Case 1 Write-up: Reed SupermarketsMKTG101- MarketingPrepared for:Professor Anirban MukherjeeSection G1 / Case Study Group #12ANG Kai WeiCheryl YEO Pei QiDaniel KONG Jia ShengDhruv AGARWALPatrick TAY Wei Sheng1.Major ProblemsReed needs to increase its market share by 2% in the coming year; from $660.0m of sales at present to around $754.3m. To that end, the following considerations are pertinent.Intensifying competition in every segment of the supermarket industry: The entry of Whole Foods market has intensified competition between high-end offerings previously the province of only Reed and Delfina, At the bottom, limited selection stores have expanded rapidly, drawing price-sensitive consumers. As a result, Reeds market share has fallen marginally since 2005[footnoteRef:1]. [1: Calculations (exhibit 1) show that Reeds total sales and market share declined by 0.02% and 0.0005% respectively since 2005]

Reeds foreboding high-priced image: Amidst current economic uncertainty, consumers are choosing value over convenience. Reeds current offerings are second only to Whole Foods in extravagance. 86% of non-Reed consumers cite better pricing elsewhere within top two reasons for shopping elsewhere. Since the economy is unlikely to improve significantly in 2011, pricing will stay a concern for Columbus consumers, with little room for high-end supermarkets to grow. Reeds consumers are increasingly price sensitive and less loyal: Compared to before, consumers are more likely to switch across different supermarkets to obtain the best value. Furthermore, surveys have shown pricing listed as the topmost importance by 75% of Reeds customers, hence Reed faces an added challenge in retaining its original consumer base as well.The mixed results of the Dollar Specials: The Dollar Specials have mitigated Reeds pricey image, particularly relative to Delfina and Whole Foods, despite Reeds high prices in reality. However, the association with dollar stores dilutes Reeds brand image, and encourages Reed customers to switch allegiances in search of bargains, to the detriment of Reeds sales.[footnoteRef:2] [2: The effectiveness of the Dollar Specials is further illustrated on page 3]

2.Strategic OptionsReduce pricing Keep pricing modelIncrease pricing

Introduce private label brands and organic products(1) Reduce overall pricing of current products and introduce more private label brands and organic products, targeting low-middle end consumers(3) Keep the current pricing model on current products while introducing more organic products and private label brands, targeting middle-high end consumers(5) Increase overall pricing of current products while introducing more organic products and private label brands, targeting low/middle to high end consumers

Maintain current product mix(2) Reduce overall pricing of the same current product mix and target low-middle end consumers(4) Maintain status quo with current pricing model and product mix, targeting middle-high end consumers(6) Increase overall pricing of current product mix and as a premium brand, target high end consumers

With the economy in a state of recovery, increasing prices Options 5 and 6 is unwise. Maintaining the status quo (Option 4) is unlikely to attract the new consumers necessary for 16% market share. On the contrary, market share may be eroded by the Aldi/Dollar threat.The Columbus population has a 11.6% higher median household income than state and national average, with an increasing population growth of 11%. Given these demographics, there is a target market of middle-high end consumers that Reed is able to capture. On the other hand, the increasing introduction of dollar and limited selection stores, which targets low-middle end consumers, has been eating away Reeds market share in the industry. This poses a threat to Reeds 2011 goal, as there is a need to consider the lower-middle end group that has been increasing since the 2008 recession.Reed also has to guard itself against rising competitors like Aldi, either by maintaining its dollar special campaign or introducing more private label brands to attract the price-conscious consumers, which is the main concern for most customers (exhibits 5 and 6). Furthermore, if Reed chooses to maintain its dollar special campaign, it has to dispel the identity clash with Reeds original positioning of serving high-end consumers with its high-quality image. 3. Recommended StrategiesWe recommend that Reed maintains the pricing model on its current products and introduce more quality premium private label brands at lower prices to capture the lower-end segment, in response to the Columbus Aldi/Dollar threat. Reed should also introduce more organic products to capture the increasing health-conscious consumers. The dollar specials program should be stopped, as it is not consistent with Reeds brand positioning that was built over the years. Instead, couponing and discounts will be introduced and these also increase loyalty among consumers. Future marketing campaigns should aim to promote these changes and highlight Reeds strategy of offering quality products at low prices.4. Options GridOption 1Option 2Option 3

Description of OptionReduce pricing and introduce more private label and organic productsReduce pricing and maintain existing product mixKeep pricing model on current products and introduce private label and organic products

Overall AssessmentDo not recommend: Extensive lowering of prices and increasing private label brands move away from Reeds image positioning and might be seen as just another replica of dollar storesDo not recommend: Market share will not improve as reduced pricing on current products eats into overall marginsRecommend: Maintains Reeds brand equity positioning and captures margins through lower-priced premium private label brands

