Survival tips for the coming price wars

The growing influence of Amazon, the expanding footprint of European hard discounters and the ensuing struggle for market share portend an era of price wars are likely, but be cautious before entering one, and sneaky fast when you do, an expert said in a presentation last week.

In an online presentation, Ken Ouimet, CEO and founder of Engage3, a price optimization firm in Davis, Calif., said food retailers could learn from previous events of intense price competition in food retail to prepare for the next. In these cases, retailers who understood their competition, chose carefully where to differentiate, and acted decisively and discreetly stood a better chance of success.

In 2001, for example, Kmart underestimated its then-smaller rival Wal-Mart Stores, which had developed a powerful EDLP approach but mostly in rural markets that the former misunderstood, Ouimet said. When Walmart expanded to more populous regions where Kmart operated, Kmart engaged it directly in a pricing battle and wound up spending itself into Chapter 11 bankruptcy while Walmart raced to greater share.

By contrast, Ouimet explained, Kroger in 2004 took a thoughtful approach to battling Walmart that was built around a proprietary strength — the loyalty of its best shoppers — and that gambit paid off for years.

“Be prepared and don’t just react; be thoughtful,” Ouimet recommended. “You have to know your competition and their cost structure in relation to your own so you know a likely outcome of a price war. Can you afford it? Or are you getting into a losing game?”

Ouimet attributed an increasingly fierce competitive environment today to the rise of alternative shopping options headed by Amazon.com, which he said brings new capabilities in pricing and speed to the landscape, and could bolster a robust online business with as many as 20,000 physical stores.

“Amazon can change a price in 90 seconds,” he said. “Most retailers still rely on manual processes that can take three months. Three months isn’t going to cut it today.”

He said retailers are capable of “defending their turf” in a price war provided they have a good understanding of their customers including the places they shop in addition to their stores, and a similar knowledge of the motivations and capabilities of their competitors. Taking those steps should reveal areas in which stores can exploit an advantage, he said, but added that doing so effectively often requires stealthness and speed.

“Fly under the radar and attack where they’re not looking,” he recommended, adding that retailers should “strike hard and fast,” when they do. Ouimet also said retailers should prepare to reinvest in their battle plans as they make them. “These [price wars] can last for a while,” he said.