Market share over profit?
A critical view on CTR’s Schwinn bike strategy Joachim Harms
“We have priced the high quality Schwinn bikes for $699 and fully reach the semi-enthusiasts! Actually, adding Schwinn bikes to our portfolio led to double digit growth.” That’s what Canadian Tire’s Jody Charlebois told us two weeks ago in her guest lecture. But, is it really the case? Was it the right way to price a top brand at such a level? Wasn’t it wasting profit in order to keep their no.1 position in the market?
An article of Prof Hermann Simon and Frank Bilstein, pricing experts of Germany’s Simon- Kucher & Partners consultancy, raises some doubts if CTR did the right thing: General Motors, for example, declared in 2007 that their attempt to sell more at lower margins in order to gain market share failed. Moreover, they should try the Porsche way: Never produce a car which might not be sold. In this way, exclusivity, a key driver for profits since the first days of economic trade, stays untouched.
In addition to that, CTR seemed to brake a golden rule of marketing: “You never get a second chance to set the first price” By offering the high-end Schwinn bike for $699, the race to the bottom in this particular market just begun. Competitors will undercut these prices within months and we will see prices passing the $600-line. Thus, profit margins of premium products are given up freely!
On the other hand, we have to admit that it all depends on CTR sourcing and costs of goods sold. As we know that they have particular expertise in Asia (especially China) they probably knew exactly what price they can set. Moreover, other gains through adding Schwinn to their portfolio must be seen as well: Adding selection as part of their retail value proposition and strengthening their credibility as the leading bike retailer in Canada. From that point of view, adding Schwinn was an appropriate step.
Anyway, from a pricing point of view, their move was more than risky. Compared to Canada’s independent retailers, who set prices for Schwinn bikes well above $1000, CTR seemed to give up some potential. But in order to attract their customer base, which are the famous semi-enthusiasts (they call them “Paul & Diane”), CTR preferred market share over profits.
If this was wrong, what else to do? Well, according to SKP, companies should reshape their mindset, plan their actions on a long-term perspective and clearly communicate their goals. If not, Simon came to the final conclusion: “To fight on price against ‘free’ is a hard battle to win profitably.”[1] Thus, Business is not the war for market share; it is a strategic game for highest profits. So, giving up parts of their market dominance might boost Canadian Tire’s profit margin even more. In 2007, it was 7.2 % which is already higher than Wal-Mart’s 5.49% in the same period.[2][3] But even better results require ambitious goals. And their official slogan “Bigger & better”, printed on the cover of the 2007 results, is an excellent example for what Simon means with “reshaping the mindset” in order to be more profitable.[4]
Of course, their initiative seems to be the big punch in a saturated market as the Canadian bike business is. And of course, they captured market shares from the individual retailers and preach their Schwinn strategy as highly successful.
Future will show if their aggressive pricing was the right strategy. Perhaps Jody Charlebois will report that in a guest lecture in next year’s HBA 2 class…
Prof Hermann Simon, Chairman, and Frank Bilstein, Executive VP, are both associates of the world’s leading pricing and marketing consultancy Simon- Kucher & Partners (SKP). Running offices in Bonn, Boston (Cambridge), Frankfurt, London, New York, Paris, San Francisco, Tokyo and other ten cities, SKP employs more than 480 consultants and offers over 20 years of marketing and pricing strategy experience.
Source (s): http://www.the-chiefexecutive.com/features/feature1011/, 24 Apr 2007
[1] Article ”Choose profit over market share”, p.3, http://www.the-chiefexecutive.com/features/feature1011/, 24 Apr 2007
[2] EBIT margin, annual reports 2007, Wal-Mart Stores, Inc., pg. 41 http://walmartstores.com/Media/Investors/2007_annual_report.pdf
[3] EBIT margin, annual reports 2007, Canadian Tire Corporation Ltd., page 5 http://corp.canadiantire.ca/EN/Investors/FinancialReports/Annual%20Reports%20Library/CTC_AR_2007.pdf
[4] Annual reports 2007, Canadian Tire Corporation Ltd., page 1 http://corp.canadiantire.ca/EN/Investors/FinancialReports/Annual%20Reports%20Library/CTC_AR_2007.pdf
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