How dare they compete!
Another article on alcohol retailing provides this “beautiful” quote (FYI this follows on from a previous post):
The end of loss-leading was welcomed by Glengarry product manager Liz Wheaden, who said the practice had the potential to lower customer expectations at the same time as it “destroys” brands.
Loss-leading made customers come to expect to be able to buy a product cheap, Ms Wheaden said.
While her company had never used loss-leading, the practice had forced Glengarry to offer more variety and improved customer service to compete.
How dare supermarkets push other retailers to cut prices, increase choice, and improve service. Have they no shame!!
I’m guessing the end of supermarket loss-leading sales will now lead to Glengarry reducing their variety and customer service then. 😛
and so it should be, the thought of retailers offering better price, quality, customer services to customersis disgusting. We should only be buying local with our government approved liquor rationing vouchers.
it is possible that supermarket’s loss leading on wine is anti-competitive. Supermarket’s use their market power to buy wines significantly below the cost that liquor outlets can source it at, and sell it significantly below cost subsidised by their other products. If this drives liquor outlets out of the market, so supermarkets can then reprice higher, this is anti competitive.
predatory pricing reduces competition.
furthermore supermarkets have market power when it comes to food. so they can eat it in the markets where they don’t have market power by pricing below cost, and subsidise it with markets where they do have market power and make higher margins.
I don’t know the numbers but I wouldn’t jump to the conclusion that the Glengarry guy is wrong. in fact supermarkets may be acting illegally and putting him out of business.
then again, at the end of the day i expect the market is pretty much contestable, so any pricing below cost is good for me.
@goonix
That is what it sounds like
@MikeE
Indeed 😛
@steve
Indeed very true.
If this is the case though we should have seen supermarkets start in increase prices by now surely? As the purpose of predatory pricing is to reduce competition so as to increase prices in the future.
As you say – the market is probably fairly contestable (as are most retail subsectors) so this explanation probably wouldn’t roll 🙂
Isn’t there a time consistency problem with the concept of predatory pricing? If a company prices low to force out competitors but then raises its prices later (presumably to a price where it has a huge economic rent, sufficient to cover the cost of the earlier low pricing plus make profit) then it is again subject to the threat of competition. Hence if the market is contestable the threat of predatory pricing suffers froma lack of credibility.
This article nicely shows
1. producers are no fans of competition – in fact they despise it
2. why competition matters for consumers
The Left think of the pro-competition reforms of the 1980s and 1990s as being producer-friendly. Nuh uh.
Slightly off your topic but I think relevant is that they (the supermarkets) are only allowed to compete in the wine and beer segments whilst not in spirits, RTD’s or fortified wines or weak spirits. If they are fit to sell beer and wine why not the others? If they are not fit to sell spirits etc, why are they allowed to sell beer and wine? Does this not favor wine and beer producers in that they have access to additional sales outlets?
yes, you could also argue for liquor outlets that because or the restriction on spirits, liquor outlets have some market power, and can price wine competitively, and make higher margins on restricted products like spirits.
@ matt
liquor outlets weren’t making any money, hence we saw progressives buy liquor king (i think it was that chain), and they are certainly looking at other liquor acquisitions as liquor outlets are strugging to compete with supermarkets.
On the otherhand what we are seeing now might be because the predatory pricing strategy has failed as the market has become more contestable than when the strategy of discounting wine started. Dairy’s often sell wine now as a competitive fringe, and do quite well.
Alternatively, maybe they have been successful and have now reached a reasonalbe outcome. perhaps they realise now they can’t price most of them out of the market, but they have priced low enough to become the dominant players and now its time to increase prices again. In terms of wine and beer, what we have now is a cozy duopoly with a competitive fringe from dairy’s and liquor stores.
@Dismal Soyanz
not necessarily, if the additional margins they gain on food justify the discount on wine, they don’t need to increase prices on wine by that much of a significant ammount to pay off those discounts. they simply need to keep it slightly below the contestable price. plus with their duopsony (i don’t know the 2 firm version of a monopsony) they can source it pretty cheap and therefore still make a large margin.
it is abuse of significant market power.
I have been watching this discussion unfold and it is interesting to see how a jounalists attempt to create a story damning lost leading practices of supermarkets as contributing to our nations drinking problems sparking up what I would like to say are some very knowledgeble repies on Market forecs and pricing. Matt has picked up on the journalist misconstruing what Liz Wheadon has said about “forcing” Glengarry to offer more variety and customer service where actually his has always been the foundation of what our business is built on. Lost Leaders are rare. It’s the Wine producers and suppliers who are dropping their pants and we will see the results of this over time I an sure. Steve is correct regarding the purchasing power giving huge advantages to Supermarkets and therefore making it possible for them to sell products lower than traditional retailers can even buy it for. That’s Life! Traditional retailers must look for points of difference and for us it is superior products, niche products wider range and most importantly knowledgeble stuff to provide that very important customer service. As well we support the smaller artisan producers who can not afford to or do not have enough to supply supermarkets. It is interesting to note that both supermarkets moved together in saying they will not do Loss Lead on liquor as this shows the insignifacance of it in the debate.They will always command the price position. Now breifly I would like to add that the real issue of drinking abuse in our society needs be addressed through the community and our attitudes to alcohol, some say that taxation of RTD’s and Alcopops is the answer some say the drinking age but ultimately it has to start with a respect for drinking with moderation and responsibility. The arguement for Wine in supermarkets was originally based on this with Wine (and Beer) being seen as a natural and sociable accompaniment for food to be consumed at home.
Thanks for the Market Forces explanations of pricing and by the way it is Liquorland that was sold to Foodstuffs by DB.
@ Steve
But isn’t that simply an ongoing subsidisy from food to drink? Doesn’t that then take it out of the realm of “true” predatory pricing. Also, is there really an “extra” margin on food – i.e. do they set the margin on food higher to compensate for the loss on alcohol? Or do they rely on volume?
@Jak
Thanks very much for that, if you are truly from Glengarry. Surely that is your point of difference, not price.