Three is a crowd – The dynamic supermarket price paradigm.

By Mary Ann Gitonga & Lachlan C

Pricing is one of the ways in which a company gains its value back from the customers. Pricing is influenced by a company’s costs, its competitors and what the company perceives the customers will be willing to pay for the product. Pricing is one of the 4 P’s in marketing that can easily be changed (along with Product, Promotion & Placement). As I am sure you have seen, milk prices at one of the supermarket giants (Woolworths, Coles & Aldi) can vary in price several times within a month.

Pricing can be divided into three main categories: Low, Middle & High.

Low

How do we determine costs are covered?

Are low prices a constant strategic choice? Or fluctuating low prices – in order to cover prices

  • Cost plus pricing
    • Mark up above average cost
    • Supermarkets use this technique to maintain competitive advantage. Keeping a small margin and as long as they break even, the supermarkets don’t mind. To be even more competitive they rely on reducing costs where possible.
  • Loss Leaders
    • Sell below cost to bring in customers to buy other products
    • Supermarkets have used techniques such as selling bread and milk at ridiculously low prices (possibly at a loss), and have uber confidence in their product placement and specials to get customers to buy more products than they initially intended.
  • Market Penetration
    • Low price to attract volume
    • This has been seen recently with the introduction of Coke’s new product Coke Life. They have hijacked the hype of this new product and reduce the price to get as many people interested in purchasing this product, so that they may continue to buy the product in the future.
    • Specials are often used to get rid of stock that is soon to expire. Woolworths even use the stickers Reduced to Clear to gain the last profits from the product before they expire.
  • Nearly Predatory
    • Price low enough to discourage competitors
    • Supermarkets are often being blamed for the closure of local businesses such as butchers and green grocers. The ACCC aims to take action against businesses that use predatory pricing, but admits it is hard to prove a business is involved in predatory pricing due to it appearing pro-competitive initially and there is often no clear evidence. – https://www.accc.gov.au/business/anti-competitive-behaviour/predatory-pricing

High

  • Willingness to pay
    • Pricing right below what a customer is willing to pay
    • This could be done to such products that are imported and have a special significance to a certain group of people. For example a South African may want to purchase Biltong Slices, and can only get it from a select few stores.
  • Market scheming
    • Pricing high to have most margin (often on the back of new product)
    • This technique could be used when offering a new product, such as the recent Woolworths campaign placing Channel 10’s ‘Recipe to Riches’ winners product on their shelves.
  • Prestige/Status pricing
    • Pricing high for image appeal
    • At Christmas, Coles had rights to sell a Christmas Pudding created by Heston Blumenthal. The high price of this product reflected the prestige of a Celebrity Chef such as Heston.
  • High prices due to real quality difference
    • Boutique products such as Maggie Beer’s Burnt Fig, Honeycomb & Caramel Ice Cream would be priced higher than say a Woolworths Select Honey, Caramel & Macadamia Ice Cream, due to the difference in Quality that is perceived by the name Maggie Beer.

Middle Pricing

  • Competitors dictate how much middle pricing occurs. Woolworths would identify how its competitors price their products, in the aim to provide a lower price. Woolworth’s competitors would also do the same in return. Therefore, the high prices are often unmanageable due to their desire to maintain competitiveness against the others.

When looking at price positioning the stand out company in this three-way battle is clearly Aldi. That being said Coles and Woolworths have provided that opportunity through the historical attitude of being able to shrug of competitors employing temporary price wars or buying out the competition It is an all to often sight to see two Woolworths in close proximity to each other.

As Nirmalya Kumar from the Harvard business review articulates poignantly, the strength of Aldi’s price positioning comes from it’s lean and agile business model which focuses on selling more of select segment of products at a consistent and competitive price. This enables better utilisations of quantity discounts for products research shows to be of equal quality and in some cases better quality.

https://hbr.org/2006/12/strategies-to-fight-low-cost-rivals

http://www.emeraldinsight.com/doi/full/10.1108/09590550610714639

The other big differentiation between Aldi and its competitors is they have consistent or linear pricing model, whereas Coles and Woolworths go on local pricing. This makes a substantial difference in the segment they target as it provides fiscal consistency, which is a wonderful Segway into the other aspect in which Aldi does extremely well, consumer psychological & economic behaviour.

Aldi’s Core Values

It is well established that humans are creatures of habit, who are by default reluctant to change or at a minimum are resistant to it until it becomes their new norm. This mesh of economic strategy that Aldi use;

  • Lean Supply Chain
  • Larger volume of fewer items
  • Efficient checkouts
  • National consistent pricing

Coupled with the psychological strategy;

  • Clustering
  • Recency Illusion

Make a fantastic mix and a more holistic approach to the way the positing differentiates their products and pricing. A solid example of this is for the price conscious consumer, if they can budget for the same products being the same price regardless of store then confidence can be gained in expenditure.

