Pricing strategies adopted by supermarket retailers

In this chapter the background of the topic and the discussion about research problems of the thesis are introduced as well as the purpose and delimitations of the study. They will be described and examined in order to enhance the understanding of our intention for the research and its boundaries.

1.1 Background

Pricing is an exercise, rather an integral part of economic decision making regarding what the seller or the producer can expect to receive in exchange for the manufactured products or the intangible services.

In economic sense, a lot of micro and macro factors go into bearing their consequences for price determination vis a vis the level of demand in the particular market. Pricing theory ,since its inception has researched the absolute and evolving nature of pricing decisions to be made and executed by various stake holders in the economic system [1] .

In business enterprises ,the pricing decisions are no doubt the most significant decisions which not only have consequences for marketability, ability to meet or not to meet the current levels of demand ,the level of competition ,the sustenance and survival of the entity, but also in turn determines the cash inflows, business viability and the very economic supply chains, value chains and virtually the entire economic system and its performance over periods of time as well [2] .Innovation cannot stop ,whatever the conditions may be [3] .

The financial modeling in financial analysis as well as the marketing mix, all insists on just the right pricing to capture consumer’s surplus and in turn generate the monetary resources for enterprise to sustain and evolve [4] . The pricing is the sole decision which brings in money, everything else is just cost [5] .

The British Super Markets

A supermarket, a form of grocery store, is a self-service store offering a wide variety of food and household merchandise, organized into departments. It is larger in size and has a wider selection than a traditional grocery store and it is smaller than a hypermarket or superstore [6] .

Supermarkets have their roots in the 19th century Co-operative movement [7] through which groups of local retailers would come together to sell affordable food under the control of consumer members [8] . The first co-operative was founded in Rochdale, Lancashire in the 1840s. Subsequently co-operatives across the North of England came together to form the Co-operative Society in order to allow the purchasing goods in bulk [9] .

In the United Kingdom, first supermarket emerged under the new Premier Supermarkets brand in 1951, taking ten times as much per week as the average British general store of the time [10] . Other chains caught on, and after Galvani lost out to Tesco’s Jack Cohen in 1960 to buy the 212 Irwin’s chain, the sector underwent a large amount of consolidation, resulting in ‘the big four’ dominant UK retailers of today: Tesco, Asda (owned by Wal-Mart), Sainsbury’s and Morrisons [11] .

The major chains have been opening ever-larger format stores, with Asda and Tesco in particular opening hypermarkets [12] . The major grocery retailers have diversified into non-food retail, online shopping, and other activities unrelated to shopping.The industry structure has now evolved [13] . The on going consolidation and mergers and acquisitions as well as development of monopoly is rendering a new shape to the industry [14] . The bigger the supermarket chain, the more ability it has to abuse its market position and put pressure on other parts of the food chain [15] .

The Leading supermarkets

Tesco – Tesco became the market leader in 1995 and has continued to increase its market share ever since, reaching a staggering 31.5% market share in 2006 [16] 

Asda – Asda’s business is more focused on hypermarkets and out-of-town stores than the other UK chains, in the model of Wal-Mart, which bought it in 1999.

Sainsbury’s – neck and neck on market share with Asda, Sainsbury’s slipped since being the top retailer in the UK but is now doing well [17] .

Morrisons – Morrisons became the fourth supermarket chain when it acquired the majority of Safeway stores in 2005.

Marks & Spencer – M&S has 450 stores in the UK, and a further 150 worldwide.

The Co-operative Group – The Co-op has a total market share of around 5%.

Retailers today face many challenges: keeping costs low and supply chain efficiencies high; protecting their brand and reputation; responding rapidly to changing consumer tastes; expanding their reach to penetrate new markets and compete from a position of strength; and greening their operations .

Approaches to pricing

Change has become the universal constant. There were times in British organized retail industry ,when the economic dominance over global economic systems was unchallengeable [18] . In the post-recession period since the 2008,the economic realities have undergone transition. The same pricing decisions now needs re interpretation in wake of emerging economic complexities and financial crisis.

