Competitive Analysis

"Flanking in a Price War" discusses some of the strategies utilized by retail grocery chains, wholesalers, and co-operatives within the Quebec Grocery Industry. Pricing strategies are the main focus of this article. It outlines both successful and non-successful pricing tactics. In addition, it emphasizes the importance of considering all pricing options, through price experiments, before deciding upon a pricing strategy.

It tells of the decline of an industry leader, Steinberg Inc. Steinberg Inc. dominated the Quebec grocery retail industry from 1950 to 1980 while using a discount pricing strategy. Use of that pricing strategy enabled Steinberg to gain more of the market share, forcing some of the smaller independent grocers to close. It also weakened the market position of some of its tougher competition, especially six small fully integrated chains.

Steinberg Inc.'s success quickly gained the attention of some of its toughest competitors. Two retail co-operatives merged and two major wholesaler-sponsored groups (Provigo and IGA) aggressively took over franchised convenience stores. 81 Dominion stores, which was Steinberg's main competition, were acquired by Provigo. It was those acquisitions that helped Provigo become Quebec's largest chain. All four of the major companies were using a price promotion strategy.

The grocery industry was experiencing rapid fundamental and competitive changes. As a result, all the firms were forced to chose new competitive strategies. Their chosen strategies would prove to be critical to their future success. Steinberg initiated a price war with major price cuts, rebates on all receipts, and heavy promotion. Provigo and Metro-Richelieu quickly responded in kind. IGA, however, decided to have academic professionals to perform price experiences before developing their strategy.

The experiment had a Bayesian design, using a basic factorial covariance model. The experiment explored the differential price elasticity between stock-up goods and nonstock-up goods. Stock-up goods are defined as frequently used nonperishable items that can be stockpiled. Nonstock-up goods are defined as items that are usually perishable and are often used/purchased infrequently. It was also assumed that demand elasticity for price decreases would be considerably larger than for price increases.

The experiment was scheduled to run for six weeks. Seventy-two grocery items, both stock-up and nonstock-up items, were chosen by a panel of grocery retailing experts to be used in the experiment. The items selected had steady weekly sales and were sold in large volumes. The regular price was used as the baseline for the first two weeks. During the third and fourth week the items were divided into three groups and placed in one of three pricing categories: 20 percent increase of the baseline prices, 20 percent decrease in baseline prices, or the baseline price was retained. All the prices were scheduled to return to the baseline price during the fifth and sixth week of the experiment.

There were various measures used to secure the validity of the experiment: The items selected were not advertised during the course of the experiment; employees were not aware of the experiment's purpose; and the items were well stocked to prevent sellouts.

The experiment's design had several desirable features. It considered and adjusted for average environmental and market influences on grocery sales. In addition, it calculated the best pricing strategy as well as the financial risks associated with that strategy. Each week managers were able to evaluate the anticipated losses associated with the pricing strategy. If they felt the strategy would reduce their profits or was undesirable in any way, they were free to stop the experiment at any given stage.

The experiment was stopped after the second week. IGA management decided that the hypotheses behind the experiment had been proven. Stock-up items were more sensitive to price changes than nonstock-up items. Nonstock -up items were less responsive to price changes because they were unable to stockpile the items. Therefore, they decide to offer reduced prices on stock-up goods and raise the prices on nonstock-up goods. They also decided to advertise and promote their price reductions, which proved to a smart decision. During the pricing war, IGA had the smallest decline in margin out off all the major competitors and the largest raise in sales percentages. When the price war ended, three months