Strategic FitLow1) Moves away from strong brand identity and might be seen as imitating dollar stores2) Able to reach the increasing price- and health-conscious consumers3) Dollar specials has lowered overall marginsMedium1) Maintaining current product mix upholds brand equity positioning2) Able to reach price-conscious consumers while maintaining its high quality image3) Low prices like dollar specials program will reduce overall marginsMedium1) Might confuse Reeds quality image, unless private label brands are ensured to be of premium quality2) Reach out to price- and health-conscious consumers via private label brands and organic products respectively3) Potential cannibalization

Financial AttractivenessMedium1) Long term: Focus shifts to private label brands hence might be more profitable as more cost-conscious consumers are attracted2) Might lose its original quality-conscious consumers3) Short term: Costly to reposition Reeds brand image and its core competencies

Low1) Reduction of prices like the dollar specials program has proven to lower overall margins, at least in the short run2) Costs of lost margins outweighs the long term benefits of increasing price-conscious consumer base

Average breakeven sales discount of 22.6% (Minimum average price of $2.09 per product)High1) Margins can be maintained with keeping the current pricing model on existing products2) Price-conscious consumers can be captured via the increased introduction of private label brands, hence further increasing market share revenue3) Long term benefits should outweigh short term cannibalization cost

Noteworthy Risks1) Does not anticipate competitive reaction2) Might lose consumers seeking quality products as perceived as a move away from premium product differentiation3) Market share for this segment might have reached / is reaching its peak4) Loses strong brand identity established over the years1) Does not anticipate competitive reaction2) Might adversely lower overall profit margins as B/E volume is too high, and as can be seen from the current dollar specials program (further justified below)

1) Does not identify cannibalization2) Might lead to confusion with Reeds identity with the introduction of low-priced private labels, if the emphasis on quality premium private label brands is not well-marketed to the public3) Does not account for cannibalization

5. Justifications on RecommendationsMaintain current pricing model and stop dollar special campaign: The dollar specials program has been highly ineffective, as evaluated quantitatively below:An average household makes 109.2 trips to the supermarket each year (2.1 weekly*52 weeks). Dollar special campaignHouseholds that do not purchase dollar specialsHouseholds that purchase dollar specialsTotal

Average annual transaction value for one household$3437.61($31.48*109.2)$1375.05(assuming each household purchases at least 3 products a trip)

# households shopping at Reed184,314(96% of $660m sales)($633.6m/$3437)19,199(4% of total $660m sales in 2010)($26.4m/$1375)203,513

Assuming no dollar special campaign from the start

Original # households shopping at Reed197,586(traffic increased by 3% with dollar special); ((100/103)*203,513)

Potential total sales of Reed $679.22m(197,586*3437.61)

