PROBLEM STATEMENT Superior Supermarkets (SS) must decide whether or not to pursue an everyday low pricing (ELP) strategy

at its three Centralia MO locations. Strategic Issues & Marketing Mix Pricing: Current prices are reflective of a high-end branding strategy. SS everyday (non-promotional) prices are approximately 10% higher than Harrison (Hr) and about 7 percent higher than Grand American (GA) and Missouri Mart (MM). Subsequently, higher prices have become a competitive concern due to their declining market share in Centralia. The negative growth rate, based on 1995 to 2002 figures from Figure 2, is -0.53%. Product line: SS are supermarket stores. The stores products may be divided into 5 categories: 1) grocery (including diary); 2) fresh meat/poultry/seafood; 3) produce; 4) seasonal and general merchandise; and 5) bakery and deli. Promotion: The 2002 advertising budget was 0.89% of sales revenue, or $127,500. Competitors spent an estimated 1.0% of their sales revenue. If ELP is adopted, SS would increase the advertising budget (discussed later). Location: SSs three locations (North Fairview, West Main and South Prospect) provide a competitive advantage. As cited by the VP of Operations: we offer greater convenience of shopping with our three stores and that is worth something (implying higher prices). Further evidence is indicated in Exhibit 6 customer survey ranking most convenient: SS -35%, MM -25%, Hr -21%, and GA -18%. Goals & Objectives 1. Increase market share in Centralia. 2. Maintain contribution margin while offering an expanded selection of loss leaders. 3. Understand customer needs to improve consumer image of and experience with SS. 4. Develop an advertising campaign commensurate to objectives 1-3. Concerns & Constraints 1) Concern1: SS relatively higher prices and the growing price consciousness among Centralia shoppers. 2) Concern2: Loss in market share in Centralia since store sales were below budgeted levels in the 1st quarter of 2003. 3) Constraint1: Geographic distribution best performing store, South Prospect, is 2 blocks away from a competitor. The other 2 stores have competition either across the street or within the same shopping centre. 4) Constraint2: Implementing ELP strategy while maintaining current contribution margin. SITUATIONAL ANALYSIS Organizational Background History: SS is a division of Hall Consolidated (HC), a privately held wholesale and retail food distributor. HC distributed food and related products to some 150 company-owned supermarket units operating under three supermarket chain names through 12 wholesale distribution centers. These distribution centers also supplied about 1,100 independent grocery stores in the US. HC sales in 2002 were $2.3 billion. Products: Products fall into 5 categories and have sales(%) and profit margin(%), respectively: 1) Grocery (including diary) -50%, 30%; 2) Fresh meat/poultry/seafood -20%, 18%; 3) Produce -18%, 30%; 4) Seasonal and general merchandise -7%, 33%; and 5) Bakery and deli -5%, 50%. Size: SS stores capture 23% of Centralias supermarket market share. Only MM, with 27%, had more market share. Strategic organization: Maintain high-end brand as indicated by their slogan Superior Supermarkets = Superior Value.

Managerial organization: James Ellis Sr. VP of HC + President of SS; Randall Johnson District 3 Manager of SS (Centralia); Controller (unnamed). Strengths: Strong financial backing from HC, gross profit margins of 28.8% exceed industry average of 26.4%, 12 distribution channels/network from HC distribution centers, open management communication. Weaknesses: Store physical size relative to competitors (implied); store layout (indicated by Exhibit 6); inadequate review process measured quarterly as opposed to monthly. Market Characteristics Demand: Relatively elastic, with multiple opportunities for competitors to steal market share. Exhibit 5 shows how $100 is spent in Centralia supermarkets: 49.67% perishables, 30.95% food grocery, and 19.38% on miscellaneous (health care, general merchandise, etc.). Customer: The median age of the Centralia population was 35 years; the median household income was $36,000; and 80% of residents had a high school education or more. Expectations/Minimal Threshold to purchase: Reasonable prices, convenience, quality produce/meat, overall variety of foods (taken from Exhibit 6); products must be consistently available and reasonable customer service is expected. Market size= 41000 residents or 13,500 households (US Consensus 2000). Competition: Main competitors with market share (%) and growth rates, respectively, include: GA -13%, -6.36%, MM -27%, 0.97%, Hr -22%, 11.82%, and other stores -15%, -3.50%. The four main stores (SS, GA, MM, Hr) accounted for 85% of all food sales in Centralia. Size: GA has 1 store 39,800sq. ft, Hr has 1 store 50,000sq. ft, MM has 1 store 120,000sq. ft. There are a total of 148 supermarkets operating in Centralia. Strategy: MM is the food sales volume leader of Centralia and offers more general merchandise, accounting for 60% of its floor space. Hr captures the business of most of the middle- and upperincome groups in Centralia with annual incomes in excess of $40,000. The store focuses on ELP and is considered clean, orderly, attractive and well-managed. GA is considered the most modern store in Centralia and has the finest fixtures and dcor its wide aisles make it relatively easy to shop. Competitors strengths: Increased floor space, attractive stores, greater overall variety (Exhibit 6), customer awareness and contact (indicated by the advertising budget), and ELP strategy. Competitors weaknesses: Single location, bakery (Exhibit 6). Supply Chain: HC distributed foods with 12 wholesale distribution hubs provide SS (implied). The extensive network presents SS with a competitive advantage. Policies/Practices: Providing on-time delivery of goods is critical for SS to maintain adequate customer service levels. Without the products customers demand consistently available, customers would be lost. Strengths: Extensive in-house network. Weaknesses: None mentioned. External environment: Opportunities include buying-out smaller competitors, enter other Centralia locations, develop a price conscious advertising campaign aligned with customer expectations, improve brand image via store renovations, and participate as a member of the community (i.e. host local charity events and other goodwill). Threats: New competitors entering the market, current competitors adding locations, and pricing wars as a result of SS adopting an ELP strategy. INDENTIFYING VIABLE ALTERNATIVES Alternative 1 Do nothing. Do not adopt ELP and keep the current promotional budget. If market share continues to decline, at the growth rate of -0.53% or greater, this alternative would be deemed unsuccessful. Conversely, if market share remains stagnant or improves, this strategy would prove to be prudent. Alternative 2 Implement a limited ELP model. By marginally increasing the amount of loss

