Business Strategy in Supermarket Industry: Low Pricing

Introduction

The quick development of various technologies and the establishment of open world trade regimes have changed the face of modern business (Teece 2010). Modern customers have more choices based on the easy access to alternatives to any product (Teece 2010). The supermarket industry is one of the most competitive areas of modern product retailing business. To gain success, supermarket industry players need to employ successful business strategies. Everyday low pricing is one of the most popular strategies for attracting customers and promoting business sustainability in this industry. Analyzing benefits and drawbacks of such business strategy based on relevant literature review helps to suggest recommendations for its future implementation in the supermarket industry.

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Prices in food retailing business are heavily influenced by the pricing strategies of competitors. Stores have to choose whether to employ everyday low pricing strategy or high-low pricing strategy. Based on the chosen strategy, the company takes further actions in setting prices for products and adjusting the overall strategy to the chosen approach (Dorfman 2014). Everyday low pricing was introduced by Procter & Gamble in the 1990s to reduce the negative effects of “retailers’ forward buying and diverting” (Shimp 2010, p. 469). Such practice suggests that manufacturer charges the same price for a certain brand “day in and day out” to set stable prices for retailers (Shimp 2010, p. 469). Later, many retailers began practicing such method and it has become a widely used strategy based on maintaining constant low prices instead of relying on short-term price cutting (Kurtz & Boone 2009). Such strategy was successfully employed by numerous supermarket chains. Wal-Mart is an example of effective implementing of this business strategy.

Literature Review

Since low pricing strategy became one of the most popular business practices in the supermarket industry, many academics have investigated its specifics and presented relevant information in various literature sources. Studying valid peer-reviewed articles and books helps to examine views of researchers on this strategy.

Various sources discuss the positive effects of everyday low pricing for the overall profitability of retailing businesses in the supermarket industry. Volpe (2011) states that everyday low pricing strategy is one of the most effective practices enabling supermarkets compete with hypermarkets. Such pricing strategy appears to be effective in “mitigating the negative effects” of hypermarkets’ domination (Volpe 2011, p. 500). However, using the same strategy for manufacturers appears to be not that much successful. Kazmi (2007) discusses the experience of Procter & Gamble in employing everyday low pricing strategy and defines such unsatisfied retailers putting great pressure on the company as the main drawback.

Numerous sources discuss different aspects that influence the effectiveness of everyday low pricing strategy. Schroth and Socorro Souza da Mota (2014) investigate the specifics of categories of consumers attracted by different pricing strategies. The authors claim that the choice between such strategies should depend on “clientele being served” (Schroth &Socorro Souza da Mota 2014, p. 203). The authors analyse the existing evidence supporting the statement that everyday low pricing strategy is more appreciated by customers that make less frequent visits with larger purchases while high-low pricing strategy attracts customers interested in frequent shopping with small purchases. “Large-basket consumers” prefer everyday low pricing as they are interested in the overall pricing of all products (Schroth &Socorro Souza da Mota 2014, p. 203). Ellickson and Misra (2008) support this claim and find everyday low pricing strategy more suitable for retailers operating in areas with a large low-income population with less access to public transportation. Besides, the researchers emphasise the importance of collecting “postgame outcome data” to assess the effectiveness of employing the strategy in the particular store (Ellickson & Misra 2008, p. 825).

Though many studies support the effectiveness of everyday low pricing practice, some books and articles demonstrate its negative sides and emphasise the efficacy of competing approach – high-low pricing. Hamister and Suresh (2008) conducted a large quantitative study demonstrating that constant pricing can reduce the profitability of the retailer “under the conditions of serial correlation” (p. 453). The authors claim that such reduction can be significant to supermarkets operating with thin profit margins (Hamister and Suresh 2007). Solomon et al. (2009) analyse the advantages of employing high-low pricing strategy able to compete with everyday low pricing. The authors state that supermarkets employing high-low pricing strategy can benefit by promoting the quality of food and ethical shopping (Solomon et al. 2009). Volpe and Li (2012) also support the claim that high-low pricing brings many benefits if sales and promotions are used thoughtfully.