If the consumer is the water running down a waterfall and the supermarkets are the rocks directing the flow of that water what happens when flow of water subsides or changes direction? Think of the rocks as the investment put into pricing/marketing and the exposure that leaves when the products quality are the same.

“Competition is the keen cutting edge of business, always shaving away at costs” – Henry Ford

References

Broadbridge, A., 2005. Retailing and producer-retailer relationships in food chains. [Bradford, England]: Emerald.

Harvard Business Review, 2006. Strategies to Fight Low-Cost Rivals. [online] Available at: <https://hbr.org/2006/12/strategies-to-fight-low-cost-rivals&gt; [Accessed 6 May 2015].

Iacobucci, D., 2013. MM. Mason, Ohio: South-Western.

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19 thoughts on “Three is a crowd – The dynamic supermarket price paradigm.

  1. Very topical. Lot in the news today about Woolworths due to share price drop. They have come out and said there are only two markets now, those who will want to pay the lowest price always and those who want luxury. There is no in between. Coles have done very well with their “down down campaign” and refurbishments of existing stores while Woolworths have focussed on a more long term strategy opening up new stores and looking to the future in relation to population growth. Only time will tell but in the meantime Woolworths have come out saying they will compete aggressively with emerging players such as Aldi matching low prices.

    I do like Woolworthes long term strategy though in regards to building more stores. I don’t go cheap cheap or down down, I just go where it’s convenient. If I walk past a Woolworthes store before Coles I go there and vice versa.

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    • Have you seen though that because Woolworths cannot drop their prices any lower they are taking Coles’ approach of reducing cost by reducing work force. So Woolies are about to fire very many employees.
      I don’t mind Woolworths approach of building more stores but I do not believe it will be sustainable. I have 3 Woolworths within a 1km of my house. The only reason that has occurred is because Woolworths do not want their competitors to move in. Fair enough but the quality of what is being supplied to one of the stores is low.

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      • It was some economy wrap on the back of these Woolworths redundancies where I heard this commentary about the different strategies. Regardless though of long term v short term strategies, dont like seeing competition driven out and quality drop.

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  2. Woolworth, coles and ALDI is the most popular supermarket in Australia. compared with the three supermarket, I prefer the Woolworth, because the price is cheaper than coles and ALDI, in term of pricing, consideration should be given to customers and competitors. For customers, each customers like the cheap price, moreover the distribution of the supermarket is very important for customers. As me I choose Woolworth has two reasons, the first one is they have cheap price, I think this is important, the second one is there are two Woolworth around my house, it is very convenient.

    For competitors, the major competitors for Woolworth is coles and ALDI, their pricing is related to the Woolworth of pricing. As i said above, in addition to price, distribution is also very important. I agree with what you said in the comments above, Woolworth don not want to rival move in, so that the people in the region will have more selective.

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  3. Even though Woolworths & Coles have lost a little of their market share to Aldi, obviously convenience & customer loyalty go a long way in determining where people shop. I think the “cheap cheap” & “down down” campaigns are being used to change people’s minds about perceptions of each brand. In researching for our blog on the milk wars, a woolies executive said that they were preceived as the most expensive of all the supermarket chains. So the “cheap cheap” campiagn is about changing that perception.

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  4. woolworths and Coles offers cheaper price than Aldi, and people now are more prefer the cheaper and more convenient one, and cheap cheap&down down are affecting customer perceptions in purchasing daily necessities. however for me, the quality is go beyond the price. and i am the one concerning the brand more than the cheap price. thus for the segments of customers like me, Aldi is more appealing, and their strategies are seem to catch more market share.

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  5. I always care about the price of products and compare these three supermarkets. I think Aldi is cheap but provides low-quality goods, they have enormous customers therefore good market penetration. However I feel I don’t want to buy necessities from a German supermarket in Australian land. Coles is my favourite, not only the price of the products, but it also provides high-quality goods, promotions every day and extended services such as Shell petrol for Flybuys customers to earn points. Woolworth has a competitive price but their products are not organized in the right place sometimes. The extent of promotions is not as good as Coles. I am a loyal customer to Coles, price, quality and brand are equally important for me.

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  6. I saw recently with the disappointing Woolworths profit report that a media commentator was making the point that Woolworths competition was not actually Aldi. The commentary was based around Aldi taking market share from smaller local supermarkets. Consumers have always cared about price but with competition becoming more intense with global retailers like Aldi it is up to Australian companies to respond. The globalisation of the economy means that it isn’t just the supermarket industry where this will be felt, it has ramifications across the Australian economy.

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  7. Considering the market monopoly coles and woolworths have had on the Australian grocery market and there ability to squeeze competitors out of the market perhaps it is the aside of the international brands that enables them to survive and compete against the big two ?

