Build-to’s – The Basics

There are two basic pricing strategies a c-store retailer can employ for items such as soda drinks. The first is an Every Day Low Price (EDLP) in which the retailer sells the product based on a “flat” every day cost from their supplier. C-Store retailers using this strategy do not run item/price promotions to attract/reward customers. They rely on an attractive every day low price. This has the advantage of reducing ringing errors and provides their customers a stable retail.

This other pricing strategy is one in which the retail price of the products is linked to the cost. For example, when the c-store receives a price reduction from its suppliers, they reflect it in the price they charge their customers. This approach is far more common in our industry. For example, your price on 2 liter Coca Cola is being reduced for the next four weeks and you feature Coke 2 ltr. on sale. In some cases, the amount of the discount you received is directly linked to the reduction you are willing to take in your retail price and in other cases it is not.

When an item is placed on sale, your customer buys more of it. They may either consume more or “load” their pantry with extra. The question is, do you? Do you use “bridge buying” to provide yourself an opportunity to increases the gross profit generated by these sale items. If so, how do you determine how much to buy.

The concept of bridge buying is simply buying enough product to “bridge” between this sale and the next. Utilizing bridge buying lowers your average cost and increases your gross margin. This is illustrated in the table below. In it you can see what happens to two retailers’ gross profit over a two month period on one item – Coke 2 ltr. In the example both retailers buy from the same supplier and have equal sales volumes.

In this example, Retailer A had been maintaining accurate build to sheets for his soda category and knew that during a non-promotion month that he would sell 200 Coke 2 ltrs. At the end of the promotion he purchased an additional 25 cases of 2 ltr. Coke, resulting in an extra $32 dollars gross profit on this one item in February.

His purchases “bridged” the two promotion periods, reducing his average cost. The most effective use of this process is when you plan your promotional calendar so that you can bridge between two promotions of the same item.

The question always comes up — how much should I bridge buy? The answer is a function of how deep is the discount you are receiving, how much space do you have, how much money are you willing to invest, what are you payments terms with the supplier and how much do you sell of the item during a non-promotional month.