Case Analysis - STRATEGIC MARKETING MANAGEMENT

Tim Christiansen BUMT 5500

Superior Supermarkets

Superior Supermarket’s Problem

Superior Supermarkets has been in business in Dixie Town for over 60 years and has both

the largest number of stores in town, as well as the largest market share in supermarket sales.

Recently, Superior’s franchise wholesaler, which Superior has been a member of since 1952,

proposed that Superior use the private-label brand which it distributes as a way to boost sales and

margins for the store. Up until now, the store has only sold national brand labels and the owner

of Superior (Sam Harris) is very resistant to bringing in private labels. He has expressed his

belief that the company has been successful because it provides convenience, service and

national labels.

Sam Harris Jr, the son of the owner is at least open to the idea of bringing in private label

goods and has paid for a survey to be done to get some better data about what this change in the

store merchandise might be able to do for the company. While he is open to the idea, he does

admit that it would be a strategic change for the firm. The franchise group has said that in order

to be consistent for Superior’s customers the adoption of the private label goods would have to

be company-wide and for a minimum of five years.

The decision needs to be made at the next board meeting. Does Superior begin selling

private label merchandise, in every store, for the next five years, or not?

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Laying Out the Options

The first alternative is to simply reject the offer from the franchiser and continue business

as usual. Sales are good and have been going up, but there is a significant amount of competition

within the town for the consumer’s supermarket shopping dollar. The competition has been

relatively stable but consumers have been becoming more accepting of private labels and the

company might lose market share if it doesn’t have anything to offer to the cost conscious

consumer.

The second alternative is to accept the offer from the franchiser. Accepting the offer

would mean carrying these products for a minimum of five years, even if they did not seem to be

well accepted by Superior’s customers. And the products would have to be in every store. The

stores would also lose about 10% of the current shelf space to the private label brands. Since all

the stores have a concern about the amount of space in the store, the private label merchandise

would have to replace other brands rather than being considered as an additional source of

revenue. Sam Jr. had the controller of the company check on how this might affect the sales.

The controller said that the best estimates would be that anywhere from 2 to 15% of the sales

would switch from national brands to the private brand, and about 7% seems to be the average

from what he has seen. However, the private label merchandise would be priced about 10%

lower than the national brands they would be replacing, thus the next years sales estimate of $28

million would probably go down.

Sam Jr. wanted some hard data to help him decide whether he should try to encourage the

board to adopt the private label merchandise. He knew that at the absolute minimum, bringing in

the private label merchandise must not lower the overall gross margin dollars for the store. The

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survey he arranged to have done by a college class in the town will provide him with some

primary data which may help in making the decision.

Evaluating the Options

Maintain Status Quo

The first option of essentially doing nothing does have some very appealing aspects.

First, there would be no change in current operations, so there would be no cost associated with

restocking and relabeling shelves, etc. Admittedly, those are probably minor costs, but in

addition to no change in the operations, there would be no change in the image of the firm to the

public. It would continue on by providing convenient locations, national brands at the premium

prices they demand, and good customer service.

The data the Sam Jr. has collected also lends some support to this option. Table A-1

shows the Superior is the most patronized of all the chain supermarkets at 30.5% of all shoppers.

While the difference between Superior and Old South was only a little over one percent, it was

higher, even though Old South carries private label goods. And Table A-3 suggests that

Superior’s shoppers do not come to the store for the price level (only 10.1%), they are coming

for the location and the selection of brands that are available. The personnel in the store were

equally important as the price at 10.1%.

Table A-4 suggests that the Superior customer is no more, nor no less, knowledgable

about prices than the Old South shoppers who have the option of private labels. So if the

Superior shopper knows prices about the same as the Old South shopper, why aren’t they

shopping at Old South to buy private labels, which are lower priced?

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The data do support the fact that Superior is the most expensive store in town. Table A-6

shows that even if the Superior shopper buys the lowest price product available when they are

doing their shopping, they will still be spending over $4 more than if they bought the lowest

price products at Old South. They would even be spending over a dollar more for the national

brands. But, the private labels that Superior could sell would only be able to reduce the prices by

10%, so a reduction of 10% of the Superior shopping basket from A-6 would only bring the price

down to $39.57, which is only about a nickel less than what they would spend at Old South, not a

large savings by any means.

And finally, if the private labels were accepted, the controller has noted that these

products will not attract customers from other stores unless they are advertised. Since these

products have a lower price that will bring sales down and smaller sales may translate into

smaller gross margin to try to cover increased costs generated by trying to advertise these private

label products.

Bring in Private Labels

Since the discussion about margins available was just mentioned, what would the margins

be if private labels were brought in? From the controller’s note, we know that about 7% of the

sales would switch from national brand to private label, and that private labels retail for about

10% less. So 7% of the estimated $28M for next years sales would go down by 10% or about

$1.96M in sales would go down to $1.764M. Thus, next year’s sales would only be $27.8M

which would still make it the market share leader in the town.

But what about the margins? The national brands generate on average about 19% gross

margin. Thus, on the $1.96M of sales that would have been national brands it would have

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generated about $372,400 of gross margin. And the private label would only sell $1.764M, but

the margins on average are about 25%, so the gross margin that they would represent would be

about $441,000. The increase in margin should be about $68,600. A complete chart showing all

the potential combinations of sales and margins for national vs. private can be found on

Appendix A, but on average the private labels will generate a higher gross margin.