The economic questions remain the same yet environment is different .The most basic question is regarding the quantum of allocation of manufactured product or the service or the probable creation of value for consumer. Then comes the objectives and the motives before cornering on a specific price. Profit maximization or cost-plus pricing or demand based or value-based pricing or rate of return pricing, or competitor indexing [19] .

The intentions to provide local flavor-different prices at different locations can be another strategy. The efficient market mix calls for market share development ,incorporating the information and demand based asymmetries as well as cornering the competitor [20] . Marketing age and dependency of consumers herald yet another dimension in pricing. Oligopolistic attempts to retain market share can be visible in form of price maintenance, price collusion, or price discrimination. More than that the microeconomic factors like production costs, extent of competition , role of state and demand elasticities do creep in. The value chain costs and methods of payments as well as associated lateral costs can also figure up.

After all , a well-designed pricing strategy needs to help the organization achieve the economic objectives and financial goals. Along with this it should make the business motives achievable .In addition to this it needs to support a product’s positioning and be consistent with the other variables in the marketing mix .

Evolution and Prevalence

The capitalistic – socialistic economic divide is no longer feasible. The market structure is in itself much more complex than ever. The attempts to single out one strategy no longer seems to be practical. Thinkers and philosophers are coming up with new theoretical inputs to the change.

The law of one price (hereafter LoP) , one of the most basic laws of economics and yet it is a law observed in the breach [21] . Demanding two prices for same product in one market for exactly the same good-is so simple as to invite complication.

Changes in ways to approach the problem do happen. Economists come up with new theoretical rationale behind the current problems . LoP has undergone restatement [22] .As information about a commodity improves, its price variability will decline [23] .The dynamics of information availability or non-availability seems to be the under current behind price variability.

The philosophy of price variation seems to have revolutionized after the Barzel’s innovation. Most commodity exchange agreements consist of an explicit, objectively measured contractual component enforced by the state, and an implicit, subjective component enforced by reputations.

Becoming informed about the former is relatively easy, but becoming informed about the latter is not [24] . Buyers do not fully adjust for differences in the reputational component of similar commodities. This gives sellers discretion in setting prices, and we expect prices to diverge even at equilibrium. Costless information, along with competition, yields the LOP.

LoP is based on greed , homogeneity of goods and speed to equilibrium [25] .The following conditions are needed for the LoP to be plausible [26] :

A. Multiple sellers at one spot to ensure competition at each location.

B. Standardized, bulk sale commodities with specialized traders, for which ready credit is available.

C. Rapid attainment of equilibrium.

Yet the practical observation clearly suggests that , even if all commodities were goods, the sheer volume of goods makes the collection, compilation, storage and transmission of data so costly that we will never get individual data, only indexes and aggregates.

Then the trend of modern consumerism is toward more personalized products, which not only increases the number of goods to be considered but also makes price discrimination more likely.

Further , all modern economies are moving away from mass produced manufactured goods and toward services. This clearly complicates the pricing tactics .

it appears to be in the interest of sellers to acquire one degree of information beyond that acquired by consumers–hence there will always be some room for the sellers to manipulate consumers and violate the LoP in the process [27] 

1.2 Problem Definition

The master thesis covers the topic of how same product-………. being priced at three different retail chains(………) , in ……..area in ……….. In today’s environment customers are becoming more demanding in terms of better service, including reliability and faster delivery.

Pricing in itself is being viewed with competitive advantage aspect. Yet the availability and non-availability of information can bring about the LoP. There seems to be no validity for the argument that increasing information processing capacities will bring about the end to price variation across the considered retail chains in …..area in …………….

An underlying reason for the importance of the chosen topic lies in evaluating the reasons behind the price variations across the ………as well as providing superior pricing strategy inputs which is the main foundation for a sustainable competitive advantage.

1.3. Research Methodology

In this paper, the researcher will investigate into product differentiation used by the retailers to charge different prices for same products to different customers, using the case of supermarkets…………. in ……. Area across ………………..city.

The study will adopt triangulation method to carry out the research. Given the time and resource limitation, a convenience sampling method will be used. Observations regarding the prices of different products sold by the three leading supermarkets – Tesco, Sainsbury and Waitrose will be made and analyzed. The final result will be achieved by combining the existing qualitative theories with the observation and analyses of the data collected.

