Winners and Losers in a Major Price War Author(S): Harald J
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Winners and Losers in a Major Price War Author(s): Harald J. van Heerde, Els Gijsbrechts and Koen Pauwels Source: Journal of Marketing Research, Vol. 45, No. 5 (Oct., 2008), pp. 499-518 Published by: American Marketing Association Stable URL: http://www.jstor.org/stable/20618839 . Accessed: 26/10/2014 04:38 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. American Marketing Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Marketing Research. http://www.jstor.org This content downloaded from 88.255.245.252 on Sun, 26 Oct 2014 04:38:26 AM All use subject to JSTOR Terms and Conditions HARALD J.VAN HEERDE, ELS GIJSBRECHTS, and KOEN PAUWELS* Although retail price wars have received much business press and some research attention, it is unclear how they affect consumer purchase behavior. This article studies an unprecedented price war in Dutch grocery retailing that started in fall 2003, initiated by the market leader to halt its sliding market share. The authors investigate the short- and long term effects of the price war on store visits, on spending, and on the sensitivity of these decisions to weekly prices and price image. They use a unique data set with consumer hand-scan and perceptual data for a national panel of 1821 households, covering two years before and two years after the price war started. Although the price war initiallyentailed more shopping around and increased spending, spending per visit ultimately dropped because consumers redistributed their purchases across stores. The price war made consumers more sensitive to weekly prices and price image, which helped both the chain that showed an improvement in price image (the price war initiator) and the chains that already had a favorable price image (hard discounters). The price war initiatormanaged to halt the slide in itsmarket share, and its stock price improved. The losers were the rivalmid-level and high-end chains. Unlike the initiator, their price image did not improve, and they suffered from increased price image sensitivity. The authors provide managerial implications for firms that are (or about to be) involved ina price war. Keywords: price war, multivariate Tobit IImodel, store visits, spending, price image Winners and Losers in a Major Price War A price battle between large retailers is not uncommon. In the early 2000s, the leading Dutch supermarket chain But the war that now is different. price rages entirely Albert Heijn suffered from an unfavorable and deteriorating The cuts a much assortment, price encompass larger price image, which was especially troublesome in light of and the percentage price reductions are spectacular. the rise of hard discounters (Aldi and Lidl) and worsening More is going on here. (Sch?ndorff2003, p. 1) economic conditions. Despite their continued belief in the retailer's quality and service, fewer and fewer shoppers could justify paying such high prices. After several years of a market on October Albert *Harald van Heerde is Professor of Marketing, Waikato Management sliding share, 20, 2003, Heijn School, University ofWaikato, and Extramural Fellow at CentER, Tilburg decided to slash its prices formore than 1000 products. the University, Netherlands (e-mail: [email protected]). Els Gijs Using the headline "From now on, your daily groceries are brechts is Professor of Marketing, Tilburg University, the Netherlands much less expensive," its double-page color advertisements (e-mail: Koen Pauwels is Professor of [email protected]). Marketing, in all national and local made clear that the Ozyegin University (Istanbul), and Associate Professor of Business newspapers chain was to Administration, Tuck School of Business, Dartmouth College (e-mail: committed decrease its prices systematically [email protected]). The authors gratefully acknowledge the and permanently.1 support of Aimark and Publi-info, which provided the data for this study. They especially acknowledge the assistance of Alfred Dijs, Dick Valstar, Peter Gouw, Ton Luyten, and Vincent van Witteloostuyn (Europanel). For their constructive comments and feedback, the authors thank Marnik additional factors may have contributed toAlbert Heijn's decision to Dekimpe; Scott Neslin; Laurens Sloot; and seminar participants at the initiate a major policy change. Its holding company, Ahold, was involved Marketing Dynamics Conference, theMarketing Science Conference, and in a major accounting scandal in 2002, which seriously affected its reputa theNorth-East Marketing Consortium. Research funding was provided by tion as a reliable firm. Furthermore, in theweeks preceding the price war, theMarketing Science Institute and theNetherlands Organization for Sci themedia and the general public had been stirred up by a payment bonus entific Research (to the first author). Michel Wedel served as associate edi forAlbert Heijn's chief executive officer, which many considered exces tor for this article. sive in a time of economic decline. Several customers even decided to par ticipate in a boycott of Albert Heijn to express their disagreement. ? 