Ideas for Leaders #403

How to Win a Price War

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.

Key Concept

Price wars are usually won by companies with the widest profit margins and the best cost structures — i.e. those that can afford to fight them. It is, however, possible for a business with a cost disadvantage to achieve victory. Much depends on the way a ‘campaign’ is carried out and planned. Sometimes strategic capabilities, not cost structure, decides the outcome.

Idea Summary

Competing aggressively and repeatedly on price can threaten the future of companies. The losers of price wars have been known to go out of business, and the survivors to suffer a long-term squeeze on profitability. Generally, the winners are companies that have a superior cost structure. It is, however, possible for a ‘weaker’ company to succeed — provided it ‘leverages’ strategic capabilities.

The story of Dutch grocery chain Albert Heijn (AH) illustrates the point. AH successfully fought a price war on ‘home turf’ between 2003 and 2005 — despite the fact that its leading competitors had a cost advantage of 6%. The company, like its nearest rivals, was losing customers to German discounters Aldi and Lidl.

Market research data showed its market share had fallen by almost two percentage points in the second quarter of 2003. Its leaders wanted it to be a ‘supermarket for everyone’ but decided to avoid direct confrontations with Aldi and Lidl. Instead, they continued to position the chain as mid-priced and service-oriented and promoted private-label products, including milk and other dairy ‘staples’. The company kept its plans secret — from both store managers and suppliers — for as long as possible. This meant that when, in October 2003, it announced the most significant price cuts in its 116-year history, the industry was caught off guard.

The strategy was backed by newspaper and TV ads. By targeting its own former customers rather than the customers of rivals, AH was able to avoid a strong counter-attack. Initial reaction from rivals was muted, allowing AH to concentrate on its most obvious ‘opponent’, Super de Boer. Less service-oriented than AH, Super de Boer was seen as less expensive, but AH sensed vulnerability: the performance of its parent company, Laurus, had been weak. 

The price war was viewed with scepticism by analysts but, despite a share price fall, AH held its nerve. Over the next two years, it continued to surprise the opposition by repeated rounds of price cuts. Each week, the pricing strategy had a different focus; one week cheese, the next cosmetics or baby food. The marketing message, meanwhile, was that the supermarket was steady, predictable and unaggressive.

Within four months, AH was winning back customers — and competitors were getting nervous. Initially, Laurus matched some of the price reductions. In January 2004, however, it decided to go further and announced price cuts on 40 popular products of between 24 and 43%.

The owner of three supermarket chains, Laurus had had to develop different retailing strategies for different formats. When it finally introduced broad-based cuts in the spring and summer of 2004, it was too little too late. Shortly afterwards, AH launched a major assault, cutting prices on 2,000 products by up to 35%.

As the initiator of the price war, AH had been able to negotiate price concessions from suppliers — and it was hard for Laurus, which had three different purchasing procedures, to catch up. After losing money in 2004 and 2005, the company decided to sell off the bulk of its operations and focus on Super de Boer. By contrast, AH regained the market share it had lost before 2003 and became the Netherlands’ number one.

Importantly, AH’s strategy was accompanied by a cost management and restructuring program — headcount was reduced, operations consolidated, processes streamlined — and by improvements to its service ‘proposition’, including the introduction of a children’s play area in stores.

Holding on to its position hasn’t been easy for AH but its story shows that a clear direction and focus can win a price war.

Business Application

The AH case study suggests five ‘rules of engagement’ in a price war:

  • Affirm the need — study market data to identify shifts in customer spending patterns and decide whether the ‘cause’ is ‘just’. (No price war should be entered into lightly.)
  • Pick your battlefield — decide, for example, whether to cut prices geographically or target specific consumer groups or products and whether you’re going to compete at the ‘bottom end’ or in the ‘middle’ of the market.
  • Pick your target — taking on everyone with a similar business model is difficult and expensive. It’s much better to go after a single competitor that appears to be vulnerable.
  • Stay under the radar — preparing silently will enable you to take your ‘enemies’ by surprise and give you time to rally your allies.
  • Align revenues with cost structures — reducing operating costs will help you generate profits on lower turnover. 
Contact Us

Authors

Institutions

Source

Idea conceived

  • June 2014

Idea posted

  • June 2014

DOI number

10.13007/403

Subject

Real Time Analytics