Evaluation of the Strategy

The analysis of the relevant literature shows that everyday low pricing practice appears to be rather beneficial for supermarket business. It has already demonstrated its effectiveness in hypermarkets field and can boost the supermarkets’ compatibility. The success of such hypermarkets chains as Wal-Mart and IKEA and such supermarkets chains as Tesco, Aldi and Lidl demonstrates the high efficacy of everyday low pricing strategy. However, this practice should be employed only after careful examination of appropriate factors influencing its effectiveness. Proper examination of its outcomes is also required for defining the strengths and drawbacks of implementing this strategy in the particular store.

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Recommendations

The success of implementing everyday low pricing strategy directly depends on the prior investigation on the specifics of the market the supermarket is aimed to enter. Therefore, the most important recommendation to this sector is to study the tendencies developing on the market and the possible influence they may have on pricing decisions of the competitors. Besides, analysis of potential customers’ population is also highly recommended, as the effectiveness of everyday low pricing strategy is largely affected by the specifics of the clientele of the stores. Therefore, the customers’ age, income, shopping habits, and other important factors should be analysed to adjust the strategy to the needs of the clientele.

Another recommendation on the use of everyday low pricing strategy by supermarkets is related to the necessity to determine the primary objectives of the business. The switch to such strategy can bring great results if the company needs to decrease inventory costs and risks of stock shortages. The need for improving the coordination of supply chains can also be considered a relevant reason for employing the discussed strategy. Careful assessment of the factors mentioned above is highly recommended for any retailer considering switching to everyday low pricing a possible decision.

Analysis of relevant literature on everyday low pricing reveals the effectiveness of such business strategy in supermarkets industry and demonstrates the specifics that should be carefully studied by the retailers willing to implement it.

Reference List

Dorfman, J H 2014, Economics and management of the food industry, Routledge, Abingdon, UK.

Ellickson, P B & Misra, S 2008, ‘Supermarket pricing strategies’, Marketing Science, vol. 27, no. 5, pp. 811-828.

Hamister, J W & Suresh, N C 2008, ‘The impact of pricing policy on sales variability in a supermarket retail context’, International Journal of Production Economics, vol. 111, pp. 441-455.

Kazmi, S H H 2007, Marketing management: Text and cases, Excel Books India, New Delhi.

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Kurtz, D & Boone L E 2009, Contemporary business, South-Western Cengage Learning, Mason, Ohio.

Schroth, G & Socorro Souza da Mota, M 2014, ‘Agroforestry: Complex multistrata agriculture’, in N K Van Alfen (ed), Encyclopedia of agriculture and food systems, Academic Press, London, pp. 195-208.

Shimp, T 2010, Advertising promotion and other aspects of integrated marketing communications, South-Western Cengage Learning, Mason, Ohio.

Solomon, M R, Marshall, G W, Stuart, E, Mitchell, V & Barnes, B 2009, Marketing: Real people, real decisions, Pearson Education Limited, Harlow, UK.

Teece, D J 2010, ‘Business models, business strategy and innovation’, Long Range Planning, vol. 43, pp. 172-194.

Volpe, R 2011, ‘Evaluating the performance of U.S. supermarkets: Pricing strategies, competition from hypermarkets, and private labels’, Journal of Agricultural and Resource Economics, vol. 36, no. 3, pp. 488-503.

Volpe, R & Li, C 2012, ‘On the frequency, depth, and duration of sales at high–low pricing supermarkets’, Agribusiness, vol. 28, no. 2, pp. 222-238.

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StudyCorgi. (2020, October 25). Business Strategy in Supermarket Industry: Low Pricing. Retrieved from https://studycorgi.com/business-strategy-in-supermarket-industry-low-pricing/

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