Monday, December 5, 2011

Supermarket Price Wars

As de Kluyver states, there are two generic strategies to create a sustainable competitive advantage: cost leadership and differentiation. In the Netherlands every few years a huge price war arises between supermarkets. During these periods the supermarkets focus on cost leadership. According to de Kluyver, there are three main points in a cost leadership strategy (de Kluyver):
- Minimal expenditure in R&D, marketing and overhead
- Serves as an entry barrier to potential competitors
- Can help maintain a defensible position in the marketplace

In 2003a price war was started by market leader Albert Heijn (AH). AH’s goal was to lose the expensive image of the supermarket and retrieve lost customers. The price war didn’t only lead to huge price decreases but also to big changes in the industry. Several brands disappeared while others got bigger. AH had at that time a market share of 28.5%. The second biggest supermarket, C1000, had a share of 14.4% (Velde, 2008).

In 2004 the government strongly requested the supermarkets to stop with the price war, because of its many negative side effects; the quality of food decreased, a smaller range of offerings, a relative increase of prices of local grocery stores, and a loss in jobs (SNM, 2004) . In 2006 the price war ended.

In 2007, analysts were expecting another price war soon, because none of the parties was at the position they wanted to be, leading to a restless situation. Also, the food prices were strongly increasing, but no supermarket wanted to be the first to increase prices and everyone was looking at each other. Analysts expected more brands to participate in the upcoming price war, because there were too many different parties active (Distrifood, 2008). Analysts were right; in 2008 AH lowered its prices again because its expensive image was returning. The number two supermarket, C1000, immediately responded by lowering its prices, too, and another price war started (Hafkamp, 2008). Different methods were used to attract more customers, AH for example used the lowest-price guarantee. Every time one supermarket lowered its prices, others followed (RTL, 2009a). The price war ended at the end of 2009 with several brand take-overs.

In 2010 new speculations of price wars arose because the coming two years 175 new cheap supermarkets, especially from the brand Jumbo, would be opened. Analysts forecasted the cheap brands would attract customers to their new stores by applying new price declines (RTL, 2010). Another reason given was that turnovers of supermarkets were being threatened and supermarkets would do everything to keep their market share.


In 2011 no new price war has started yet, but AH, with a market share of 34%, has announced to start new price discounts soon to protect its market share and try to shake off the again returning luxurious image. All other brands will follow, since AH decides what happens in the supermarket industry (ANP, 2011).

As the previous information has shown, AH has had a hard time shaking off its expensive image resulting in several price wars. This might be caused by AH normally following a differentiation strategy; it uses product design, brand image, and special services like home delivery. The key of this strategy is that customers should be willing to pay for value added (de Kluyver). However, consumer statistics showed that because of the credit crisis, 60% of the consumers buy more discounted products and 50% choose cheaper brands over A-brands (RTL, 2009b). AH used price wars to shake off its expensive image and keep its market share. It was possible to do this because it is the market leader. AH wants to keep its large market share, though it should realize that this may not be possible if it decides to focus on the differentiation strategy (de Kluyver).

This information makes me wonder if AH will be able to keep up this mix of strategies to maintain its market share. AH is trapped in between two choices; offering products for the lowest price or offering highest quality products and services. I think AH in the long-term will not be able to keep up its mix of strategies, and I think it should focus on either differentiation or on cost leadership.

Sources:
ANP. (2011, November 14). Retrieved December 5, 2011, from Elsevier: http://www.elsevier.nl/web/Artikel/322301/Nieuwe-prijzenoorlog-supermarkten.htm
de Kluyver, C. (n.d.). Strategy: A view from the top.
Distrifood. (2008, January 16). Retrieved December 5, 2011, from Distrifood: http://www.distrifood.nl/web/Nieuws/Formules/Formules-artikel-pagina/128104/Nieuwe-prijsoorlog-bedreigt-supermarkten.htm
Hafkamp, M. (2008, December 22). AdFormatie. Retrieved December 5, 2011, from http://www.adformatie.nl/nieuws/bericht/supermarkten-hervatten-prijsoorlog
RTL. (2009, November 9). Retrieved December 5, 2011, from RTL: http://www.rtl.nl/(/financien/opvolgergezocht/nieuws/)/components/financien/rtlz/2009/weken_2009/34/0817_1815_Supermarkten_maken_zich_op_voor_een_nieuwe_prijzenslag.xml
RTL. (2009, December 8). Retrieved December 5, 2011, from RTL: http://www.rtl.nl/(/financien/opvolgergezocht/nieuws/)/components/financien/rtlz/2009/weken_2009/47/1117_1125_mensen_kopen_goedkoper_eten_insupermarkt_door_kredietcrisis.xml
RTL. (2010, Februari 8). Retrieved December 5, 2011, from RTL: http://www.rtl.nl/(/actueel/rtlnieuws/binnenland/)/components/actueel/rtlnieuws/2010/02_februari/08/binnenland/Hoe_gaat_jouw_super_verder.xml
SNM. (2004, December 22). Retrieved December 5, 2011, from SNM: http://www.snm.nl/page.php?pageID=78&itemID=739&themaID=8
Velde, F. v. (2008, January 16). Retrieved December 5, 2011, from Elsevier: http://www.elsevier.nl/web/Nieuws/Economie/154112/Welke-supermarkten-profiteerden-van-de-prijzenoorlog.htm



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