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The Game of Pricing in Philippine Supermarkets

china business - mr. miguel p. suterio Nov 30, 2009

Given the expansion of SM Hypermarkets and Puregold, pricing has increasingly become important in turning a store into a shopping destination. There are other market players that have used pricing as one of their major attractions. These are large supermarkets with a wholesale orientation or medium-size with low prices to compete with stores of a similar structure. Cherry Foodarama and Hi-Top are examples of the former; Parco, of the latter.

The question that follows is the sustainability of the various operating models adopted by the different players in the food retail industry. In the end, who has the best chance of surviving the game of pricing at retail? It is important to take note of the emerging operating cost structures of the different formats based on size.

Let us consider two groupings: the small and medium-size formats and the large format. The following table summarizes what has emerged today when it comes to cost structures.

From the table, it can be seen that large-format stores receive the best support from trade suppliers. This phenomenon is driven by their capability to generate huge sales volumes for suppliers. This goes together with the need of supplier managers to perform primarily based on volume. So large-format stores are in the best position to bring down prices even close to the acquisition cost of small and medium-size stores for some fast-moving consumer products.

Perhaps, this arrangement between large-format stores and trade suppliers is further strengthened by how key accounts management is presently appreciated. Trade suppliers only need to focus on a select number of players in the market to generate the volumes and growth targeted for a trading cycle.

Key accounts, plus a more focused sales and marketing team, equals efficiency and profits. At least, that is how the equation is supposed to work. Whether or not the equation actually works to the satisfaction of the trade supplier is another question.

Supermarket Cost Structure

Let us go back to the game of pricing at retail. It is clear that large-format retailers have all the advantage when it comes to pricing as a way to turn a store into a shopping destination. Small and medium retailers will not survive if they play the game of large players. Their operating cost structures are different and heavily tilted in favor of size. I recall Sam Walton advising Wal-mart’s competitors not to play his EDLP (Everyday Low Price) game as they could never win against Wal-mart.

Is there a future for small and medium-size stores? Is there a way out of the game of pricing at retail or is there a better way to play the game? If small and medium-size players simply bring down prices to compete with large formats, they will not survive. Their cost operating models do not support an everyday-low-price model as practiced by large formats.

The following are some options small and medium retailers can consider, especially with the continuing fast pace of expansion by large-format players:

  1. Focus on differentiating the store through product selection and customer service;
  2. Limit product selection per category to brands and sizes that contribute to store profitability based on margin and the cost incurred in selling the item;
  3. Substantially bring down cost of operations by adopting some large format practices;
  4. Selective price reductions;
  5. Better planned and more exciting promotions;
  6. Form alliances with other small and medium players to be able to generate volume leverage; and
  7. Streamline operating costs.

Competition is always an open-ended story. It is difficult to predict with certainty how the future will be for small and medium-size players. How they fare is a function of several variables: vision, management commitment, competence in strategy identification and execution, innovativeness. Small and medium stores will have to evolve their enterprises as shopping destinations, not based on price, but through branding.

(China Business Philippines 11/09)