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Pricing strategies in the German retailing sector

Pricing strategies in the German retailing sector. Dr. Anke Möser*. Master Seminar „Food Marketing“ - 28.11.2008. * Center for International Development and Environmental Research, Justus-Liebig University, Gießen. Outline. Background information regarding the German food retailing sector

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Pricing strategies in the German retailing sector

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  1. Pricing strategies in the German retailing sector Dr. Anke Möser* • Master Seminar „Food Marketing“ - • 28.11.2008 * Center for International Development and Environmental Research, Justus-Liebig University, Gießen

  2. Outline • Background information regarding the German food retailing sector • Price level in Germany • Pricing strategies3.1 Price actions3.2 Price rigidity3.3 Psychological pricing • Private labels • Price-quality relationship • Summary

  3. Special characteristics of the German retailing sector • High concentration; • Relative absence of foreign retailing companies; • Low margins; • Excess capacity; • Discriminating consumers („Geiz ist geil“)

  4. Market share of leading companies 95.1% 94.3% 90.0% 81.0% Top 20 85.2% Top 10 84.2% 79.0% 70.0% Top 5 62.4% 59.0% 61.4% 52.0% 1992 1995 2000 2004 Year BackgroundTrends atindustry level Source: LZ (various years).

  5. BackgroundTrends atindustry level Market share of leading companies Source: LZ (various years).

  6. BackgroundStore-types Structure and changesa) a) Excludes online shops and non-organised food retailing. After 1991, stores in the former German Democratic Republic are included, and discounters are shown separately. Remaining food stores contain discounters until 1990. Source: EHI (various years).

  7. BackgroundStore-types Market shares and total revenues Source: EHI (various years).

  8. BackgroundForeign direct investments Outflows and Inflows to the German retailing sector Source: Deutsche Bundesbank (various years).

  9. Price level in GermanyHarmonised consumer price-index for food and non-alcoholic beverages (1996 – 2005) Source: Own computations using EUROSTAT-Database (2006).

  10. Sales Price difference Psychological prices Price rigidity Pricing strategiesFirst impressions – The case of coffee Source: Möser (2002).

  11. Data base • 38 German food-retailing sector stores; • 20 national brands: 85,297 prices; • breakfast products in the widest sense; • 144 weeks, 40/1996 to 26/1999; • data on products, EAN code, prices, sold quantities, promotion activities, selling stores.

  12. Data base

  13. Law of one price is not confirmed! Price level: Is the law of one price confirmed?

  14. Price actions • Prices which remain below the normal price, by at least five percent, for four weeks or less; • After more than four weeks, such low prices are counted as normal prices; • Frequent instrument (“Hi-Lo-Pricing”); • Characteristics of products:- Loss-leader products- durable/storable (not fresh).

  15. Price actionsFood retailers/ store types Statistical German Food Retailers Median Measure A B C D E F Median of a ) 1.7 8.9 9.6 5.1 3.9 2.6 1.3 Sales a) Median of the medians, computed across firms/ store types. Source: Herrmann/Möser/Weber (2008)

  16. Price actionsFood retailers/ store types Source: Herrmann/Möser/Weber (2005)

  17. Price actionsDetails at the firm level a) Median of the medians, computed across the six firms. – b) Median of the medians, computed across 20 brands. . Source: Herrmann/Möser (2006)

  18. Price elasticities Source: Möser (2002, pg. 174 f.)

  19. Price rigidityTheoretical considerations Pro price changes • Supply changes- seasonable effects- seller’s competition- product innovations • Cost changes Contra price changes • Theory of menu costs

  20. Price rigidityMeasurement Definition: Mean duration of unchanged prices (Powers and Powers, 2001) With w number of weeks with price observations wPCH number of weeks with price changes.

