Superior Supermarkets - company overview and recommendations

University Degree Business and Administrative studies

October 28, 2004

To: Steve Clinton

From: Team 5, Mkt 6503

Kristin Pearce

Dart Stovall

John Vinturella

Re: Superior Supermarkets

Recommendation

Superior Supermarkets should pursue an everyday low pricing strategy in both the grocery and general merchandise categories. Superior should reduce its prices by 4.2% in these categories, and increase its advertising to 1.2% of sales; these price changes will produce a 10% increase in sales, and increase market share to 24.2%, while providing the budgeted 1% net margin.

Problem Statement

Superior Supermarkets must decide whether or not to pursue an everyday low pricing strategy in its three stores servicing grocery shoppers in the Centralia MO area.

Underlying Issues and Facts

Superior Supermarkets (SS) is a division of Hall Consolidated, a privately owned wholesale and retail food distributor. Hall distributes food and related products to some 150 company-owned supermarket units and about 1,100 independent grocery stores in the U.S. through 12 wholesale distribution centers. Hall’s sales in 2002 were $2.3 billion.

Superior is the smallest of the three supermarket chains owned by Hall, with sales of $192.2 million in 2002. Superior serves small towns in the South Central U.S., and is number one or two by market share in each of its trade markets.

Sales of the three Centralia stores were $14,326,700 in 2002. Their gross profit margin was 28.8%, while the median for the U.S. grocery industry was 26.4%.

Randall Johnson, the District Manager for the Centralia stores, has recommended that they implement everyday low pricing (ELP). The reasoning behind his desire to implement the ELP strategy is that Superior’s prices are higher than the competition at a time of growing price consciousness, and that the price differential could cause them to lose market share.

Superior President James Ellis suggests that their recent consumer research should be studied to assist in the pricing decision. If the research suggests that an ELP strategy should be used, it would then be applied to all three of the Centralia stores. One company official suggests that the pricing strategy should be part of a broader store positioning strategy, and it should be supported with advertising.

The SS Controller estimates that ELP can save the company 50 basis points (0.5% of sales) by lowering inventory and handling costs, and an additional 60 basis points by lowering the amount of re-pricing required. These savings could be added to gross margin, or, as Johnson suggests, be used to supplement their advertising budget.

It is acknowledged that SS is rightly perceived as having the highest prices in the area. To the extent that price knowledge exists, it is thought to be category dependent. This adds a dimension to the ELP implementation decision, specifically whether ELP should be applied across the board, or just for certain categories.

Johnson favors an across the board application of ELP. Hall’s V.P. of Retail Operations favors limiting ELP to grocery and dairy items, and seasonal and general merchandising, representing 57% of Superior’s sales; the Controller concurs.

If an ELP strategy is adopted, it is important that Superior decide how much prices should be lowered. SS prices are estimated to be about 10% higher than Harrison’s, the current low price leader, and about 7% higher than the other major competitors. There is a consensus that they should not attempt to outprice Harrison’s.

Additional information, a situational analysis, is included as Attachment 1.

Assumptions

Implementation of an every day low pricing strategy will enable Superior Supermarkets to gain market share.
The 4.6% increase in Food and beverage retail sales in the Centralia market between 2001 and 2002 will continue in 2003.
The departmental distribution (grocery, meat, etc…) by percentage of Superior’s sales will remain the same for all analyses.
When price changes are applied selectively by department, the affected departments will sell enough additional units to bring in the same amount of sales dollars, maintaining the distribution ...

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Additional information, a situational analysis, is included as Attachment 1.

Assumptions

Implementation of an every day low pricing strategy will enable Superior Supermarkets to gain market share.
The 4.6% increase in Food and beverage retail sales in the Centralia market between 2001 and 2002 will continue in 2003.
The departmental distribution (grocery, meat, etc…) by percentage of Superior’s sales will remain the same for all analyses.
When price changes are applied selectively by department, the affected departments will sell enough additional units to bring in the same amount of sales dollars, maintaining the distribution percentages by department.
A second constraint on possibilities evaluated is that net margin must be 1%. For the current situation, net margin is said to be “slightly under 1%;” we will assume that the difference is small enough to use 1% in our estimates.
For advertising expense, we assumed that sufficient promotion of the new price strategy would require 1.2 % of sales.
We used the “Other Expense” category to include expenses other than advertising. It is assumed that this level of expenses, lowered by the 110 basis points saved by the new price strategy, would be sufficient to handle the options considered.

Analysis

See Attachment 2 to verify figures discussed in this analysis. Comments in italics refer to titles in the attachment.

We began with a Market Share Analysis to determine the share required for the various scenarios with respect to sales increases that we evaluated.

A Margin Analysis gave us the amount to attribute to Other Expenses. The resulting figure was divided by 1.011 to reflect expense savings under an every day low pricing strategy. This gave us an expense figure in dollars, $3,813,375, which was used in the options considered.

For each level of sales we could then calculate the minimum contribution dollars required as $3,813,375 + 2.2% of sales (1% net and 1.2% advertising). This figure appears as the leftmost cell of the total line of each scenario, and can be used to determine the maximum price cut that can be accomplished for that sales level.

