Pricing Strategies

"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.