Case 1 Write-up: Reed Supermarkets

MKTG101- Marketing
Prepared for:
Professor Anirban Mukherjee





Section G1 / Case Study Group #12

ANG Kai Wei
Cheryl YEO Pei Qi
Daniel KONG Jia Sheng
Dhruv AGARWAL
Patrick TAY Wei Sheng



2
1. Major Problems
Reed needs to increase its market share by 2% in the coming year; from $660.0m of sales at
present to around $754.3m. To that end, the following considerations are pertinent.
Intensifying competition in every segment of the supermarket industry: The entry of Whole
Foods market has intensified competition between high-end offerings previously the province
of only Reed and Delfina, At the bottom, limited selection stores have expanded rapidly, drawing
price-sensitive consumers. As a result, Reeds market share has fallen marginally since 2005
1
.
Reeds foreboding high-priced image: Amidst current economic uncertainty, consumers are
choosing value over convenience. Reeds current offerings are second only to Whole Foods in
extravagance. 86% of non-Reed consumers cite better pricing elsewhere within top two reasons
for shopping elsewhere. Since the economy is unlikely to improve significantly in 2011, pricing
will stay a concern for Columbus consumers, with little room for high-end supermarkets to grow.
Reeds consumers are increasingly price sensitive and less loyal: Compared to before,
consumers are more likely to switch across different supermarkets to obtain the best value.
Furthermore, surveys have shown pricing listed as the topmost importance by 75% of Reeds
customers, hence Reed faces an added challenge in retaining its original consumer base as well.
The mixed results of the Dollar Specials: The Dollar Specials have mitigated Reeds pricey
image, particularly relative to Delfina and Whole Foods, despite Reeds high prices in reality.
However, the association with dollar stores dilutes Reeds brand image, and encourages Reed
customers to switch allegiances in search of bargains, to the detriment of Reeds sales.
2

2. Strategic Options
Reduce pricing Keep pricing model Increase pricing
Introduce private
label brands and
organic products
(1) Reduce overall
pricing of current
products and
introduce more private
label brands and
organic products,
targeting low-middle
end consumers
(3) Keep the current
pricing model on current
products while
introducing more organic
products and private
label brands, targeting
middle-high end
consumers
(5) Increase overall
pricing of current
products while
introducing more organic
products and private
label brands, targeting
low/middle to high end
consumers
Maintain current
product mix
(2) Reduce overall
pricing of the same
current product mix
and target low-middle
end consumers
(4) Maintain status quo
with current pricing
model and product mix,
targeting middle-high
end consumers
(6) Increase overall
pricing of current product
mix and as a premium
brand, target high end
consumers
With the economy in a state of recovery, increasing prices Options 5 and 6 is unwise.
Maintaining the status quo (Option 4) is unlikely to attract the new consumers necessary for 16%
market share. On the contrary, market share may be eroded by the Aldi/Dollar threat.
The Columbus population has a 11.6% higher median household income than state and national
average, with an increasing population growth of 11%. Given these demographics, there is a
target market of middle-high end consumers that Reed is able to capture. On the other hand, the
increasing introduction of dollar and limited selection stores, which targets low-middle end
consumers, has been eating away Reeds market share in the industry. This poses a threat to
Reeds 2011 goal, as there is a need to consider the lower-middle end group that has been
increasing since the 2008 recession.

1
Calculations (exhibit 1) show that Reeds total sales and market share declined by 0.02% and 0.0005% respectively since 2005
2
The effectiveness of the Dollar Specials is further illustrated on page 3
3
Reed also has to guard itself against rising competitors like Aldi, either by maintaining its dollar
special campaign or introducing more private label brands to attract the price-conscious
consumers, which is the main concern for most customers (exhibits 5 and 6). Furthermore, if
Reed chooses to maintain its dollar special campaign, it has to dispel the identity clash with
Reeds original positioning of serving high-end consumers with its high-quality image.
3. Recommended Strategies
We recommend that Reed maintains the pricing model on its current products and
introduce more quality premium private label brands at lower prices to capture the lower-
end segment, in response to the Columbus Aldi/Dollar threat. Reed should also introduce more
organic products to capture the increasing health-conscious consumers. The dollar specials
program should be stopped, as it is not consistent with Reeds brand positioning that was built
over the years. Instead, couponing and discounts will be introduced and these also increase
loyalty among consumers. Future marketing campaigns should aim to promote these changes and
highlight Reeds strategy of offering quality products at low prices.
4. Options Grid
Option 1 Option 2 Option 3
Description of
Option
Reduce pricing and
introduce more private
label and organic products
Reduce pricing and
maintain existing product
mix
Keep pricing model on
current products and
introduce private label and
organic products
Overall
Assessment
Do not recommend:
Extensive lowering of
prices and increasing
private label brands move
away from Reeds image
positioning and might be
seen as just another replica
of dollar stores
Do not recommend:
Market share will not
improve as reduced
pricing on current
products eats into overall
margins
Recommend: Maintains
Reeds brand equity
positioning and captures
margins through lower-
priced premium private
label brands
Strategic Fit Low
1) Moves away from
strong brand identity and
might be seen as imitating
dollar stores
2) Able to reach the
increasing price- and
health-conscious
consumers
3) Dollar specials has
lowered overall margins
Medium
1) Maintaining current
product mix upholds
brand equity positioning
2) Able to reach price-
conscious consumers
while maintaining its
high quality image
3) Low prices like dollar
specials program will
reduce overall margins
Medium
1) Might confuse Reeds
quality image, unless
private label brands are
ensured to be of premium
quality
2) Reach out to price- and
health-conscious
consumers via private
label brands and organic
products respectively
3) Potential
cannibalization
Financial
Attractiveness
Medium
1) Long term: Focus shifts
to private label brands
hence might be more
profitable as more cost-
conscious consumers are
attracted
2) Might lose its original
quality-conscious
Low
1) Reduction of prices
like the dollar specials
program has proven to
lower overall margins, at
least in the short run
2) Costs of lost margins
outweighs the long term
benefits of increasing
High
1) Margins can be
maintained with keeping
the current pricing model
on existing products
2) Price-conscious
consumers can be captured
via the increased
introduction of private
4
consumers
3) Short term: Costly to
reposition Reeds brand
image and its core
competencies

