Pricing strategies in the German retailing sector

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

1. Background information regarding the German food
   retailing sector
2. Price level in Germany
3. Pricing strategies3.1 Price actions3.2 Price
   rigidity3.3 Psychological pricing
4. Private labels
5. Price-quality relationship
6. 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
BackgroundTrends at industry level

• Market share of leading companies

Source LZ (various years).
5
Background Trends at industry 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
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
Brand Description Brand Name
1 170g-bottle of coffee cream with 12 fat Baerenmarke "Feine 12", 170g
2 170g-bottle of evaporated milk with 8 fat Baerenmarke Kaffeetraum 8, 170g
3 Nine-piece-package of frozen rolls Coppenrath Wiese "Unsere Goldstuecke", 9 Stueck
4 500g-package of ground coffee Dallmayr Prodomo, 500g
5 Package of four bottles at 100g of a probiotic drink Danone Actimel Drink Classic, 4x100g
6 500g-package of butter toast Golden Toast Butter Toast, 500g
7 Eight-piece-package of warm up rolls Golden Toast Sonntagsbroetchen, 8 Stueck
8 200g-tin of cappuccino with 10g milk chocolate Jacob's Café Zauber Cappuccino, 200g plus 10g Milchschokolade
9 375g-package of cornflakes Kellogg's Cornflakes, 375 g
10 250g-piece of Irish butter Kerrygold Original Irische Butter, 250g
11 1l-bottle of fresh milk with 3.8 fat Landliebe Landmilch 3.8, 1l
12 500g-package of full corn bread Lieken Urkorn "Das Vollkorn-Saftige", 500g
13 500ml-beaker of chocolate drink Muellermilch Schoko, 500ml
14 375g-package of breakfast cereals Nestlé Cini Minis, 375g
15 375g-package of muesli-like breakfast cereals Nestlé Nesquik fuer ein Knusperfruehstueck, 375g
16 400g-glass of nut-and-chocolate cream Nutella, 400g
17 500g-beaker of margarine Rama, 500g
18 450g-glass of strawberry jam Schwartau Extra Erdbeerkonfituere Extra, 450g
19 Package of 25 tea bags Teekanne Teefix, 43.75g, 25 Teebeutel
20 150g-package of crispbread with chocolate Wasa Schoko Wikinger, 150g
13
Price level Is the law of one price confirmed?
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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
German Food Retailers

Statistical
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
Product
Dallmayr Prodomo, 500g -4.2764
Kelloggs Cornflakes, 375g -0.6663
Nutella, 400g -3.4569
Rama, 500g -3.1516
Source Möser (2002, pg. 174 f.)
19
Price rigidityTheoretical considerations

• Pro price changes
• Supply changes- seasonable effects- sellers
  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 rigidity Food retailers/ store types
German Food Retailers

Statistical
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 rigidity Food retailers/ store types
Source Herrmann/Möser/Weber (2005)
24
Price rigidity Details 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).

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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 94Lidl 61Tengelmann 35Rewe 2
  7
• New trend in German food retailing private label
  brands positioned as "premium" brands to compete
  with existing "national name" brands.

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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.

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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).

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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.e
  uropa.eu/portal/page?_pageid1090,1_dadportal_s
  chemaPORTAL.
• 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) 5167.
• 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) 199227.
• 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_at_zeu.uni-giessen.de