Managing Price Pressure By Means Of Price Reduction

Companies in the retail industry operate in a high price elasticity environment as there is not much product differentiation to leverage. Buyers face almost no switching cost if they chose a substitute offering better value. On the contrary, large and diverse population making small purchases works in favor of the industry. No one individual or a small group has the power to significantly impact the industry, but overall buyers enjoy have a high bargaining power in the industry.

In this article Michael Baker discusses the livelihood of small retailers in a market subjugated by the financially dominant oligopolies, Woolworths and Coles. While the small independent retailers in direct competition with Woolworths and Coles provide some competitive respite for consumers, as they encourage competitive pricing, albeit predatory pricing, it is clear that Woolworths and Coles control the supermarket industry in Australia, in the formation of a duopoly. It is evident that Woolworths and Coles engage in predatory pricing in an attempt to eliminate independent retailers from the market. This article discusses recent efforts made by the Australian government and the Australian Competition

The recent recession has hurt the entire retail market and regaining profits will be a constant challenge for the entire industry. In order to remain competitive, Ann Krill states,” value and versatility have become very important. She needs an incentive to shop.” (Hymowitz, 2012) Ms. Krill goes on to say,” I think in uncertain economic times, value becomes more important...” (Hymowitz, 2012)

More recently, the recession impelled many bricks-and-mortar retailers towards a damaging focus on discounting that eroded not only many stores’ price positioning but also any point of differentiation or exclusivity.

Consumer today have a different expectation than a decade ago. Consequently, I believed if a Retailer want to be survive and thrive in the hostility of the today’s market, they must focus on all four of competitive priorities such as cost, quality, time, flexibility.

In this report I discuss the comparison of competitive strategies between the two major departmental stores in Australia being David Jones and Target and how they differ from each other. I also discuss the current issues that are faced such as Global Financial Crisis that has had much impact on both stores as well as future threats such as online shopping which is believed to be the latest trend is shopping which has already affected the stores but could make competition even tougher in the near future for both stores.

The bargaining power of customers is high. First of all, the customer size is tremendous globally, which also has an accelerating growth rate in recent years. Customers’ leverage is strengthening as a result of this. Another inevitable factor is that with countless retailors online, there is low switching cost for customers to find other alternative companies that suits their desire to conduct purchases. Moreover, consumers today are more sophisticated. Consumers are less commit to impulsive-buying, yet are more willing to study about product features and evaluate their options before purchasing online. Their purchase pattern can also be hard to learn too.

Moreover the people's living style has changed which has been seen in the increase of living as an “individual” due to demographic influences such as ageing population, late marriages, increasing number of divorces and separations (Australian Bureau of Statistics, 2005). Those factors will have direct influence on a demand for high quality household items and grocery products with lower prices because consumers will concentrate more on their hobbies and socialising events. Furthermore Australia has a multinational and multicultural society and overall the authenticity and nurturing good relationships are important behaviours in daily life of people in Australia which reflects well into the strategy of Aldi providing the authentic high quality brand products (Graiser & Scott 2004).

In recent years, department stores industry has contracted since the hit of Global Financial Crisis creating shock on consumers’ confidence (Figure 2), despite Australia’s narrow escape from going into recession (Uren, 2009). As a result, the marginal propensity skyrocketed after GFC effect hit the economy from nearly mere 3% in mid-2007 to 12% in late-2008 (Figure 3). To stimulate the economy, RBA employs monetary policy by continuously lower cash rate since 2011 (RBA, 2012).

Today’s customers are more aware and empowered, and have more bargaining power due to the exponential increase in competition – direct, indirect or substitute. In retailing, they want hassle-free shopping, have less time at their disposal to locate the shop and the merchandise and are reluctant to keep waiting. The modern format retail stores are doing their best to anticipate the customer’s demands and are going all out to redesign their store interiors, offer more choices in varieties and assortments, and are giving as many services as feasible.

First, there are good numbers in the higher income categories in Australia. Second, there are an increasing high income earners and middle class which present a great market opportunity. Third, the Australia’s brand conscious society is well suited to the department store concept. Also, advanced computer-based technology and stable political environment contribute to a favourable business climate. The only drawback is economic uncertainty which hinders firms future strategic direction.

“We are on the cusp of exciting change in retail as we enter the new era where the customer is in charge. But far from being daunted by change, I firmly believe it brings opportunity for our business, our employees, our suppliers and of course, our customers. You just have to look for that opportunity. Woolworths is leading this shopping revolution in Australia and there’s a lot more opportunity still to be realised.”

With an aim to reduce purchasing cost, pressure put on suppliers by Woolworths has driven down the cost. Woolworth is really good at controlling purchasing cost by using the “supplier beating up game”. Even though some particular suppliers have strong brands, they could not avoid the situation that if they do not offer Woolworths with price concessions, there will be a reduction in orders demand and a rise in orders demand to their competitors which leads to changing market-share balance. Purchasing cost is the largest cost category of goods for sale, by reducing it, Woolworths acquires strong potential savings which distributes to company profit and customers through price reductions.

The strategy for setting a product’s price often has to be changed when the product is part of a product mix. In this case, the firm looks for a set of prices that maximizes its profits on the total product mix. Pricing is difficult because the various products have related demand and costs and face different degrees of competition.

Pricing is an important marketing strategy which helps organizations leverage and effectively use decision-making in a vertical and horizontal fashion to impact the demand for the products as well as bring a competitive effect ADDIN EN.CITE Noble1999552(Noble & Gruca, 1999)55255217Noble, Peter M.Gruca, Thomas S.Industrial Pricing: Theory and Managerial PracticeMarketing ScienceMarketing Science435-4541831999INFORMS07322399http://www.jstor.org/stable/19318110.2307/193181( HYPERLINK l "_ENREF_11" o "Noble, 1999 #552" Noble & Gruca, 1999). Effective pricing strategies help to optimize the revenues of buyers by maximizing revenue for the organization. For retailers, they have embarked on data collection activities which provide crucial information to enable them make effective pricing strategies for the present market conditions. This information helps the retailers to understand the price sensitivity of demand as well as how to influence the price elasticity of demand towards the success of their marketing strategies. This first part of the paper evaluates the type of information collected by typical retailers in contrast to information that is collected by retailers who run consumer loyalty schemes. It also finds how these pricing strategies apply to the classical economics theory of supply and demand and discusses the factors that affect the price point purchase behavior of consumers. The second part looks at the purchase decision-making