2008, American Marketing Association Journal of Marketing Research ISSN: 0022-2437 (print), 1547-7193 (electronic) 499Vol. XLV (October 2008), 499-518 This content downloaded from 88.255.245.252 on Sun, 26 Oct 2014 04:38:26 AM All use subject to JSTOR Terms and Conditions 500 JOURNALOF MARKETING RESEARCH, OCTOBER 2008 Figure 1 PRICES OF A 1.5-LITERBOTTLE OF COCA-COLA AT FOUR LEADING CHAINS OVER TIME Albert Heijn 130.00 S 120.00 -J ^ -^ 110.00 IS c 100.00 ?? ? s g 3 90.00 o0) 80.00 ? 70.00 i-r 2002-01 2002-27 2003-01 2003-27 2004-01 2004-27 2004-53 2005-26 2005-52 Year-Weak C1000 120.00 110.00 100.00 - 90.00 - O m 80.00 ? w O O - 70.00 - 60.00 -1-1-1 -1-1 T "T T T" 2002-01 2002-27 2003-01 2003-27 2004-01 2004-27 2004-53 2005-26 2005-52 Year-Weak Edah 130.00 Start price war 120.00 110.00 COc 100.00 (bS 90.00 O Ml - 80.00 O - 70.00 60.00 -1 T T -1-1 T T ~r 2002-01 2002-27 2003-01 2003-27 2004-01 2004-27 2004-53 2005-26 2005-52 Year-Weak Super de Boer 140.00 130.00 Jj-ST 120.00 ?? 110.00 g 100.00 O MJ? ~ - < > 90.00 '= ?. 80.00 H 70.00 i-r 2002-01 2002-27 2003-01 2003-27 2004-01 2004-27 2004-53 2005-26 2005-52 Year-Weak This content downloaded from 88.255.245.252 on Sun, 26 Oct 2014 04:38:26 AM All use subject to JSTOR Terms and Conditions Winners and Losers ina Major Price War 501 The price reduction applied to many national brands 2006). In theNetherlands, more than 52% of households from a wide variety of categories. For example, Figure 1 frequently shopped at hard discounters Aldi or Lidl in fall shows how the regular price for a 1.5-liter bottle of Coca 2003, up from 30% in 2001 (GfK 2003). The reaction of Cola went down from 1.23 to 1.12 (-9%). Although traditional retailers has varied from focusing on quality and Albert Heijn's operation to decrease prices was undertaken service to engaging the challengers with substantial price in complete secrecy, within two days all major competitors reductions (Rogers 2001). However, these price reductions carrying this (Coca-Cola) stockkeeping unit (SKU) (C1000, may trigger price wars, as in the case of Dutch supermar Edah, and Super de Boer) matched or even exceeded the kets, which can last for a long time and strongly affect all price reductions. market players (Rao, Bergen, and Davis 2000). A week later,Albert Heijn decreased prices for another The literature is inconclusive about the consequences of 550 products. The price war that followed is unprecedented price wars. Although, in general, price wars are believed to in Dutch retailing. As Table 1 shows, many more price hurt revenues and long-term prospects for themarket play cutting rounds occurred over the next years and lasted until ers (Brandenburger and Nalebuff 1996), other studies sug October 31, 2005. These subsequent rounds involved differ gest that the impact depends on each player's price position ent brands (national versus private label) and categories, and role in the price war (Busse 2002; Elzinga and Mills resulting in negative retailmargins for hundreds of products 1999; Rao, Bergen, and Davis 2000). Although the (Holla and Koreman 2006; Van Aalst et al. 2005). As for antecedents of price wars have been well documented (see scope and depth, this national price war dwarfs both docu our subsequent literature review), empirical research on mented incidents in the grocery industry that Heil and their consequences is sparse. As a recent review concludes, Helsen (2001) mention: the price cuts on private labels "It is unclear what the overall effects of price wars are. among theU.K. retailers Tesco and Asda and the 2% price Price wars are often assumed to lead to losses for the firms drop in theHouston retailingmarket. In our case, the price involved in the battle.... It is, therefore, important to war was nationwide, entailing an 8.2% reduction in food research how price wars affect firms in the industry, prices (Baltesen 2006a) and resulting in the lowest inflation whether these effects are uniformly distributed, and how level in 15 years (Consumer Reports 2004).