The First To Go

Assume you own a greeting card shop. A big store moves in down the street. They sell gifts, wrapping paper and greeting cards, all at low prices. How do you survive with the new competition? Do you cut prices on your cards? If so, how much? Do you differentiate yourself by giving a higher level of service- maybe customized greeting cards? Another way of asking the question: What clients are the first to go- and can you survive without them?
Two professors recently issued a study on the affect of Wal-Mart Supercenters offering full-service groceries in new markets. Why is the Wal-Mart business model a threat to supermarkets?
First, many customers already use the store for low priced items- why not buy groceries too? This is particularly true of lower-income shoppers. That group is the “first to leave” their traditional supermarket for Wal-Mart. Second, margins on groceries are small. The traditional grocery does not have much room to cut prices and remain profitable.
The professor’s study found that “Wal-Mart’s food prices are about 10 percent lower” than competitors. Traditional supermarkets were found to lower their prices 1 to 1.2 percent. Large supermarket chains cut their prices less than half as much as smaller grocers in the study. Finally, supermarkets that survived chose to upgrade their service to differentiate themselves from Wal-Mart.
The Lesson: When facing a new competitor, carefully consider increasing your service to compete, rather than just prices cuts.
Your Homework: If you faced a new competitor, what customers would be the first to leave your business? Why are they leaving? If they are leaving for lower prices, can you replace them with other customers who like your better service?
(Source: “Chain Reaction”, St. Louis Post Dispatch, 9/2/07)