price-conscious
consumer base

Average breakeven
sales discount of 22.6%
(Minimum average price
of $2.09 per product)
label brands, hence further
increasing market share
revenue
3) Long term benefits
should outweigh short
term cannibalization cost
Noteworthy
Risks
1) Does not anticipate
competitive reaction
2) Might lose consumers
seeking quality products as
perceived as a move away
from premium product
differentiation
3) Market share for this
segment might have
reached / is reaching its
peak
4) Loses strong brand
identity established over
the years
1) Does not anticipate
competitive reaction
2) Might adversely lower
overall profit margins as
B/E volume is too high,
and as can be seen from
the current dollar specials
program (further justified
below)

1) Does not identify
cannibalization
2) Might lead to confusion
with Reeds identity with
the introduction of low-
priced private labels, if the
emphasis on quality
premium private label
brands is not well-
marketed to the public
3) Does not account for
cannibalization

5. Justifications on Recommendations
Maintain current pricing model and stop dollar special campaign: The dollar specials
program has been highly ineffective, as evaluated quantitatively below:
An average household makes 109.2 trips to the supermarket each year (2.1 weekly*52 weeks).
Dollar special
campaign
Households that do not
purchase dollar specials
Households that purchase dollar
specials
Total
Average annual
transaction value for
one household
$3437.61
($31.48*109.2)
$1375.05
(assuming each household
purchases at least 3 products a trip)

