other Hispanic-themed groceries.

The company hoped the pricing program would help draw customers back to Avanza.

Here's how Shelf Plus 10 works. To turn a profit, grocery stores would need to charge consumers 25 percent more than what it paid manufacturers. But Nash Finch figured it could charge a 10 percent markup on certain items and still make money, Covington said. Nonperishable items such as flour or tortilla chips, which tend to sell quickly, are delivered and stocked directly by the vendor, which results in labor cost savings that Avanza can pass along to the customer.

Inside baseball

So Avanza would negotiate a lower price from the vendor in exchange for the retailer taking less profit. By charging only the 10 percent markup at the register, Avanza hoped the lower shelf prices would lure shoppers.

Avanza placed shopping carts at the front of the store that compared how much an Avanza customer would pay for a bag of groceries with Shelf Plus 10 pricing versus a competitor. The retailer also placed signs throughout the store that originally read "A great way to save -- plus 10 percent at the register." The company recently changed the signs to read "A charge of 10 percent will be added at the register."

Some experts think the program is too confusing.

Customers like it when prices go down, not up, said David Livingston, managing director of DJL Research in Pewaukee, Wis. "It's probably a good idea to stop it," he said. "Consumers don't get it. They don't understand they are getting lower prices. I don't even understand it."

Nash Finch never expected consumers to comprehend such inside baseball, Covington said. Rather, he said, shoppers would know they are getting a better deal at Avanza just by looking at their total grocery bill.

"We don't have any customer who can explain [Shelf Plus 10] any better than I explained it," Covington said. "What they can tell you is that they are saving money at Avanza."

He said the company will continue to evaluate the program. Despite some complaints, he insists most shoppers are not bothered by Shelf Plus 10.

"Customers tell you real quick when they don't like something by going somewhere else," Covington said. "And that hasn't happened."

Thomas Lee • 612-673-7744

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