There are also a number of factors from the survey which suggest this might be an

appropriate strategic direction to take. First, while Superior does have greater sales than any of

its competitors, it also has more stores. Thus, if you compare average store sales it is slightly

behind Old South at about $5.332M per store compared to Old South’s $5.357M per store. And

Old South does have private labels selling at lower prices.

Table A-2 suggests that Superior loses more shoppers to other stores than any other chain

except Big Bear and Big Bear has a different kind of product mix which may make it harder for

customers to do all their shopping in one store. And the largest percentage of customers that

Superior loses goes to Old South which prominently features and advertises its private label

merchandise.

Table A-3 does show that Superior shoppers don’t come for the price, but its customers

also didn’t find it was all that convenient. Both Old South and Big Bear customers found their

stores convenient locations to be a bigger draw than Superiors. So if convenience is not

something that the Superior shopper really sees in the store, why are they coming to the store?

The choice of selection is less important to the Superior customer than to either the Big Bear or

Old South shopper. But the personnel are as important as prices, and higher than the other two

chains. And the personnel wouldn’t change.

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Possibly the most revealing data is from Table A-5. Here we see that Superior’s shoppers

think buying private label merchandise is a great way to stretch the budget — but Superior

doesn’t sell private label products. So where are these shoppers going to stretch their dollars?

Somewhere other than Superior.

Recommendation

The decision of whether or not to bring in private label merchandise is a critical strategic

decision for the firm. It has long term consequences of at least five years and sale of these

products throughout the company. It is important to carefully weigh the evidence.

There is no doubt that it looks like the margins for the firm would increase, even though

sales levels would go down. But we do have to balance this potential increase with the

probability of higher advertising costs to promote these products. While on average the gross

margin should increase by $68,600, the extra costs of advertising could seriously erode that

advantage.

There is also little doubt that the Superior shopper is looking for private labels as a way

to stretch their food budget, they just are not finding these products at Superior. This could be

one reason why so many of the shoppers Superior is losing to other stores are choosing Old

South.

But there is also strong evidence that price of the products is not a major concern for

Superior shoppers. The data suggest that price level ranks at least third or fourth in the list of

reasons why shoppers chose Superior. And the Superior shopper is at least as knowledgeable

about price as the Old South shopper, so if they are equally as knowledgeable, maybe the

Superior shopper just doesn’t care as much about the higher price.

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While there is certainly some good support for either view, I would have to recommend

to NOT introduce private labels. The firm has a strong image with its shoppers of providing a

wide variety of national brands, through convenient locations, with good service. The addition

of private labels would provide a new means of reaching the price sensitive shopper, but that

would take more advertising and would essentially be trying to compete with a competitor who

has built up this market over the years. Instead of trying to beat the competitor at their game,

why not stick to your own direction and do a better job of fulfilling the strategic direction of the

firm. Acquiring new customers who only want lower prices, at a significant increase in

advertising, means that they could then be easily lost when a competitor lowers its prices. I

believe it would be much better to find something that the competitors can’t match and use that

as a strategic tool to grow sales and margins.

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Appendix A $28,000,000 Estimated Sales for Next Year

7.0% Percent of Sales that would change from National Brand to Private Label $1,960,000 Sales volume that would be affected

10.0% Difference in price between National Brands and Private Label $1,764,000 Sales volume if customers bought Private Label instead of National Brand

Margin Analysis Margin for National Brand

Margin for Private Label

17% 18% 19% 20% 21%

$333,200 $352,800 $372,400 $392,000 $411,600 20% $352,800 $352,800 $352,800 $352,800 $352,800

Difference $19,600 $0 $19,600 $39,200 $58,800 21% $370,440 $370,440 $370,440 $370,440 $370,440

Difference $37,240 $17,640 $1,960 $21,560 $41,160 22% $388,080 $388,080 $388,080 $388,080 $388,080

Difference $54,880 $35,280 $15,680 $3,920 $23,520 23% $405,720 $405,720 $405,720 $405,720 $405,720

Difference $72,520 $52,920 $33,320 $13,720 $5,880 24% $423,360 $423,360 $423,360 $423,360 $423,360

Difference $90,160 $70,560 $50,960 $31,360 $11,760 25% $441,000 $441,000 $441,000 $441,000 $441,000

Difference $107,800 $88,200 $68,600 $49,000 $29,400 26% $458,640 $458,640 $458,640 $458,640 $458,640

Difference $125,440 $105,840 $86,240 $66,640 $47,040 27% $476,280 $476,280 $476,280 $476,280 $476,280

Difference $143,080 $123,480 $103,880 $84,280 $64,680 28% $493,920 $493,920 $493,920 $493,920 $493,920

Difference $160,720 $141,120 $121,520 $101,920 $82,320 29% $511,560 $511,560 $511,560 $511,560 $511,560

Difference $178,360 $158,760 $139,160 $119,560 $99,960 30% $529,200 $529,200 $529,200 $529,200 $529,200

Difference $196,000 $176,400 $156,800 $137,200 $117,600

Average Difference

$68,600