Published by Rebecca Berryman – 96535162
Over the years there have been many competitions between the major supermarket players where they have competed on price. In March of this year Coles announced that it was cutting the price of tissues and toothpaste (Low, 2016) and in January we saw a war on cooked chickens with Coles dropping their cooked chickens from $11 to $8 and Woolworths dropping their cooked chickens from $11 to $7.90 within a week. The aim of this is to encourage shoppers to purchase not only the cooked chickens but other produce from their store and according to Westfarmers it appears as though this strategy is working with strong sales growth across its fresh segment (Low, 2016). This price cuts also follow the price cuts of bread and milk. Which were both reduced to prices as low as $1.
Is the consumer better off as a result of these price wars?
Overall whilst a consumer may benefit from the lower prices at the time the overall impact may be a negative result for the consumer as if retailers are competing on price they have to decrease their costs to remain viable. Consequently, they may cut cost in the area of service. They could also cut costs in the area of research and development resulting in the product not progressing over time. Finally, they may not be able to sustain the decreases in prices and resulting in bankruptcy. (Van Heerde et al, 2008) In this situation again the consumer would be worse off as there is a decrease in choice. Once the retailer has removed their competition they may then go back to increasing their prices, possibly to a point where they are higher than they were to start with.
Do these price wars affect other retailers?
The impact of this price war on other independent retailers can depend on what it is that is being sold at a lower cost. If consumers feel that they are getting a better quality product at the independent store then they are usually prepared to pay for this. The people that are looking for bargain bread are not the same people who purchase their bread from specialty stores. For example when the supermarkets cut the price of bread, sales of Bakers Delight and Brumbies were not impacted. (Langley, 2014)
What is the impact on the supplier?
Whether or not a price war will have a positive or negative impact on a supplier depends on what the supplier is willing and is able to negotiate. In the price wars involving milk the farmers were significantly worse off with their margins going from 4 cents per litre to just 1 cent per litre (Cook, 2012). A small decrease in price may be acceptable when there is a large increase in volume but it is important to remember that any change in price will directly affect the bottom line of a wholesaler and the full impact of the price war is not evident until prices are restored to normal (Sotgiu, Gielens, 2015).
Therefore the wholesaler may appear better off whilst in the price war but the price war can do long term damage to the brand.
Are the major players the winner?
Van Heerde et al found in their study of a price war that occurred in Dutch grocery retailing that the initiator of the price war had increase price image and increased market share. The high and mid end players were negatively impacted with less consumer spending, however the hard discounters benefited from the price war. (Van Heerde et al, 2005)
In conclusion whilst there may be some short term gains to be had from price wars in the end there aren’t usually any real winners from competing on price. Competing on price is not recommended instead the retailer would be better enhancing and marketing their value (Iacobucci, 2014).
Cook, H, 2012, “Milk wars leave sour taste in farmers’ mouths”, Sydney Morning Herald, www.smh.com.au, 21st January 2012, [accessed 26th April 2016].
Iacobucci, D. (2014) Marketing Management (MM), 4th Edition, South-Western, Cenage Learning, Mason, p124.
Kisambira, E, 2011, “Uganda calls time out on mobile-phone price wars”, CIO East Africa, http://www.cio.co.ke, 16 March 2011, [Accessed 1st May 2016]
Langley, S, 2014, “Supermarket bread price wars won’t impact specialty bakers, Roy Morgan Research”, Australian Food News – Thought for Food, http://ausfoodnews.com.au, 20th October 2014, [Accessed 25th April 2016]
Low, K, 2016, “Cooked chook the new front in supermarket price wars”, The Sydney Morning Herald – Business Day, www.smh.com.au, 11, April 2016, [Accessed 25th April 2016].
Low, K, 2016, “Coles, Woolworths, Aldi price war gets personal with cut-price tissues and toothpaste” The Sydney Morning Herald – Business Day, www.smh.com.au, 4 March 2016, [Accessed 25th April 2016].
Sotgiu, F, Gielens, K, 2015, Suppliers Caught up in Supermarket Price Wars – Victims or Victors? Insights from a Dutch Price War, Journal of Marketing Research, Vol L11, 1 December 2015, p 784 – 800, [Accessed 25th April, 2016]
Van Heerde, H, Gijsbrechts, E, Pauwels, K, 2008, Winners and Losers in a Major Price War, Journal of Marketing Researd, Vol XLV, October 2008, pp 499-518, [Accessed 25th April, 2016].