Australian grocery supermarket sector is dominated by two big players Coles and Woolworths with a combined total market share of around 70% (Roy Morgan Research, 2015). Grocery products are essential items for households and the customers are price sensitive. Demand for everyday necessities is elastic as the consumers can switch to cheaper alternatives. Therefore, both large supermarkets promote themselves as the cheaper grocery suppliers; Coles’ “down down”, Woolworths’ “cheap Cheap”. Two big supermarkets are at a price war while the next major player Aldi is clearly the winner in low price race.
Below is a comparison of prices between major supermarkets in Australia.
|Average price of grocery basket – retailers compared|
(no. of stores)
|Savings from specials|
|Aldi private label (n=18)||$87.68||$87.57||$0.11 (<0.5%)|
|Coles private label (n=32)||$114.24||$113.75||$0.49 (<0.5%)|
|Woolworths private label (n=32)||$119.40||$118.56||$0.84 (1%)|
|Coles leading brands (n=32)||$174.97||$162.56||$12.41 (7%)|
|Woolworths leading brands (n=32)||$176.77||$172.16||$4.61 (3%)|
*Basket made up of 28 leading brand products or their private label equivalents across all three chains plus three fresh
Above date shows clearly that there is no significant price difference between Coles and Woolworths. According to Roy Morgan Research (2015) over two third of the consumers visit at least two different supermarkets in an average 4 weeks period so brand loyalty for supermarkets in Australia is not significant. Therefore, both these supermarkets try to attract price sensitive grocery consumers through different pricing strategies
One of the main pricing strategies used by big supermarkets is weekly specials. Every week the supermarkets offer special catalogue prices on many items with some of them as cheap as 50%. Why do supermarkets offer weekly specials? The reason can be explained with consumer psychology;
Contextual Framing – we all like to get a bargain. The fact that some products have been discounted from a higher price gives a signal to the consumer that an opportunity has arisen to buy a higher quality product at a lower price. Perhaps the regular price of another similar product may be at the same level but the consumers tend to believe that product with discounted price is of higher quality because the consumers think that the price (regular price) of a product is a cue for better quality. Also there is this “feel good” factor when customers get a bargain. The consumers think that they are smart shoppers by grabbing the discounted deals.
Other strategy used by the supermarkets is the everyday cheap prices for some items. 1$ milk, 1$ bread and most recently $8 roast chicken are some examples. Supermarkets have negotiated with the suppliers to provide these at a low price. Pricing strategy for these products is the low price strategy to cover the cost plus a small margin.
Offering private brands at cheaper prices is another pricing strategy used by both Coles and Woolworths. This is a good market segmentation strategy. Price sensitive low income consumers select these cheaper products and the consumers who can afford the branded items use the price as a cue for the quality and tend to go for the branded products. According to Clemons (2015), private label brands account 21% of the package groceries in Australia.
All these so called “bargains” are designed to increase the foot traffic to the store are get the consumers to spend on many more items. It is evident from their “fat” margins so these big players have done well to make us spend more and “feel good” at the same time.
However the “Aldi effect” in the grocery is changing the Australian supermarket sector. Aldi’s Low Price strategy with cost plus small margin is forcing two big players to slash the prices.
Clemons R, 2015, ‘Want to spend less at the checkout?’, Choice, Retrieved 30 April 2016, <https://www.choice.com.au/shopping/everyday-shopping/supermarkets/articles/cheapest-groceries-australia>
Roy Morgan Research 2015, ‘The ALDI effect: Australia’s changing supermarket scene, Roy Morgan Research, Retrieved 30 April 2016, <http://www.roymorgan.com/findings/6297-aldi-effect-australias-changing-supermarket-scene-201506220132>
Roy Morgan Research 2015, ‘Supermarket loyalty: what’s that?’, Roy Morgan Research, Retrieved 30 April 2016, <http://www.roymorgan.com/findings/6442-supermarket-loyalty-whats-that-201509072312>