# households
shopping at Reed
184,314
(96% of $660m sales)
($633.6m/$3437)
19,199
(4% of total $660m sales in 2010)
($26.4m/$1375)
203,513
Assuming no dollar special campaign from the start
Original # households
shopping at Reed
197,586
(traffic increased by 3% with dollar special); ((100/103)*203,513)
Potential total sales of
Reed
$679.22m
(197,586*3437.61)
Hence, with the assumption that households purchasing/not purchasing dollar specials products
are mutually exclusive, the dollar special program had resulted in an opportunity cost of
$19.22m, a decline of 2.92% from its potential revenue. Furthermore, the dollar special
campaign is not consistent with Reeds brand positioning as consumers confuse it with nearby
dollar stores. Hence we recommend scraping the dollar special campaign and resume Reeds
current pricing on its current products and thus continue to capture the high-end segment of the
market.
Introducing more organic products: Reeds competitors Delfina and Galaxy have faced a
larger loss in total margin sales in the past 5 years. Furthermore Galaxys loss of a store is
roughly equivalent to 0.5% of total market share (exhibit 1). Hence we recommend that Reed
5
increase its range of organic products at lower prices (via couponing) and capture the customers
and market share that were lost by these two companies. This strategy gives Reed an advantage
in both the price index and quality index that enables it to capture consumers from Delfina and
Galaxy in the long run, given the moderate economic resurgence. Couponing also encourages
consumer loyalty and therefore Reeds competitively lower-priced organic products will
significantly capture the increasing health-conscious consumers, thereby increasing Reeds
overall market share.
Introducing private label brands: Increasing competition from Columbus Aldi/Dollar stores,
which offer mainly low priced private labels, is a possible threat to Reeds market share
especially with the current economic climate. As mentioned in the case, there are two kinds of
consumers that Reed needs to capture those who shifted to cheaper stores when a recession hits
and those who prefer buying private labels due to their low prices and variety. Hence Reed
should introduce more private label brands to be sold at lower prices and consider offering
coupons for these products. At the same time, Reed should emphasize and instill quality control
on the kinds of private label brands it chooses to introduce into its stores. This is to ensure Reed
maintains its high-quality image as it brings in premium private labels, a distinction compared to
its competitors. Therefore we believe Reed will be able to achieve its target of 16% market share
by protecting its current consumers and attracting the more price-conscious ones, with its good
quality yet low-priced products.
Increasing Advertisements: Raiding Galaxy Galaxy offers a rich harvest field for Reed to
reap market share. Notably, Galaxy stores are old and poorly located. With its attractive stores,
long business hours, and quality customer service, Reed is well placed to capture customers
disenchanted with Galaxys poor ambience.
Within Reeds market segment, Galaxy customers are the easiest to target. With 10.07% market
share (exhibit 1), Galaxy is the second largest player after Reed and offers a sufficient critical
mass of customers for Reed to work with. Amongst the shoppers in Reeds segment, Galaxys
customers can be attracted the most painlessly. Given the poor profitability of Galaxy stores, it is
unlikely that Supervalu, Galaxys owner, will invest significantly in defending Galaxys market
share. Instead, market sentiment has Supervalu contemplating exiting its investment in Galaxy
stores in Columbus. A spirited defence of Galaxys market share is thus unlikely. In contrast,
taking customers from other competitors in the segment will be far less painless. TopVal for
example, headquartered in Columbus, will likely aggressively maintain its market share if
challenged. In sum, wooing customers from Galaxy is wise.
Segmentation, targeting and positioning The Columbus market is broadly divisible into high,
medium and low-end supermarkets. Reeds customers hail from the high end of the market, and
are identifiable by their maturity, affluence and smaller household sizes, as well as preferences
for pets. In contrast, Galaxy customers shop in the middle of the market, and suffer from its
dilapidated and poorly located supermarkets. Even so, intriguingly, Galaxy customers are content
to pay ostensibly Reed-like prices for their shopping (exhibit 3, figure below). They therefore
represent a highly attractive segment for Reed to target; one that Reed can win over with a value
proposition of (perceptibly) higher-quality products at similar prices (exhibit 3, figure below).
However, just as Reed can attempt to entice Galaxy customers with high quality products at
similar prices, so too can such lower-end firms like WalMart, through the value proposition of
similar-quality products at lower prices. As a result, although Galaxys middle-market segment
offers opportunities for profit, the low entry barriers make for substantial competitive intensity.
Reed thus finds itself with moderately-high competitive strength amidst a highly attractive
segment. A wise move for Reed is to act speedily in wooing Galaxy customers, before the
segment becomes shaken-out by the entrance of lower-end firms.
6
Advertising this product-price positioning strategy of higher quality at similar prices places
shopping at Reed not merely as an alternative to patronizing Galaxy, but further as an
improvement upon it. However, in placing Reed within the frame of reference of mid-range
prices from the introduction of private labels and distinguishing Reed based on the point of
difference of its superior quality, it is vital that the advertisements maintain Reed as a premium
brand. For it is all too easy to inadvertently conflate the two and market Reed as a middle-market
brand; diluting its brand image and repelling existing customers.
Trading Margins for Market
Share: Attracting Galaxys
customers Since Galaxys
customers are the easiest to attract,
Reed should direct marketing
efforts towards them. Galaxy
occupies a medium position in the
Columbus market, slightly below
that of Reed (exhibit 1). Prices at
Galaxy are also perceived to be
marginally below those at Reed
(exhibit 3, right figure). Offering a
slight price reduction (of 0.5% to
1%) through coupons on high volume items, coupled with advertising to inform customers of
that fact, will allow Reed to match Galaxys prices and draw Galaxy customers through the
significantly higher quality of Reed products (exhibit 3). With 55% of non-customers citing price
as the biggest disincentive to shopping at Reed, a price reduction using coupons is apt for
attracting their business, hence growing Reeds market share.
Mitigating Reeds high-priced image In the troubled economic times of 2010, customers are
especially sensitive to price. Coupled with advertisements to inform shoppers about Reeds new
premium products (private labels and organic) at low prices and its coupon discounts on regular
products, customers will notice and patronize Reed more often. Moreover, with price as the most
important factor to 75% of Reeds existing clientele and 55% of customers who shop elsewhere
(exhibits 5 and 6), the initiative will likely be received enthusiastically.
Funding the coupons will be more profitable rather than costly, preserving brand quality by
maintaining premium service consistent with Reeds image. The low pricing will also reaffirm
Reeds attentiveness to customer needs. Building goodwill and nurturing customer loyalty,
coupons offering discounts will motivate non-customers in the middle-high market segment to
patronize Reed and reinforce relationships with existing customers; strengthening market share.
Evaluation: Assuaging the impact of increasing advertising and lowered prices from private
labels will be the increased profits from discontinuing the loss-making dollar specials. Relatively
small in quantum, the strategies also leave enough profit to placate shareholders. More
importantly, the fillip they provide to market share will put Reed on course to meet its 16%
target by 2011. Finally, while moving Reeds pricing in the direction of middle-end
supermarkets, the reduction will not take Reed into the turf of TopVal, averting a mutually-
destructive price war.