How to Survive a Price War

Meijer, the Great Lakes region hypermarket chain, is going ready to launch the next attack in the Detroit area milk price war. Beginning this Sunday a gallon of the bovine extract will cost only $1.49 in all varieties except chocolate and organic.

Kroger began the war earlier this year by dropping its price to $2.39 per gallon from the region’s average of about three dollars. Initially other chains held back from matching Kroger’s drop which lowered the retail lactate price below wholesale. express hr

“They are losing about a dollar a gallon. We cannot afford to match them,” said one local Walmart employee under conditions of anonymity.

As others eventually entered the price war Kroger escalated it by dropping their price to $1.99, then $1.79, and lastly to their current (as of this writing) $1.59. Other grocers and retailers have continued to drop their prices in order to stay in the milk business. Some, including Kmart, have dropped milk completely to prevent the perceived profit drain of selling below cost.

Retail history has many examples of dealing with items sold for less than they can be restocked, also known as “lost leaders”. Some are best practices and others provide guidance as to what to stay away from.

Here are 5 price war survival rules:

  1. Think market-basket. Never put the lost leader near the door. Instead, get your customers to walk past high mark-up items to get to giveaways. You can quickly get their market basket to a break-even point or even profits when they pick up a few impulse items on their way to or from the lost leader. Remember a rule of successful retailing: if a customer walks in for two items they need to leave with five.
  2. Do not fight with the big dogs. If you have a small shop do not feel you have to undercut or match prices with the chains. Instead focus on your value as a smaller, more personal place to shop. Customers love personalized service and appreciate it if you can call them by name. Smaller stores often have the ability to do so.
  3. Do not undercut the competitor. Undercutting the competition in a price war does not make you the winner. Matching the price is normally as far as you have to go — and sometime you can be higher in price. In the Detroit area Walgreens has trailed in the price war. They are charging 22 cents more than the large grocers but it has not had an impact on their sales volume according to store level clerks. Customers pay extra for the shorter checkout lines and close in parking.
  4. Keep a good attitude. It is not the individual consumer’s fault you are selling an item without the profit margin you were hoping to receive. Be polite and happy for them. Granted this is hard to do however rudeness toward them will result in losing both your profit of the lost leader AND the customer.
  5. The only winner of a price war is the consumer. Help consumers win and they will become faithful. In the 1990s Toys R Us won the diaper price war by establishing themselves as the low price diaper leader. They retained that title, and consumer loyalty, long after raising their prices to more profitable levels.

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