  21. Price rigidityFood retailers/ store types Statistical German Food Retailers Median Measure A B C D E F Median of a ) P rice 35.8 8.8 7.3 26.3 44.3 11.9 19.1 rigidity German Store Types Statistical Small La rge Median Super - Measure Discounters Consumer Consumer markets Markets Markets Median of a ) P rice 37.5 13.2 11.1 9.0 12.2 rigidity a) Median of the medians, computed across firms/ store types. Source: Herrmann/Möser/Weber (2008)

  22. Median Price Rigidity by Store Type(Point Estimates and Confidence Intervals)

  23. Price rigidityFood retailers/ store types Source: Herrmann/Möser/Weber (2005)

  24. Correlation coefficient between price rigidity and price actions: -0.459*** Price rigidityDetails at the firm level a) Median of the medians, computed across the six firms. – b) Median of the medians, computed across 20 brands. . Source: Herrmann/Möser (2006)

  25. Psychological pricingTheoretical considerations (I) • (i) Economic literature: • Nominal pricing points lead to • kinks in the demand curve; • nominal price rigidity. • (ii) Marketing/psychology literature: • Consumers tend to • round down prices; • do left-to-right comparison of prices (Schindler/Kirby).

  26. Psychological pricingTheoretical considerations (II) (iii) Are psychological pricing points an important cause of price rigidity? • not so much (Blinder, et al.,1998); other factors are more important, e.g. • co-ordination failure; • non-price competition; • implicit contracts. • But: food retailing is underemphasized in the study by Blinder. • Could be one determinant among others!

  27. Psychological pricingTheoretical considerations (III) • More potential determinants of price rigidity in grocery retailing do exist: • the sale phenomenon (Hosken/Reiffen); • strategies of firms and store types: EDLP versus HiLo (Owen/Trzepacz 2002). • The linkages could be complicated.

  28. Psychological pricingMeasurement Overall importance of psychological prices (PSYCH): - percentage share of the important psychological prices in all observed prices. Concentration ratio (CR2): - for the two most important psychological prices.

  29. Psychological pricingFood retailer/ store types a) Median of the medians, computed across firms/ store types. Source: Herrmann/Möser/Weber (2008)

  30. Overall Importance of Psychological Prices by Store Type(Medians and Confidence Intervals)

  31. Psychological pricingFood retailer/ store types a) Median of the medians, computed across firms/ store types. Source: Herrmann/Möser/Weber (2005)

  32. Psychological pricingExample: Wasa Schoko Wikinger

  33. Psychological pricingExample: Dallmayr Prodomo

  34. Private labels • Manufactured or provided by one company for offer under another company's brand; • Positioned as lower cost alternatives to regional, national or international brands; • Wide distribution in Europe (market share of 23% in 2004); • Highest market shares in Switzerland (50%) and Germany (35%) (2007); • Growth rates in Germany: Beer (+17.0%); convenience cheese (10.6%); • Share of sales in German food retailers (2007):Aldi 94%Lidl 61%Tengelmann 35%Rewe 27%; • New trend in German food retailing: private label brands positioned as "premium" brands to compete with existing "national name" brands.

  35. Private labels – Imitations of national brands

  36. Private labelsAre they always cheaper? • Methodology: price relations between national brands and private labels (Walosczyk, 2008); • Shopping basket of 20 food products (e.g. ice cream, honey, chocolate, spaghetti, potato chips, rice, jam); • Scanner data of the German retailing sector (2000-2001); • Results:- private labels are on average nearly 50% cheaper than national brands;- highest price differences: ice cream, spinach, rice, potato chips; - large consumer markets offer the lowest prices.

  37. Price-quality relationshipBackground • Classical price theory: Consumers have full information regarding quality of products; price is the monetary “sacrifice”; • Reality: Due to information asymmetry the consumers are not fully informed; • Price can be used as quality indicator; • Association: Higher prices = higher quality

  38. Price-quality relationshipFormer results (consumer goods) General result: Wide variation of measured correlation indices Research questions: • Is the price a useful quality indicator?- Low correlation coefficients:→ prices are bad indicators for quality; - More recent studies:Prices are only indicators for objective quality. • Are consumer markets efficient?- Low correlation coefficients as indicators for market failure;- More recent studies: low price-relationships can be induced through: - low quality/high prices; or - high quality/low prices.

  39. Price-quality relationshipRecent results (fruit juices) • Data base: - “Stiftung Warentest“ test reports on fruit juices • 1992 – 2007 • twelve tests with 242 products; - quality judgment: like school grades (1= best quality and 5= worst quality).

