case study - supermarket petrol pricing
Predatory pricing on the supermarket petrol forecourts
This case study outlines how Safeway launched a petrol price war in 2002 to boost grocery market share.
Introduction
In June 2002, Safeway used a predatory pricing strategy for the sale of petrol from its supermarket garages in an attempt to increase its share of the UK grocery market. The strategy stunned competitors – and angered non-supermarket petrol retailers.
The Safeway petrol price offer
Safeway’s offer to the consumer comprised a price reduction on fuel purchases based on the amount customers had spent on groceries at its stores each visit.
Customers received 2p off a litre if they spent £25, 5p for £50, 12p for £100 and 20p for £150. The maximum 20p discount equated to a saving of £10 a week for the driver of an average family car.
The maximum 20p price reduction brought the price of a litre of petrol at Safeway down to 53p. This meant customers only had to pay enough to cover duty and VAT.
Safeway was effectively giving its petrol away in an effort to increase its share of the grocery market, which stood at around 10 per cent.
On the first day of the price promotion, fuel sales at Safeway's
180 petrol stations rose by 25 per cent.
Competitor response
Asda, which controls 15.6 per cent of the grocery market, was the only supermarket-based petrol retailer to react to Safeway's promotion. It swiftly cut its prices by 0.8p a litre.
Sainsbury's and Tesco, with 16.6 per cent and 26 per cent of the grocery market respectively, refused to be drawn into a fuel price war. They maintained their existing pricing strategies.
Both retailers guarantee to match the cheapest petrol prices within a three to four mile radius of their stores, but exclude promotional offers from this pledge. Sainsbury's introduced a petrol discount scheme in 1998, but the maximum discount offered is 4p a litre - awarded when customers spend £100.
Petrol retailers, rather than supermarkets, had the most to lose from Safeway's offer. Profit margins on petrol tend to be less than 4p a litre and, unlike supermarkets, petrol retailers are not able to fund losses through other activities.
The impact on the overall petrol retail market was softened by the comparatively small number of Safeway petrol stations. Large petrol companies such as Shell and Texaco each have more than 1,000 stations throughout the UK.
Reasons behind the strategy
Why would Safeway decide to instigate a price war of this kind? How frequent are price wars and do they work?
Price wars are not a new idea. For example, daily newspapers often engage in them – with varying degrees of success.
Price wars, of varying intensity, are fought in every market. Price-cutting is often seen as a way to eliminate smaller competitors, grab market share and boost sales. But any temporary increase in sales is not necessarily sustained after normal pricing is resumed.
What was the motivation behind Safeway’s decision? A Safeway marketing spokesman claimed that:
"We are aiming to drive sales and increase individuals' spend. The fuel promotion will encourage customers to increase their current spending levels from the average £80 a basket, and may also pull in customers who usually shop with competitors If the promotion generates high levels of sales it will fund itself, so we could keep it going for some time. But it is a promotion."
Retail analysts say that pricing strategies like Safeway's petrol promotion can be an effective way of gaining market share. To be successful, however, they must be
• Well-timed
• Well-planned, and
• Well-executed
According to a retail analyst:
“Price can make customers switch temporarily to a competitor, but it is not enough to make them stay. If price was the only factor grocery shoppers considered, then Aldi would win every time - yet the budget chain has a UK market share of just 1.7 per cent. "
Price-cutting may bring people in the door, but you cannot keep customers on price alone. Customer loyalty has to be earned, not bought. There is also a risk that price-cutting can devalue a brand
Price, then, can be an effective marketing tool - but it must be combined with a thorough strategy incorporating quality, service and customer retention. Implemented properly, price-cutting has the potential to bring down competitors and boost sales. Done badly, it can be a destructive waste of time and money.
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