1.4 Research Objectives

The paper intends to carry out an assessment of product differentiation used by different supermarkets in order to charge different prices for the same products. The basic research objectives of this study are:

To understand the rationale behind pricing

To understand what affects pricing in the chosen supermarkets in the designated area of study

To discover different pricing strategies

To understand what theories retails use in corporate decision making

To understand the extent to which retailers use product differentiation to charge different prices from different customers.

However, the main objective of the study will be to understand the pricing theories that exist in writing and the observation made about the pricing theories used by the supermarkets in reality.

1.5. Thesis Organisation

The chapter one is an introduction to the research document, detailing on the background as well as the rationale behind choice of topic. It zeroes on the definition of problem at hand ,discusses the objectives before the research and the general approach to research work. Second chapter discusses the general nature of organized retail, especially the supermarket in and across the Britain ,the inherent challenges and problems. The next chapter would be the review of existing academic literature with focus on various pricing theories, approaches and similar research undertaken at various academic institutions. The fourth chapter will detail about the methodology utilized for pursuing this research task , determination of sample ,sources of data and data analysis method definition. The next chapter is an analysis of data .The sixth chapter presents the findings from the research work .The seventh chapter revolves around the discussions of the findings and their general implications for future consumer relations ,the competition in market place and like wise. The next chapter summarizes the observations and findings and concludes the research. The appendix carries the bibliography , the questionnaire , press clippings and the information about the marketing schemes of the chosen super markets.

Chapter 2 Organized Retail Industry : A Profile

2.1 Introduction

Retailing is the business where an organization directly sells its products and services to an end consumer and this is for his personal use. By definition whenever an organization be it a manufacturing or a whole seller sells directly to the end consumer it is actually operating in the Retail space [28] . This industry has traveled a long way from a humble beginning to a situation where worldwide Retail sales is more than $ 7 Trillion .

Retailing has played a vital role worldwide in increasing productivity across a wide range of consumer goods and services. It is a changing Industry and old traditional ways of doing business has lost relevance nowadays. It is an Industry which is heavily dependent on consumer spending [29] . In this ecosystem consumers play the most important role. As a result of this, Retailers are continuously challenging themselves to find out ways and means of identifying customers need . They are busy in devising new strategies to have an atomic level understanding of consumer demand.

2.2 Global Retailing

The top 200 Retailers alone contribute for 30% of worldwide demand. Retail sales is generally driven by people’s ability (disposable income) and willingness (consumer confidence) to buy goods and services. Money spent on household consumption worldwide has increased by 68% between 1980 and 2003. The leader has unquestionably been the USA where some two-thirds or $ 6.6 trillions out of the $ 10 trillions American economy is consumer spending. Consumers are spending around $ 3 trillions on discretionary products and services. Retail turnover in the European Union is around Euros 2000 billion and the average growth in this sector seems to be following an upward trend [30] . The Asian economies (excluding Japan) are expected to grow at 6% consistently till 2005-06. Positive forces at work in Retail consumer markets today include high rates of personal expenditures, low interest rates, low unemployment and very low inflation. Negative factors that impact retail sales involve weakening consumer confidence.

2.3 Type of Retailers

Retail Organizations have shown great variety and different format of stores are coming up quite rapidly [31] . Generally Retailers can be of six types.

Specialty Store

This stores are characterized by narrow product lines but with deep assortments such as Apparel Stores , Sporting goods store, Furniture store ,Florist and Book store. Under this also there could be specializations like limited line store ( eg. Men’s clothing store) and Super specialty store (eg. Men’s custom shirt store ). Example of such stores are Athlete’s foot ,Tall men.

Departmental Store

Several Product Lines -typically clothing ,home furnishing and household goods with each line operated as a separate department managed by specialist buyers and merchandisers Examples Sears, JC Penny , Nordstrom.

Supermarkets

Relatively large ,low cost ,low margin high volume ,self-service operation which is designed to cater total needs for food, laundry, household maintenance products .Supermarkets earn an average profit of only 1 percent on sales. Example : Safeway, Kroger.

