What are the real outcomes for brands caught up in the crossfire of supermarket price wars?
According to a recent study, price wars seem like a great idea for retailers, but they could promise more than they deliver to manufacturer brands.
In their paper, Suppliers Caught in Supermarket Price Wars: Victims or Victors? Insights from a Dutch Price War (2015), marketing researchers Francesca Sotgiu and Katrijn Gielens found inconclusive outcomes for brands when retailers engage in price wars: some reported increased demand and higher sales for a time, but others suffered lower volumes and a deterioration in status.
“During retailer-initiated price wars (PWs), hundreds of brands are involved simultaneously, affecting brands’ and retailers’ positioning and ultimately making the performance outcome for individual brands difficult to predict.”
In the study published in the Journal of Marketing Research in December 2015, the authors examined the battlefield after price wars in the Netherlands to understand how brands were affected as grocery retailers competed to drive traffic and increase sales.
The authors drew their conclusions about the impact of price wars on brands by examining brand sales and shares before during and after an extended price war campaign among local supermarkets. Between 2002 and 2007, they tracked the performance of 162 brands in 25 categories at five national retailers as they waged a major price war.
Dubious gains from price wars
They found that even if brands are able to win some territory in terms of share of store sales and higher revenues, such gains often prove to be temporary.
“PWs [price wars] are not truly revenue, sales, or share generators for most brands unless prices remain reduced permanently by the retailer,” Sotgiu and Gielens concluded.
“Only after the PW, when rivals’ prices are restored and the focal brand’s reduced retail price is maintained, can substantial sales, revenues, and share gains be realized,” they added.
So any revenue increases for a specific brand depend on competing brands raising their prices back to pre-campaign levels.
Additionally, for individual brands at the mercy of retailer price wars the intense price competition could also distort consumer price perceptions. This could be potentially explosive ground for retailers attempting to restore pre- price war stickers once the campaigns ended.
“When PWs end, retailers are tempted to reverse the price cuts they initially announced as “permanent” during the PW. However, even less is known about brand performance when the PW ends, and thus retailers need to be cautious,” the authors wrote.
Moreover, once price wars end, the discounted price stickers can have the effect of placing premium, higher-priced brands at a disadvantage compared to lower cost economy brands and private labels.
Brands – and retailers – are not all equal
The study also validated one intuitive market perception: all brands are not created equal and price wars have a way of highlighting this fact. Price wars undermine the position of more expensive national brands, but they enhance the performance of less costly white label products.
“Premium (national) brands gain less in volume sales and share and even risk incurring revenue losses when retailers actively engage them in their PW battles. In contrast, PLs [private labels] still win with respect to revenue.”
The authors suggested that this gives retailers room to maneuver with private labels and national brands to create a space for in-store brands to perform better.
If all brands are not equal in price wars, neither are retailers. The Dutch price war review showed that brands might lose more ground in terms of share and sales if they’re not included in price war campaigns waged by premium retailers. The lesson for brand manufacturers is that they might want to negotiate to be part of price wars conducted by premium retailers.
Changes to marketing mix
Price wars also have an impact on the marketing mix – both before and after offensives. According to the research findings, advertising does not help soften the negative influence of post-campaign price hikes – but feature communications and price promotions do.
However the writers cautioned that such tactics should be used with care, as they may inadvertently stimulate consumers’ appetites for further price discounts and weaken brand value over time. Used prudently though, advertising can help create a buffer to moderate the revenue losses that can result from deep price discounts.
Although they noted that staying on the sidelines during a price war could prove equally or even more costly to brands, the authors concluded by warning retailers that it is difficult to predict the outcome of price discount wars for individual brands.
That’s because when retailers go to war, they generally reduce prices across a set of brands. This may have no effect on the relative position of any individual brand vis à vis its competitors; at the same time, the discount is likely to generate lower sales revenues.
Sources & Read more:
Sotgiu, Francesca, and Katrijn Gielens. “Suppliers Caught in Supermarket Price Wars: Victims or Victors? Insights from a Dutch Price War.” Journal of Marketing Research 52.6 (2015): 784-800.