Hence, with the assumption that households purchasing/not purchasing dollar specials products are mutually exclusive, the dollar special program had resulted in an opportunity cost of $19.22m, a decline of 2.92% from its potential revenue. Furthermore, the dollar special campaign is not consistent with Reeds brand positioning as consumers confuse it with nearby dollar stores. Hence we recommend scraping the dollar special campaign and resume Reeds current pricing on its current products and thus continue to capture the high-end segment of the market.Introducing more organic products: Reeds competitors Delfina and Galaxy have faced a larger loss in total margin sales in the past 5 years. Furthermore Galaxys loss of a store is roughly equivalent to 0.5% of total market share (exhibit 1). Hence we recommend that Reed increase its range of organic products at lower prices (via couponing) and capture the customers and market share that were lost by these two companies. This strategy gives Reed an advantage in both the price index and quality index that enables it to capture consumers from Delfina and Galaxy in the long run, given the moderate economic resurgence. Couponing also encourages consumer loyalty and therefore Reeds competitively lower-priced organic products will significantly capture the increasing health-conscious consumers, thereby increasing Reeds overall market share.Introducing private label brands: Increasing competition from Columbus Aldi/Dollar stores, which offer mainly low priced private labels, is a possible threat to Reeds market share especially with the current economic climate. As mentioned in the case, there are two kinds of consumers that Reed needs to capture those who shifted to cheaper stores when a recession hits and those who prefer buying private labels due to their low prices and variety. Hence Reed should introduce more private label brands to be sold at lower prices and consider offering coupons for these products. At the same time, Reed should emphasize and instill quality control on the kinds of private label brands it chooses to introduce into its stores. This is to ensure Reed maintains its high-quality image as it brings in premium private labels, a distinction compared to its competitors. Therefore we believe Reed will be able to achieve its target of 16% market share by protecting its current consumers and attracting the more price-conscious ones, with its good quality yet low-priced products.Increasing Advertisements: Raiding Galaxy Galaxy offers a rich harvest field for Reed to reap market share. Notably, Galaxy stores are old and poorly located. With its attractive stores, long business hours, and quality customer service, Reed is well placed to capture customers disenchanted with Galaxys poor ambience. Within Reeds market segment, Galaxy customers are the easiest to target. With 10.07% market share (exhibit 1), Galaxy is the second largest player after Reed and offers a sufficient critical mass of customers for Reed to work with. Amongst the shoppers in Reeds segment, Galaxys customers can be attracted the most painlessly. Given the poor profitability of Galaxy stores, it is unlikely that Supervalu, Galaxys owner, will invest significantly in defending Galaxys market share. Instead, market sentiment has Supervalu contemplating exiting its investment in Galaxy stores in Columbus. A spirited defence of Galaxys market share is thus unlikely. In contrast, taking customers from other competitors in the segment will be far less painless. TopVal for example, headquartered in Columbus, will likely aggressively maintain its market share if challenged. In sum, wooing customers from Galaxy is wise.Segmentation, targeting and positioning The Columbus market is broadly divisible into high, medium and low-end supermarkets. Reeds customers hail from the high end of the market, and are identifiable by their maturity, affluence and smaller household sizes, as well as preferences for pets. In contrast, Galaxy customers shop in the middle of the market, and suffer from its dilapidated and poorly located supermarkets. Even so, intriguingly, Galaxy customers are content to pay ostensibly Reed-like prices for their shopping (exhibit 3, figure below). They therefore represent a highly attractive segment for Reed to target; one that Reed can win over with a value proposition of (perceptibly) higher-quality products at similar prices (exhibit 3, figure below). However, just as Reed can attempt to entice Galaxy customers with high quality products at similar prices, so too can such lower-end firms like WalMart, through the value proposition of similar-quality products at lower prices. As a result, although Galaxys middle-market segment offers opportunities for profit, the low entry barriers make for substantial competitive intensity. Reed thus finds itself with moderately-high competitive strength amidst a highly attractive segment. A wise move for Reed is to act speedily in wooing Galaxy customers, before the segment becomes shaken-out by the entrance of lower-end firms.Advertising this product-price positioning strategy of higher quality at similar prices places shopping at Reed not merely as an alternative to patronizing Galaxy, but further as an improvement upon it. However, in placing Reed within the frame of reference of mid-range prices from the introduction of private labels and distinguishing Reed based on the point of difference of its superior quality, it is vital that the advertisements maintain Reed as a premium brand. For it is all too easy to inadvertently conflate the two and market Reed as a middle-market brand; diluting its brand image and repelling existing customers.Trading Margins for Market Share: Attracting Galaxys customers Since Galaxys customers are the easiest to attract, Reed should direct marketing efforts towards them. Galaxy occupies a medium position in the Columbus market, slightly below that of Reed (exhibit 1). Prices at Galaxy are also perceived to be marginally below those at Reed (exhibit 3, right figure). Offering a slight price reduction (of 0.5% to 1%) through coupons on high volume items, coupled with advertising to inform customers of that fact, will allow Reed to match Galaxys prices and draw Galaxy customers through the significantly higher quality of Reed products (exhibit 3). With 55% of non-customers citing price as the biggest disincentive to shopping at Reed, a price reduction using coupons is apt for attracting their business, hence growing Reeds market share.Mitigating Reeds high-priced image In the troubled economic times of 2010, customers are especially sensitive to price. Coupled with advertisements to inform shoppers about Reeds new premium products (private labels and organic) at low prices and its coupon discounts on regular products, customers will notice and patronize Reed more often. Moreover, with price as the most important factor to 75% of Reeds existing clientele and 55% of customers who shop elsewhere (exhibits 5 and 6), the initiative will likely be received enthusiastically. Funding the coupons will be more profitable rather than costly, preserving brand quality by maintaining premium service consistent with Reeds image. The low pricing will also reaffirm Reeds attentiveness to customer needs. Building goodwill and nurturing customer loyalty, coupons offering discounts will motivate non-customers in the middle-high market segment to patronize Reed and reinforce relationships with existing customers; strengthening market share.Evaluation: Assuaging the impact of increasing advertising and lowered prices from private labels will be the increased profits from discontinuing the loss-making dollar specials. Relatively small in quantum, the strategies also leave enough profit to placate shareholders. More importantly, the fillip they provide to market share will put Reed on course to meet its 16% target by 2011. Finally, while moving Reeds pricing in the direction of middle-end supermarkets, the reduction will not take Reed into the turf of TopVal, averting a mutually-destructive price war.

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