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  8. The milk price is indeed trivial. Safeway set its own brand of milk at $2 for a two litre bottle and $3 for a three litre bottle. I have always associated low price with low quality, but there are investigations revealed that this is just a price war between Coles and Safeway. They are willing to cut price below cost to attract customer to their stores.

    But who are the losers from this practice? It’s certainly not the retail giants. Their margins on other products can well cover the loss on milk and bread. Have living in country Victoria for the past 6 years, many of my friends are dairy farmers. They have told me on numerous occasions that the supermarket giants are hurting their livelihood.

    I still refuse to purchase Safeway or Cole branded milk and I strongly urge everyone else to do so.

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  9. As you point out at the beginning of your article, there are many factors that determine price other than trying to be cheaper than the competition. One of the key factors in being able to sustain a higher price is the ability to differentiate from competitors. I am surprised that the Australian supermarket industry has not yet targeted the higher end consumer, in a similar vein to Marks & Spencer or Waitrose in the UK.
    Especially with the rise in popularity of food and cooking, there seems an opportunity for someone to enter the market as a high end, prestige priced food store. That would allow them to justify increased focus (and expense) on animal welfare and farmer sustainability, which in turn would give them further point of difference.
    Perhaps an opportunity for some entrepreneurial soul?

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  10. When you look at Coles and Woolworths, their price for general merchandise is very similar. And usually the catalogue promotions are supported by the suppliers (manufactures). You will often see the lynx deodorant promotion price on catalogue is $3.39 at Woolworths this week, and more often you will see it will be on Coles catalogue next week anyway. And the promotional price is supported by lynx. I guess the key distinction on super markets are fresh food, diary, fruit and veggies, meats… The better | efficient of the supply chain function is, the better of the quality control is will have a significant on pricing.

    The supply chain function | structure | operation in Woolworths is 100000% better than Coles. They may sourced the watermelon from the same farm, because of the differences in supply chain, Woolworths is always able to price the watermelon lower price at the same quality of Coles , or same price but better quality than Coles.

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  11. Coles and Woolworth enjoyed market monopoly for a long time and their market share in some areas has reduced once Aldi came in to the market. I have noticed in some cases Woolworth and Coles special pricing varies from one suburb to other suburb. Price of the same goods sold in one store can vary from another store few kilometers away. .If there is local grocer who is selling grocery or fresh produce at low price, Woolworth or Coles tend to match that price or even lower their price Consumer demographics also plays a role in the local pricing strategy.of their stores

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  12. Coles and Woolies have enjoyed a monopoly for a long time and I was happy to support Aldi when they entered the market as monopolies generally drive the prices higher and put the squeeze on their suppliers. In the long run I feel the consumer suffers from monopolies with higher prices and lower quality. Certainly their suppliers have suffered and Coles have recently had to return in the order of $10million back to their suppliers for putting too much of a squeeze on their suppliers – they also copped around a $10million fine.

    I shop at a small local Coles that has higher prices and I struggle with the quality of their so called fresh produce, but I do so for the convenience. There is a choice of much larger Coles and Woolies and Aldi 2mins away but I have to go into the cavernous shopping mall packed full of weekend shoppers, which I can’t stand. So I guess I pay for the convenience – although I am re-thinking my options.

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  13. As Tjosep indicated Coles and Woolworths tend to segment their stores to determine their pricing across their various store categories. There are a number of factors that would determine the relevant pricing segment. These factors may include Competitive set, sociodemographic factors I.e price consciousness and may even vary by store category based on specific competitors in direct proximity to the store e.g. Bakery, butcher, fruit store or tobacconist. It is worthwhile to do your homework to determine where the lower priced Coles and Woolworths are relative to where you live. However, my wife being European is very comfortable to buy the majority of our groceries from Aldi these days and I am quickly becoming a convert…..!

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    • 🙂 External exposure to consumer behaviour often influences our own. With Melbourne being very multicultural i guess that is another localised strength for Aldi as people have a huge amount of international experiences with brands. This could however be a negative for closes and Woolworths as they focus heavily on certain demographics.
      Thanks for the reply

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  14. Price always the important things that to me, which have the more cheaper price would be affecting me in purchasing daily necessities. but however, sometimes, the lower price can not have the good quality, so sometime Woolworths may have the lower price but some products are really do not have a good quality, so you may buy a new one soon. so some people would be more likely choose some good brand products, these kind of customer would be more like ALDI.

    but in AUS, the coles and Woolworths already are the monopoly market, people may struggle in the lower price and convince and quality. because other brand supermarket it is hard to live in the AUS market, they do not have the competitive power against Woolworths and coles.

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    • Thanks for the insightful reply. I take your point on pricing and perception that is a huge hurdle these days which is where the revolution of the informed consumer comes into it but as it stands they are still a low percentage.

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