229-Dominick’s Finds a Way to Reduce Price…Successfully

Dominick’s is a wholly owned unit of Safeway, the large retail grocer. They have found a way to use price to gain share in a highly competitive price environment.

If a company wishes to use a discounted price to gain market share, it must assure itself that its competitors will not copy its price reduction. If a competitor copies the price reduction, then the original company’s discount is no longer distinctive and cannot drive a gain in share. Instead, its low prices cause its margins to fall without the offsetting benefit of increased sales volume.

You would like to be able to predict whether a competitor will copy a discount you offer. In the course of many pricing studies, we have found that the likelihood of a competitor responding to a company’s price reduction depends on three factors: the competitor’s knowledge of the price reduction, the company’s capacity to meet that price reduction and, often most importantly, the competitor’s will to meet the lower price. (See “Diagnose/Pricing/Competition and Their Knowledge, Capability and Will” on StrategyStreet.com.)

If your competitor does not know about your price reduction, they cannot respond in kind. In some markets, customers do not “shop” a lower price offering to their suppliers in what’s called “last look” Their suppliers may not respond to a competitor’s lower price offering because they do not know of it. The competitor also must have the capacity to respond to the lower price. In the vast majority of falling price environments, most competitors have ample capacity to respond to lower prices. Still, some competitors are unwilling to meet falling prices in an industry. These competitors are in a Leader’s Trap, where they assume that the lower prices will not attract their customers. This is virtually always a losing assumption. The phenomenon of the Leader’s Trap leads us to the third determinant of the likelihood that a competitor will respond to a lower price: does the competitor have the will to do so. A competitor needs the will to do so because its margins are likely to fall, even if it maintains its current market share. Some competitors refuse to suffer the margin consequences and live, at least for a time, in a Leader’s Trap. (See many examples on StrategyStreet/Tools/Grossary/Leader’s Trap)

So, it is difficult for a company to use a low price to gain market share. Difficult, but not impossible. Dominick’s has found a way. Dominick’s is in a price war, not only with traditional grocers, but also with Wal-Mart, Target and discount stores. These competitors of Dominick’s often have lower prices on categories of consumer purchases that Dominick’s would like to sell to their own customers.

Dominick’s has used its “Frequent Shopper Card” information to help it offer low prices to very targeted customers. It analyzed the shopping patterns of its frequent shoppers. It found that some of its customers have assumed that supermarkets are not competitive in some high-priced, high-margin products. These customers then start buying those categories from discount chains and spending their retail grocery money on perishables like milk, meat and produce. Dominick’s used this information to offer shoppers personalized savings on items they have purchased in the past and could purchase again. The store offers these shoppers very competitive discounts on products, which are profitable for Dominick’s, but that customers purchase from other competitors. The shopper is offered a very good deal. The offer comes automatically at the cash register when shoppers use their loyalty cards. The offers are good for up to ninety days on unlimited quantities of the discounted items.

Dominick’s is gaining share with this program because competitors do not have the knowledge of the lower prices. These low prices are not advertised, nor are they available to all shoppers. Instead, they are personalized offers, targeted at customers who are likely to use them soon. These same customers tend to buy these discounted products from other suppliers, assuming that Dominick’s is not price competitive with those other suppliers. Dominick’s picks up some extra sales that pay for the selective discounts it offers and competitors are unable to respond because they do not know about the discounts.

Posted 11/1/10

Update:

The Dominick’s story is one of inconsistent Function followed by a major Reliability failure.

In 1998 Safeway bought the 116 store Dominick’s chain. The acquiring company’s initial moves disappointed many of the former customers. It replaced Dominick’s preferred private label products with those of Safeway. It decreased the quality of meat and produce sold in the stores in favor of lower prices. It immediately terminated Dominick’s Performance Leader Fresh Stores concept, which emphasized high levels of customer service, olive bars, carving stations and others. Instead, Safeway remodeled the stores to follow its national concept.

Dominick’s began to hemorrhage market share. In 2002 its market share was 24.4%.  By 2007 its share had fallen to 14.5%. Worried, Safeway tried unsuccessfully to sell the chain and announced its intentions publicly. When it was unable to complete a sale, Safeway closed more stores and, in 2005, rebranded some of the stores into Performance Leader Lifestyle stores. Other stores remained as the Safeway national concept. So, Dominick’s operated under two separate concepts, confusing customers.

The nail in the coffin for the company occurred in 2011. Several of its stores were found to be selling expired food. This failure had been going on for some time. Several customers had also advised Safeway and management of this situation. To no avail.  This became a regional scandal. The company could not recover and closed down in December 2013.

Safeway failed its acquired customers on both Function and Reliability. Customers ran for the exits and the acquisition proved a failure. See HERE and HERE for more perspective.

10/22

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