Are Grocery Stores Using ‘Dynamic Pricing’?

Grocery shopping is already an expensive ordeal, with the cost of food steadily rising. Last year, food-at-home prices increased by 5% while takeout meals rose by 7.1%, and as of June, groceries have already gone up another 1.1%. But that may not be the only concern for consumers. Some stores are being accused of “dynamic pricing,” which could inflate the expense even more, especially during peak times.

Grocery Stores and Dynamic Pricing

Recently, Sens. Elizabeth Warren (D-MA) and Bob Casey (D-PA) sent a letter to Rodney McMullen, the chairman and CEO of Kroger, the country's biggest supermarket chain. In it, they expressed their concerns about AI technology “digital shelf labels,” which allow businesses to charge more instantly.

It used to take an employee up to two days to replace the paper labels that told customers how much they would pay for an item, but now, with digital shelf labels, those numbers can be changed in seconds. That seems to be a sound investment, and Kroger has been using the technology since 2018 in some of its stores. However, there are concerns that markets are using the system for more than saving time. Warren and Casey suggest it eases the way for dynamic pricing, which has been embraced by the  transportation and hospitality industries.

In the letter, the politicians referenced a 2021 analysis by UCLA that found “the adoption of time-based pricing leads to differentiated price competition; it can ‘soften’ price competition, causing both peak hour and normal hour prices to rise.” Furthermore, “time-based pricing creates value for the stores (through higher prices) [but] offers no benefit to consumers.”

Kroger, which operates 2,750 outlets in 35 states, claimed the accusation is false, that the technology has been used to lower charges to the consumer. But, according to the letter:

“These digital price tags enable Kroger and other grocery chains to transition to ‘dynamic pricing,’ in which the price of basic household goods could surge based on the time of day, the weather, or other transitory events – allowing stores to calibrate price increases to extract maximum profits at a time when the amount of Americans’ income spent on food is at a 30-year high.”

If you’ve ever taken an Uber or Lyft, booked rooms at a hotel, or secured airline tickets, then you already know how dynamic pricing works. Rideshare apps charge more depending on the day and time the service is requested. Hotel charges vary depending on the season and popularity of the destination. And airline seats can be hundreds of dollars cheaper if purchased in March instead of December or other holiday months.

The letter indicated the possibility that the use of the digital label system by grocery outlets and any other business could result in consumer goods being “priced like airline tickets,” which analysts say would create “a sense of urgency and a sense of scarcity that wouldn’t exist if there were just publicly posted prices that everyone understood.” It would also allow “sellers … to … figure out ways to extract the maximum amount of profit from each customer.”

The artificial intelligence system makes sense for businesses with a large inventory, allowing the price tag listing to be changed at the touch of a finger. Take the great toilet paper shortage of 2020, for instance. A store, realizing customers are desperate for a product, could within seconds hike its cost, forcing  customers to pay a high amount because they couldn’t get it anywhere else.

Some other examples included increasing the charge for turkey in November, just in time for Thanksgiving, or ice cream on the hottest days of the month. In the letter, Warren and Casey asked the Kroger CEO a series of questions to be answered by Aug. 20. Among them were inquiries about how often Kroger uses the system to increase item amounts, how it informs its customers of item amount changes, what is the average percentage change in prices in the first six months of using the system, and had it ever used the system to change the amount of an item more than once in a day.

Building a Personal Customer Database

Marketers are forever finding ways to determine what goods you like and want to purchase. If you’re a Facebook user, then you’ve probably clicked on an interesting ad only to be bombarded with similar ads in your social media feed. Aside from being able to quickly change ticket items, Kroger plans to introduce more AI to target consumers with advertising based on collecting personal data from them. As the letter explained:

“In addition to price gouging, the EDGE Shelf helps Kroger gather and exploit sensitive consumer data. Through a partnership with Microsoft, Kroger plans to place cameras at its digital displays, which will use facial recognition tools to determine the gender and age of a customer captured on camera and present them with personalized offers and advertisements.”

It gets even more intrusive and sinister: The system will reportedly not only build a customer database with personalized profiles of its customers but also use those profiles “to determine how much price hiking each of us can tolerate” while “quickly updating and displaying the customer’s maximum willingness to pay on the digital price tag – a corporate profiteering capability that would be impossible  using a mere paper price tag.”

In 2021, during the COVID pandemic, the Federal Trade Commission issued orders to several big grocery chains, including Kroger, Walmart, Tyson Foods, and Procter & Gamble, to provide information about their business practices. It was believed these larger companies were raising the cost of products and taking advantage of consumers during the pandemic. The report revealed that the revenue from food and beverages rose more than 6% of their total costs in 2021, and for the first three quarters of last year profits increased by 7%.

While digital labels are a convenient and time-saving tool for companies, the potential for price-gouging is a serious risk. Warren and Casey pointed out that Americans spend nearly 12% of their budget on grocery items, and that amount could increase should dynamic pricing take hold. Unlike rideshare and delivery apps, travel, and hospitality, food and groceries are essential, so the economic law of supply and demand is in play. If the demand is there but the supply is limited, prices go up. As long as people are willing to pay the costs, businesses will use that advantage to turn a profit.