leaders, the model could attract price-conscious customers at the margin. Under this model, the advertising budget could either remain the same or slightly increase. This alternative would be considered successful if SS contribution margins remain unchanged and/or sales revenue increases. Alternative 3 Implement an ELP model and increase the advertising budget accordingly. If by lowering prices SS would increase sales revenues and restore SS image of Superior Supermarkets = Superior Value amongst Centralia price-sensitive customers this option would be judged successful. Metrics would include improving current growth rates in market share. EVALUATION OF VIABLE ALTERNATIVES Table 1: Possibility Matrix OBJECTIVES STRATEGY Increase market share Maintain Contribution Margins Increase Sales Revenue Do nothing Unlikely -unless there is a change in customer demands Likely Likely based on past growth figures of 1.73% Limited ELP (without advertising) Unknown -customers would have to recognize lower prices Likely Likely based on past growth figures of 1.73% Limited ELP (with advertising) Likely -customers are price sensitive Unlikely -CM would shrink proportional to the change in buying preferences Likely based on past growth figures of 1.73% and may grow ELP (with advertising) Likely -customers are price sensitive; increased market share projected at 24.1% Likely via cost savings of (conservatively) 2.3% Likely based on variable cost control; increasing sales by 9.3% Alternative 1 A do nothing strategy would likely continue the negative growth rate of the Centralia market with projected 2003 figures of 22.87% (using -0.53% growth). All things held the same would keep the cost-revenue ratios unchanged and would therefore yield a same CM margin. Because sales revenue growth is 1.73%, we can expect 2003 figures to be approximately $4,514,403. Additionally, we would expect cost to rise proportionately. Alternative 2 Limited ELP without advertising may or may not affect market share contingent on customers awareness of the new price levels at SS. With advertising, the likelihood of increased market share would rise. Contribution margins would probably remain the same without advertising but would decrease with advertising. Also, the products featured as ELP would determine the impact on the contribution margins. High-volume popular items marked to an ELP would carry more implications towards a decrease in CM margins relative to low-volume ELP items. Alternative 3 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. Conservatively, growth would increase to 2.3% allowing for sales of $4,539,698 for 2003 and a 5 year sales target of nearly $5M (all other things held the same). Additionally, this alternative aligns customer expectations with corporate goals. RECOMMENDATIONS The possibility matrix (Table 1) on page 4 clearly defines the divisions of strategy and objectives in other words, what effects a particular strategy would have on meeting SS objectives. Based on Table 1 and thorough financial and strategic analysis, it is clear that SS should implement ELP. To implement ELP, SS should reduce prices by approximately 4% in both grocery and general merchandise categories (those with highest margin-to-customer dollar). Additionally, SS should increase its advertising budget by 0.5%,, or 1.4% of total sales. Based on these changes, SS will gain a 9.3% increase in sales revenues and increase market share to 24.1%. JUSTIFICATION FOR RECOMMENDATION

All financial objectives are met: increased market share, increased CM margin, and increased sales revenue. Also, the brand image of Superior Supermarkets = Superior Value would not be in question any longer as indicated in the case and price-sensitive Centralia customers, as well as SS, would mutually benefit.