Pricing strategy
Having ascertained its niche in the market, Netto proceeded to position itself in the area where the prices were lowest. It realized however that it would not be able to penetrate this area without squeezing its costs. This it decided to do through limiting its product range, restricting it to those core products which cover nearly 90 percent of the customer’s daily needs, while simultaneously concentrating on maximizing the volume of sales so as to reap the benefits of the ‘economy of scale’.
Adapting to the local culture:
Netto has understood that despite being a foreign company in the UK market it is necessary for it to cater to the tastes of UK customers. This is clear from the statement of John Rix the managing director, when he said, “Here we are a British company and alongside with our retail activities we wish to grow as a neighborhood retailer”.
This statement is borne out by the way Netto recruits and selects staff for its stores, i.e., they are recruited locally. Netto’s policy of being open to changes suggested by their customers also emphasizes the adaptive approach that the company believes in. Another example of this method is the introduction of regional variations in products to cater to the specific demands of northern and southern customers.
Location:
Netto realized that one of the shortcomings of having a limited range of products is that there is an increasing trend amongst consumers to prefer ‘one-stop’ shopping, even if it means spending a bit more money. To get around this, Netto adopted a policy of placing its stores next door to other stores with similar concerns. E.g., Locating its stores next to Iceland, so that the two retailers could enter into something of a symbiosis, both benefiting from the other’s complementary product range.
Merchandising
While Netto was concentrating on tertiary brands to keep its prices competitive, it discovered that the belief that ‘low price equals poor quality’ was a real threat. Netto reoriented its marketing strategies, trying to break away from the idea that, ‘low price equals poor quality’, and to establish the notion that, ‘low price equals good value’. To this end, Netto employed several methods:
- Increasing the proportion of leading brands products such as ‘Kellogg’s’.
- Start building their own brand label.
- Improving and promoting the image of the (LRD), through advertisement campaigns.
Low product range was another threat on the merchandising front for Netto. This was tackled by forming arrangements with other retailers so that they might share a location and thus benefit from the cumulative attractive power of each other’s stores, thereby maximizing their product ranges indirectly.
2. Pricing is a central part of Netto’s marketing strategy. What are the dangers of adopting such a strongly focused approach?
There are several dangers to the pricing oriented approach: First of all, a low pricing strategy will lead to a low profit margin which, as a result, will cause an unsustainable financial position such that if any negative factors effect the food retail sector the profits may vaporize. On top of this, recovery in (LRD) is very hard and takes a long time, this is clear when we look at how long it took Netto to break-even.
Low prices force a narrow range of products, as we mentioned before. This is problematic for Netto because of the increasing inclination of customers to ‘one-stop’ shopping.
The low esteem, due to the conviction that ‘low price equals low quality’, of the (LRD) in the eyes of some consumers’ is currently a problem for Netto and is a direct result of its pricing strategy.
Competition through low prices via a narrow range is an easy model to be copied, as opposed to the approach of a store like Tesco, which is much more complicated. Thus Netto may find other companies trying to beat it at its own game.
3. Produce a SWOT analysis for Netto.
4. With the grocery market becoming ever more competitive and a greater number of organizations fighting for a share of the sector, how might Netto retain its competitive advantage? What problems might the organization face in doing this?
Netto should start thinking about the ‘leasing and leasing-back’ model. For example, if a normal store requires 10,000 sq ft, Netto should lease 15,000 sq ft, using 10,000 sq ft for its own purposes and leasing the rest out to other stores. This will help Netto to extend its product range indirectly; making customers feel that Netto is effectively a ‘one-stop’ store. A potential hindrance in this approach is the possibility that Netto might one day find itself unable to let its surplus retail space. Two possible solutions to this problem would be to: one, expend great effort in finding the most desirable locations and; two, to seek the opinions of its foremost tenants regarding the location before deciding to take it; furthermore, it would be advantageous to have an official agreement with them before signing the tenancy contract with the landlord.
Another area Netto must improve upon so as to maintain its competitive position is its image. Generally, British people value good quality and a respectable image more than a low price. Netto needs to identify viable solutions towards influencing customer behavior and changing the picture of Netto from a ‘cheap (LRD) store stocking low quality goods’, to a ‘respectable store with quality goods’. One possible way of achieving this might include forming an alliance with a company with a well-known brand. People will thus associate the quality they perceive in that brand with Netto and incline towards it. This solution would present one more problem for Netto, namely finding a famous brand company that is willing to risk its image by associating with an LRD like Netto. Herein lies a challenge for Netto, and one it might be well advised to rise to.
