The humble roast chicken has become the latest battle ground in the so called ‘supermarket price wars’. Chooks have always had a special part in the Australian psyche. Who can forget the farce back in the GST debate days of 1999 when the then Labor leader Simon Crean brought a thermometer to parliament demanding to know at what temperature would cooked chicken lose its GST exempt status? GST on chooks
But I digress. The roast chook is back in the media spot light, this time due to pricing. In January 2016 Coles announced a drop in price for roast chickens from $11 to $8, however within days Woolworths had responded to the threat with a retaliatory price of $7.90. This is just the latest in the ongoing battle between the two giants, we have also seen price wars in milk and bread as well.
So what is going on?
How can price wars be explained? Is it all downside? IF you are a business owner and you find yourself in the midst of a price war what strategies can you employ?
Let’s first consider some general concepts about price. The price for a product tends to send a clear signal to consumers about the brand and positioning of the product and there is a tendency too for price to be a cue to quality (Lacobucci page 116.) So if the supermarket drops its price of chickens do consumers assume that the quality has reduced? Or can you assume that given all the publicity, with the ‘wars’ covered in newspapers, on line and current affairs shows (such as below), that consumers have been educated about the nature of the price war and don’t make adverse quality judgements?
What’s the strategy?
Typically companies have a strategy when setting price, be it aiming to maximize profit, revenue, volumes sold or profit margin. However in the case of a price war the strategy may simply be survival. (Gould, M 2015)
There is an interesting psychological dimension to price wars. Generally we feel good as consumers about our purchase decisions when we get a discount (Lacobucci page 117.) But the question to ask is how long does this ‘feel good’ factor stay if a product is reduced for a particularly long time? Does the new discounted price become the ‘new normal?’. This is both a risk and an opportunity for the large chains. Citibank analyst Woodford has argued that
“Over the last few years we have seen Coles put some price points out there on some big profile categories – bread milk and now chicken – to try to engrain a perception about pricing” (Low C 2016)
The causalities of ‘war’
Whilst consumers can benefit from price wars, the business world is littered with the corpses of companies that have gone down this route and failed. A price war between Pizza Hut and Dominos in 2015 resulted in 32 Pizza hut franchisees closing down. (Mayes A 2015.)
Just the possibility of a price war in the competitive US airline industry led to airline stock price drops in 2015. (Team T 2015). (Airlines price war)
Clearly business’s today would benefit if they can employ strategies that avoid the ‘race to the bottom’ mentality of a price war. As the Harvard Business review (Rao et al 2000) notes:
“No matter who wins (the price war) the combatants all seem to end up worse than before they joined the battle”
One option to avoid a price war is to signal to your competitors that you have a low cost structure and hence have the capacity to drop prices to low levels that are difficult to match. (Rao et al 2000). Another option is to respond with non price actions such as dramatically increasing service delivery. Recognising too that not all price wars need a retaliatory response, that only those products that offer next best alternatives to your product are a threat. (Bertini 2014).
So what conclusion can we reach?
Enjoy those cut price chickens whilst they last!
By Carmel Norton
Word press id ; CNORTO
A current affair, 2011 Television program, Channel 9, Sydney February 20
Bertini M ‘Price wars and the managers that start them’ London Business School Issue 4 2014 date retrieved 29 April 2016, Deakin university database
Gould, M 2015 ‘Pricing strategies’ Research starters, (On line edition) date retrieved 29 April 2016 Deakin university database
Iacobucci, D 2013, MM4 Student edition, South-Western Cengage Learning, USA
Low C 2016 ‘Cooked chook the new front in supermarket price wars’ Sydney morning herald April 11 2016 date retrieved 15 April 2016 http://www.smh.com.au/business/retail/cooked-chook-the-new-front-in-supermarket-price-wars-20160408-go28p5.html
Mayes A 2015 ‘Pizza hut franchisees launch class action over pizza price war’ News ABC 27 July date retrieved 25 April 2016 http://www.abc.net.au/news/2015-07-27/pizza-hut-franchisees-launch-class-action-over-pizza-price-war/6622748
PM 1999 Radio program, Radio National June 23
Rao A Bergen M Davis S 2000 ‘How to fight a price war’ Harvard Business Review March April 2000 issue date retrieved 28 April 2016 https://hbr.org/2000/03/how-to-fight-a-price-war
Team T 2015 ‘Airline stocks drop as fear of price war clouds the industry’ Forbes date retrieved 27 April 2016 http://www.forbes.com/sites/greatspeculations/2015/06/11/airlines-stocks-drop-as-fear-of-price-war-clouds-the-industry/#1b3a6b2b42d5