Welcome to the the Ivey HBA Retail Marketing Management blog. Retail marketing is an exciting, dynamic, important, and very visible aspect of the overall field of marketing. Throughout the year, students will be posting comments regarding contemporary retailing issues. Although this is intended to be used by Bus 4411 students, industry marketing professionals are also invited to join in if they like.

Wednesday, February 11, 2009

Can price wars be sustainable?

In October 2003, the largest Dutch retail chain Albert Heijn initiated a price war as a result of decreasing market share. The supermarket chain lost market share to hard discount supermarkets such as Lidl and Aldi who heavily competed on price. Albert Heijn was known for its high prices and consumers were gradually becoming unwilling to pay for the premium prices. This was partially caused by the hard discount stores and partially by the economic downturn. Therefore, the company decided to cut prices significantly for about 100 SKU’s. Consequently, other large supermarket chains that also carried national brands followed suit with even more price reductions. This was the beginning of an intense price war. (Heerde, et al. 2008)

Three year later, the price war ended and the “winner” was Albert Heijn because it increased its market share, profit and turnover the most. However what is the long term effect of the price war? Because it seems that only consumers were benefiting from the significantly reduced prices. Monthly groceries were 40 million euros cheaper for consumers. One major change as a result of the price war is that the rise of hard discount stores has been reduced and the growth of these stores came to a stop. (Baltesen, 2006)

The long term benefit of Albert Heijn is that the company was able to reposition itself by changing its RVP. First, the RVP was based on convenience and selection which positioned the company as a premium supermarket. After the price war these values have changed into price and selection. Even though the company still has a strong reputation in terms of convenience it focuses more on selection. This can be seen in terms of the five different private labels it offers that cater to different segments. Moreover, there are four different store formats that provide different services for different needs. (http://www.ah.nl/)

In terms of pricing, Albert Heijn has been able to change its reputation. According to research conducted by GfK, AH always scored relatively low on prices and discounts. However after the price war it has improved significantly on that subject among consumers. (Thijsen, 2006)

Overall it can be said that Albert Heijn made a smart move by initiating the price war because it improved shareholders’ value in terms of financial performance and reputation wise. Moreover, it reduced the growth of the hard discount stores significantly and eliminated some direct competitors. In addition, the price war resulted into a more consolidated market by ‘out competing’ corner stores and therefore generating more market share for Albert Heijn. (Meijsen, 2007)

This can be said afterwards, however I think price war can be highly risky operations and focused on the short-term. The way I think that Albert Heijn focused on the short-term is the manner in which it dealt with its suppliers. The company put lots of pressure on its suppliers and demanded low purchasing prices. I do not think that Albert Heijn tried to find a compromise with its suppliers but instead used its bargaining power to demand low prices. The reason for this is because the supermarket chain felt that they needed to respond quickly to the current market situation. Therefore, the relationships between Albert Heijn and its suppliers has deteriorated. There are three well known cases where suppliers no longer wanted to deliver to Albert Heijn as a result of the price war. These suppliers were Coca Cola, Grolsch and Peijnenburg. (Elsevier, 2005) Another negative impact of the price war in my opinion is that it has reduced the reference price for consumers while lowering the margins for the supermarket. Hence, this can make a price war a unsustainable strategy.
In conclusion, I do not think that a price war is a sustainable solution to deteriorating market share in general. However, I believe that Albert Heijn implemented the price war strategically. Overall, Albert Heijn’s implementation was not focused on the short because it not only reduced prices during the price war but kept them at a lower level for the long-term (maybe even indefinitely). This made it a sustainable strategy. Therefore, the term repositioning strategy fits better to describe Albert Heijn’s strategy instead of a price war. The only negative aspect of Albert Heijn’s strategy is that it was not quite ethical in terms of putting pressure on suppliers and wiping out a large portion of the corner stores.

Baltesen F., “Albert Heijn stopt met prijzenoorlog”, October 21st 2006, NRC Handelsblad
Heerde H.J., Gijsbrechts E. & Pauwels K, “Winners and Losers in a Major Price War”, October 2008, Journal of Marketing Research
Meijsen J., “Vier jaar prijzenslag: de kruitdampen”, October 19th 2007, Elsevier Retail
Thijssen W, “AH zet weer stap in de prijzenoorlog”, January 21st 2006, de Volkskrant
Author unknown, “Prijzenoorlog kost supermarkten 700 miljoen euro” , March 18th 2005, Elsevier
http://www.ah.nl/ (accessed on February 10, 2009)

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