Convenience Store

These are the stores which are relatively small in size and they are located near residential area , normally remains open seven days a week and carrying a limited line of high turnover convenience products at slightly high prices. Many have added take away sandwiches , coffee and pastries. Example : 7-Eleven ,Circle K

Discount Stores

Standard merchandise sold at lower prices with lower margin but higher volumes. Actual discount stores regularly sell merchandise at lower prices and offer mostly national brands. In Discount retailing , Discount specialty retailing is also present eg. discount electronic store or discount book store . Example : Wal- Mart (all purpose discount store) , Kmart . Specialty : Crown Bookstore.

Off Price Retailers.

Merchandise bought at less than regular wholesale prices and sold at less than retail prices. Often left over goods , irregulars obtained at reduced prices from manufacturers and other retailers.

Factory outlets are owned and operated by manufacturers and they normally carry manufacturer’s surplus ,discontinued and irregular goods. Example : Mikasa (Dinnerware ) and Dexter(Shoes).

2.4 Characteristics of Retail Industry

The spectrum of Retail Industry is quite wide in nature. Retail serves consumers through a small grocery store to a huge departmental store [32] . Retail Industry is heavily dependent on consumer spending. In fact 2/3 of US GDP is coming from Retail business [33] . Retail is the second largest industry in US. It has employed 23 Million people . During economic slow down consumer spending decreases and it poses threat to the Retail industry. Consumers confidence is one of the key drivers of the industry.

Decline in Small Stores

It is observed that small independently owned stores are gradually loosing their foothold in the market place. These stores are generally called “Mom and Pop” stores and they offer limited merchandise to the consumer. These store are facing stiff competition from the large departmental stores or superstores and in this process they are closing down their shutters. In many locations the arrival of a superstore has forced nearby independents out of business. In the book selling business Barnes & Noble superstore or Borders Books and music usually puts smaller bookstores out of business. This is a major characteristic prevailing worldwide. But it is also true that many small independent outlets still thrive by knowing their customers better and providing them with more personalized service.

Internet and E-Commerce

Internet the ubiquitous medium has opened a new avenue in front of the Retailers. It has offered an opportunity to the consumers to shop from the home. As it stands today overall Retail sales through internet may not be that significant but gradually it is gaining popularity amongst consumers [34] . Amazon.com is the company which is very successful in this E commerce domain.

Repositioning of Departmental Stores

The appeal of big departmental store is in the wane and they are trying to reposition themselves. They are repositioning their product lines to survive in this highly competitive market eg. A departmental stores which is supplying general merchandise to the consumer is changing themselves to a giant apparel store.

Rise in Discount stores

Supremacy of Discount store is also one of the distinct characteristics of Retail Industry today. Discount stores offer money back guarantee, every day low price etc to lure customers. They also provide floor help and easy access to the merchandise to facilitate the consumer. Wal- Mart the worlds largest Retailer comes under this category of Retail store.

Category Killers

There are Retailers who actually concentrate on one particular product category and grab a lion’s share of that market and outperform their competitors. They are called Category Killers. Toys R Us (Toy market ), Home Depot (Home Improvement) , Staples (Office Supplies) are the examples of such Retailers who have grabbed a major market share in that product category and they have forced a reduction in the number of players in that product segment. This is also a distinct trend observed in the current Retail market. Ten years back there were number of players in the toy market and no one was controlling more than 5% of market share but now the number of players has come down to six and Toys R Us is enjoying 20% market share.

Direct Marketing

With the advancement of technology Retailers have found another sales channel through which they can reach the consumer and this is direct marketing. Direct marketing has their root in direct mail and catalog marketing (Land’s End and LL Bean). It includes telemarketing, television direct response marketing. (Home shopping network, QVC) . Although an overwhelming majority of goods and services is sold through stores, non-store. Retailing is also growing at a faster rate [35] . Direct selling is $9 Billion industry with around 600 companies selling door to door. Avon ,Electrolux ,Southwestern company ,Tupperware and Mary key cosmetics are the examples who have adopted this strategy successfully.

