Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, December 1, 2011

Interformat price competition of multi-product retailers: Evidence for German grocery retailing

Posted by D. Daniel Sokol

Angela Hoffmann and Heike Senkler, Department of Agricultural Economics Christian-Albrechts-University Kiel discuss Interformat price competition of multi-product retailers: Evidence for German grocery retailing.

ABSTRACT: If rivalry in German grocery retailing sector was restricted to intraformat price competition one would expect significantly different price levels to be realized by discount stores (low), hypermarkets (medium) and supermarkets (high). The greatest similarities in price levels would be within the store formats. Assuming a two-step store choice process, we present a conception of intra- and interformat competition that combines the three meaningful dimensions of retail competition (assortment, pricing and transaction costs). Based on this idea, we investigate the interformat price competition. Given the multi-product character of retailers and assuming that consumers make their store choice on the basis of price images instead of searching for item-by-item price information, we analyze weighted price level series from up to 80 stores (5 companies) from retail scanner data from the German grocery retail sector (2000/2001). The empirical investigation can give us insights into the interformat price competition and the importance of the pricing dimension in retail competition that we sum up as follows. Our results strongly confirm that all three formats are partly engaged in interformat competition and do not approve the exclusive price leadership of discount stores. Super- and hypermarkets generally are not following the pricing of discount stores; neither in the main assortment (top-selling brands) nor in the low-price range, although the low-price levels appear to be very similar in all formats. The last fact confirms that German retailers themselves regard their (low) price image to be essential for succeeding in competition. Our empirical investigation shows that this hypothesis holds only for supermarkets. We figure out an alternative understanding of the formation of interformat price competition. Contrary to the common belief that discounters are the price leaders and that the format itself does determine the success in interformat price competition, we identify the profiteers of interformat competition by their active efforts in the dimension being originally not part of their marketing strategy. Thus, those discount stores succeed that enlarge their assortment by manufacturer brands and offer price promotions; and so do supermarkets that have a low price image. Thereby HILO strategy (frequent price promotions) can be as effective as EDLP to communicate the ‘right’ price image – the price image that attracts consumers of the interformat competition segment. In contrast, stores that maintain their core competence and remain beyond interformat competition do not only fail in interformat competition but in intraformat competition as well. In particular, some supermarkets seem to fail in the whole market because they do not actively revise their strategy and their image. Again, we mention the image as it can be a link between a common (price) strategy and the chain’s achievement in interformat price competition. It seems to be more likely to be in the consumers’ evoked set of store choice when pricing strategies are consistent within the same chain. Also, most price levels seem to be relatively consistent over time. So price level information from the past last very long and consumers decide ‘right’ if they use internal price information (experience) planning the next shopping trip. Nevertheless, what happens if consumers notice a price rise in their chosen (favorite) store? By what means can they make a quick and check whether price levels in other stores have also risen? Frequently advertised product prices (i.e. like butter and coffee prices) are supposed to signal the overall price level of the store. Future research should investigate the existence and the attributes of signpost items.

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