Price wars are the milky way for supermarkets to fight for market share

In an economic downturn, the battle for market share amongst grocery retailers becomes even more intense. Look out for some good old-fashioned price wars…

There is lots of great business studies material in this article in the Daily Mail. It describes how an everyday essential purchase such as milk is being used as a loss-leader to encourage customers back to stores (or to remain loyal).

Most price-wars are short-term in nature. Tactical price reductions on key products (usually own-label and essential or value products) help emphasise that the supermarkets are on the side of hard-pressed consumers.

The problem is that starting a price-war inevitably leads to retaliation. Once one supermarket cutrs the price of milk, everyone else follows.

And is selling a two-pint carton of milk for £0.50 compared with £0.8 really a loss-leader?

It depends on who pays for the discount offered. On the face of it, the supermarket bears the pain. however, farmers’ groups are concerned that the supermarkets will simply look for a contribution (via lower farm-gate milk prices) to the discounted price. Remember that the major supermarkets have a huge amount of buying power in this market when they finalise contracts for the supply of milk to them

Watch out for a series of price-wars over the coming months. There was one recently for petrol & diesel prices (as supermarkets competed to be the first to pass on the benefits of lower oil prices).