Demographic Changes

Retail industry is impacted by the demographic changes. As a result of this change taste of the consumer is undergoing a change and it creates a demand for certain products. World wide Retailers are keeping a close watch on this change and they are trying to realign themselves with this change.

Mergers and Acquisitions

Retailers who want to dominate the market place have adopted the strategy of mergers and acquisitions. This is also one of the distinct trends in Global Retail Industry today. Instead of achieving an organic growth Retailers can grow significantly with the help of mergers and acquisitions. This helps them to occupy more shelf space in the market place. As the volume increases they are establishing better control over their suppliers and they are reducing the procurement cost and in that way they are boosting their profitability.

This is driven by the economic growth factors, size , revenue pattern and the customer demand. Sears and Land’s End merger is one of the significant mergers which has happened in recent times. Another important example would be Nikes acquisition of Hurley, a well known surfing brand. This has helped Nike to enter in to a new market segment.

2.5 Operational Issues

In order to survive in this Industry, which is driven by the consumer demand Retailers need to successfully counter the operational issues. If the Retailers fail to diagnose and address those operational issues their existence will be jeopardized.

Supply Chain Management and Logistics

The process of getting goods to the customer has been traditionally known as Physical Distribution. Physical Distribution starts at the factory and it ends at the store. Nowadays the definition of Physical distribution is expanded and a broader concept has come which is Supply Chain Management.

Ideally Supply Chain Management encompasses the material flow from supplier’s suppliers to the final destination. Retailers need to have a grip on that whole chain in order to control the procurement and delivery cost. This will help them to choose the right supplier for the merchandise [36] . Retailers need to come out of the constricted view about the supply chain which is viewing the market as a point to point destination, instead they need to consider the holistic picture which is a part of Market Logistics. Market Logistics involves physical flow of materials from point of origin to the point where it meets the customers requirement.

This Demand Chain orientation can help them to cut down the procurement cost to a great extent. IKEA the global furniture retailing giant has successfully addressed this issue and they are able to sell quality furniture at a much lower cost than his competitors.

Pricing

In Retailing environment pricing has become a burning issue to the retailers. Customer’s expectation from a Retail store has become very high and customers are looking for more and more bargain prices. This situation can be referred as Price drought . Price deflation is taking hold in the Retail environment and any reduction in volume is complicating the scenario further. This trend is quite evident in Apparel and Consumer goods market.

Pricing seems to be a key positioning factor and must be decided in relation to the target market , Assortment mix and competition. Strategic pricing has become an important strategic tool to the retailers. Airlines Industry started this strategic pricing technique where the underlying philosophy is not all consumers want a particular product at the same time and the degree of demand will also vary. With this idea in mind different consumers are charged different prices for the same product or service.

Retailers need to adopt the right pricing tactics in this environment of fierce competition. Retail stores markdown the price for some items to attract people, this is called traffic building. They also run storewide reduction sell.

It is observed that a shoe Retail outlet sells 50% of the product at normal mark up , 25% of the product at 40% mark up and remaining 25% at cost. Some Retailers have done away with sales pricing and they are resorting to everyday low price (EDLP). It leads to lower advertising cost , greater pricing stability and higher Retail profits. Wal- Mart uses this kind of pricing strategy.

Sales Channels

Design of sales channel is also a key operational issue in today’s Retail industry. Technology has become one indispensable business component and Retailers need to make use of this successfully. Retailer needs to come out from the mindset of traditional store retailing and they need to use all available channels to reach a wider consumer community.

Amongst Non store Retail channels Internet and E commerce is gradually gaining popularity. Consumers do not need to come to store for buying goods or service they can do that over a click of a button from their drawing room. Retailers need to derive benefit from that . Marketing through call centre or catalogue marketing is also an emerging trend .

Retailers need to choose sales channels carefully and need to use all those channels effectively to acquire more customer centricity. Ultimate objective here is to offer a consumer a tailor made shopping experience and to provide more easy access to his product and service offering.

2.6 Strategies in Retail

A business firm can not travel in an unplanned way . To encounter the business challenges in a highly competitive environment and to find out a sustainable growth road map Retailers need to realize the importance of strategic planning. Strategic planning can be viewed as a stream of decisions and activ