Under the Current Situation we verified the numbers given in the case. We then looked at the effects of a 7% and 10% price decrease used across the board. We calculated the breakeven volume increases under each price cut to retain current dollar volumes by category. Large increases in sales volume would be required at both discounts, and those required for a 10% cut appeared prohibitively large.

(1) Sales increase of 4.6%, no price cut

The first case we looked at was based on an assumption that SS sales would go up in 2003 by 4.6%, same as the category, which would maintain the current market share. We felt, however, that without a price cut, we would be hard pressed to retain that share.

(2) Sales increase of 4.6%, with price cuts

With across-the-board price cuts of 7%, and even with selective 7% cuts, we could not meet our expenses and net margin constraints. The biggest price cut we could afford was a 2% cut in grocery and general departments only, and this was not considered competitive.

(3) Sales increase of 10%, with price cuts

Again, a 7% price cut proved infeasible. The biggest affordable price cut, applied selectively, was determined to be 4.2%. This would require an increase in market share from 23% to 24.2%, which we feel is achievable.

(4) Sales increase of 15%, with price cuts

The biggest affordable price cut, applied selectively, was determined to be 6%. For a 15% increase in sales we would need to attain a market share of 25.3%, which we feel is a very optimistic target for our first year under ELP.

Summary and Decision

We evaluated the options considered on 10-point scales of two attributes, weighted equally. The factors used were the feasibility of achieving the sales goal of each option, and the competitiveness of each approach.

Based on this analysis, we make the following recommendation:

Attachment 1: Situation Analysis

I. Customer Environmental Analysis

Superior operates three stores in Centralia, MO, the primary trade area in Scott County. Food and beverage retail store sales in Centralia were $62.3 million in 2002, a 4.6% increase over 2001.

Based on the 2000 U.S. Census, Centralia has 13,500 households and a total population of 41,000. The median age is 35, median household income is $36,000, and 85% of residents have at least a high school education. Just over half of Centralia residents are employed by manufacturing, retail trade, and education, health, and social services establishments.

Focus group studies have identified various aspects of food store choice and patronage in Centralia. In descending order of importance to shoppers are: price; quality of meat; produce quality, variety, and display; and, shopping convenience. Focus group participants are generally pleased with their food shopping options.

Superior has a great deal of shopper information from two studies it conducted. One establishes, by department, how $100 is spent in a typical Centralia supermarket. The other establishes, specifically for Superior supermarket shoppers, demographic information, frequency of store visits, and related shopper behavior data, including other stores shopped.

The primary reason that potential customers do not shop at SS is mainly due to price.

II. Competitive Analysis

Four grocery chain stores accounted for 85% of all food sales in Centralia in 2002. The remainder was shared primarily by two small independent grocery stores, several convenience stores, specialty food stores, and a seasonal Farmer’s Market. Three of the chains operate one store each in Centralia, while Superior has three. Each of Superior’s stores is smaller than the other chains’ stores.

Harrison’s, a 50,000 square-foot store on W. Main St., is acknowledged to have captured most of the business of the middle and upper income group (over $40,000 per year) in Centralia. Harrison’s Centralia store is one of the company’s 65 locations in Missouri and Illinois. The store is well-managed, clean and orderly. Harrison’s has a very favorable customer image, and uses an everyday low pricing strategy. Harrison’s market share of 22% ranks it third in the market, just behind Superior.

Grand American (GA) operates a 39,800 square-foot store on W. Main and Fairfield. It is one of 148 GA stores serving the region. It is the most modern store in town. It serves the lower income demographic, the $20,000 to $35,000 range. GA, with a market share of 13%, is considered a secondary competitor by Hall officials. Hall officials believe GA lacks innovative merchandising appeal, and its only real strength is its dairy department.

Missouri Mart (MM) operates a 120,000 square-foot store, 40% of which is dedicated to food items. MM’s customers are middle-aged and older families with incomes over $30,000. MM is the sales volume leader in Centralia, with a 27% market share, and is considered Superior’s principal competitor. About 32% of Superior’s customers shop MM regularly. MM’s primary strength is in groceries and special purchase displays, but the store seems to sacrifice quality and freshness for production.

Superior Supermarkets has three stores in Centralia which are generally older than those of its major competitors. Each store anchors a strip shopping center owned by Hall. Each shopping center has additional shops which provide a lot of convenience to customers. Company officials believe that SS offers high-quality merchandise, but less variety than the other major competitors. Consumer acceptance of the major store departments varies between stores.

SS features a value positioning in its advertising. It spends 0.89% of sales on advertising, while it is estimated that Harrison’s and MM spend about 1%. GA is seen to invest considerably less than Superior. Market basket studies indicate that Superior is the highest-priced food store in the Centralia area. Superior advertises high-volume items at deep discounts, and features loss leaders.

Superior’s N. Fairview store is less than two blocks from MM. The W. Main store is across the street from Harrison’s and GA. The S. Prospect store has no competitors in the immediate vicinity. It prepares baked goods for all of Superior’s Centralia stores. Market share for the three SS stores combined is 23%.

III. Strategic Analysis

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Attachment 2: Superior Supermarkets Pricing Options

Attachment 2: Superior Supermarkets Pricing Options (continued)