  40. Price-quality relationshipRecent results (fruit juices) Source: Röben (2008)

  41. Price-quality relationshipRecent results (fruit juices) Correlation analysis: - Wide variation (correlation coefficients between + 0.703 and - 0.862)Average: - 0.049; • Frequently: positive correlation coefficients.if consumers wish higher product quality, the price is a bad indicator Additional hedonic analysis: - Subjective quality indicators (e.g. pulp; fair trade) influence price.

  42. Summary High price sensitiveness of German consumers lead to: • Rising market share of discounters; • Widespread use of different pricing instruments (price actions, psychological pricing), but also a substantial degree of price rigidity; • Price elastic responses to name brands; • Rising share of private labels (also as premium brands or ecologically produced brands).

  43. References Blinder, A. S., E. R. D. Canetti, D. E. Lebow and J. B. Rudd (1998), Asking About Prices. A New Approach to Understanding Price Stickiness. New York: Russell Sage Foundation. Deutsche Bundesbank (ed.) (various years), Kapitalverflechtung mit dem Ausland. Statistische Sonderveröffentlichung 10. Frankfurt/Main. EHI (EuroHandelsinstitut) (various years), Handel aktuell. Köln: Verlag EHI – Eurohandelsinstitut GmbH. EUROSTAT-Database (2006). http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1090,1&_dad=portal&_schema=PORTAL. Herrmann, R., A. Möser and S.A. Weber (2008): Case Study „Germany“. In Stiegert K und D Kom (eds.): International Comparison of Food Distribution Systems: The Role and Vertical Impact of Dominant Retailing Firms. (forthcoming) Herrmann, R. and A. Möser (2006): Do Psychological Prices Contribute to Price Rigidity? Evidence from German Scanner Data on Food Brands. Agribusiness, Vol. 22 (1): 51–67. Herrmann, R., A. Möser and S.A. Weber (2005): Price Rigidity in the German Grocery-Retailing Sector: Scanner-Data Evidence on Magnitude and Causes. Journal of Agricultural & Food Industrial Organization, Vol. 3 (1): Article 4. http://www.bepress.com/jafio/vol3/iss1/art4. Herrmann, R. and A. Möser (2002): Variable oder starre Preise im Lebensmitteleinzelhandel? Theorie und Evidenz aus Scannerdaten. Konjunkturpolitik, Jg. 48 (2): 199–227. Hosken, D. and D. Reiffen (2004), Patterns of Retails Price Variation. “Rand Journal of Economics”, Vol. 35, No. 1, pp. 128-146. Hosken, D. and D. Reiffen (2001), Multiproduct Retailers and the Sale Phenomenon. “Agribusiness – An International Journal”, Vo. 17, No. 1, pp. 115-137. LZ (Lebensmittel Zeitung) (ed.) (various years), Die marktbedeutenden Handelsunternehmen.Frankfurt/Main: Deutscher Fachverlag. Möser, A. Intertemporale Preisbildung im Lebensmitteleinzelhandel – Theorie und empirische Tests. Giessener Schriften zur Agrar- und Ernährungswirtschaft; H. 32. Frankfurt am Main: DLG-Verlag, 2002. Powers, E. T. and N. J. Powers (2001), The Size and Frequency of Price Changes: Evidence from Grocery Stores. “Review of Industrial Organization”, Vol. 18, No. 4, pp. 397-416. Owen, A., and D. Trzepacz., “Menu Costs, Firm Strategy, and Price Rigidity.,” Economics Letters 76(2002):345-349. Röben, A. (2008): …. Master thesis. Institute of Agricultural Policy and Market Research. University of Giessen. Schindler, R. M. and P. N. Kirby (1997), Patterns of Rightmost Digits Used in Advertised Prices: Implications for Nine-Ending Effects. “Journal of Consumer Research”, Vol. 24, No. 2, pp. 192-201. Statistisches Bundesamt (Hrsg.) (2006), Preise in Deutschland 2006. Wiesbaden. Waloszyk, S. (2008): Wie beeinflussen Handelsmarken das Preisniveau? Eine empirische Analyse auf der Grundlage von Scannerdaten. Master thesis. Institute of Agricultural Policy and Market Research. University of Giessen.

  44. Thank you Anke Möser Center for International Development and Environmental Research Justus-Liebig University, Giessen Anke.moeser@zeu.uni-giessen.de

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