The Product Pricing Strategy After International Financial Crisis A Case Study on the Supermarkets in Metro Manila

Chen, Mei-Liang, Department of International Business, Hsin Sheng College of Medical Care and Management, Taiwan

ABSTRACT The effective improvement in management of retailing lowers overall distribution costs, which then reduces or stabilizes the final price provided to customers. After the international financial crisis, destroying the pricing strategies of market leader is suitable for most commodities; this is the so-called market penetration pricing. To strengthen the pricing strategy, merchandise assortment and opening hours are adequately adjusted to respond to changes of customer purchasing pattern. Retail division also furnishes manufacturers with information related to the taste, favor and purchasing power of consumers; meanwhile, certain supportive services are expanded such as debit usage and provision of substitutes to facilitate economic efficiency and competition. Keywords: commodities, international financial crisis, strategic pricing, market pricing RESEARCH BACKGROUND AND PURPOSES According to Kotler & keller (2008), retailing includes all the activities involved in selling goods or services directly to the final consumers for personal, non-business use. A retailer or retail store is any business enterprise whose sale volume comes primarily from retailing. The main retail pattern contains specialty store, department store, supermarket, fair price shop, discount retail store and catalog showroom. Retail marketing includes functions or activities involved in selling or renting goods and services for final use. Concretely, it comprises functions and activities that a family and an individual buy products and services for final consumption. Retailing in the Philippines plays a considerably significant role during development of the dynamic and competitive economy. It effectively reforms its management to decrease overall distribution costs, which then reduces or stabilizes the final price offered to customers. In addition, retail division furnishes manufacturers with information related to the taste, favor and purchasing power of consumers while retail transaction division expands certain supportive services including debit usage and provision of substitutes to facilitate economic efficiency and competition. Supermarkets in Metro Manila are comparatively large-sized, low-cost and self-service businesses which provide all aspects of merchandise that customers demand such as food, cleaning products and home repair kit. Profit that supermarkets make only accounts for 1.75% of sales amount and 13% of net value. In spite of the pressure from new and innovative rivals, supermarkets are still the retail stores that customers most often visit. (PASI,2009). According to statistics from the Philippine Association of Supermarkets Inc. (PASI), 82 supermarkets (including branches) opened in November 2008 one after another, some of which are retail leaders. In addition to PASI, 42 supermarkets successively joined the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) in November 2007. Though some supermarkets did not participate in either PASI or PAGASA, they are outstanding in the industry (eg. Shoemart, Super Value). After global financial crisis exploded, it is estimated in this year (2009) that the Philippines with a population of about 92,230,000 is a substantial consuming market. (Philippines in Figures, 2009) The market is full of various retailers from department stores, to supermarkets, Sari-Sari stores and retail vendors. Also, there are non-official retail managements such as door-to-door selling and stores alongside streets. Currently, 5000 retailers across the Philippines have sales amounts over 100 billion Pesos. (Ditas, 2009). According to National Statistical Coordinating Board, the Personal Consumption Expenditures (PCE) of the Philippines is high in percentage. Consuming population in 2009 is around 92.23 millions; inflation rate in May 2009

was 3.3%; trade deficit in March 2009 was 366 million US Dollars; export in April 2009 was USD 2.803 billion while import in March 2009 was USD 3.27 billion. In January 2009, unemployment rate was 7.7% and partial employment rate was 18.2%. General literacy rate of the Philippines in 2000 was 92.3% while functional literacy rate in 2003 was 84%. The average family income in 2006 was 147,000 Pesos. In the fourth quarter of 2008, the Gross National Product (GNP) was 2 trillion and 339 billion Pesos while the Gross Domestic Product (GDP) was 2 trillion and 126 billion Pesos. As stated above, Philippine families mostly spend on stuff satisfying their immediate needs. Food is the most important consumer goods, which means retailing especially supermarkets owns a large target market in the Philippines, Metro Manila in particular. However, the present problem is how to survive after this international financial crisis? The global financial crisis augmented competition among enterprises in the industry. Current competitors flexibly take measures such as price war, commercial campaign, introduction of new products and advance in customer service level. When one or more competitors feel stressed or find the chance to elevate their market position, the competitive awareness will form. Porter (1995) said competition is the essential factor for successful management of enterprise which determines whether the activities of company have contribution to its achievement. Strategy made by company aims to pursue the industrial competitive advantages to build favorable, sustainable competitive situation in order to fight against the competitive forces in the industry. When the financial environment gets more stringent, price becomes important in strategy formation. As Kotler (2008) thought, price is the only element of the marketing mix that generates revenues and is the most flexible one. Unlike product features and channel, price can rapidly, adequately and necessarily change. At the same time, pricing and price competition are the first question many marketing managers encounter. Nevertheless, price is the primary element to decide the market share and profitability of an enterprise. Craven (1991) in his book Strategic Marketing pointed out, when a company has clear target for pricing, its price strategy will be successfully and effectively executed. A company applies pricing strategy to achieve certain targets and some of which may conflict; when this happens, limit should be taken into consideration to these conflicted targets. The research purports to investigate the pricing strategy of supermarkets in Metro Manila after eruption of international financial crisis. Although price is a vital element, the research includes other elements of the marketing mix in this model. LITERATURE REVIEWS The retailers in Manila prefer high-profit and wholesale management, but usually it is hard to simultaneously reach these two goals. Associated books indicated that Manila retailers are often classified into three: high profit and small packaged, low profit and wholesale. No matter which management pattern is used, retailers usually win over customers who are not loyal to brands and keen to gain petty advantages by selling some commodities at a low price. Principles of marketing stress that retailers price is the important factor and that decision relevant to target market, merchandise and service assortment along with competition must be made (Kotler, 2008). Pricing strategy must be in line with overall goals of retailers who have to set clearer and detailed pricing target to avoid confusing the masses and spending much time on dispute with customers. Retail stores must often use some selling methods to attract customers to patronize, which generates abnormal profits. (Berman, 1995). Haim (1992) said pricing target is one of overall goals of an organization because most enterprises set basic targets for growth; thus, sales growth might be a rational pricing target. Sale growth is often related to decline of price or through which to achieve. However, higher sales volume cannot naturally bring high profits. When a retailer reduces price, its total revenues will fall after all. Retailers should consider through sales increasing cash flow instead of profits. Companies can lower price as possible as they can to carry out effective price war, so the service they provide are at minimum level. In early days, supermarkets and discount stores competed in this way. Companies can also rival each other by non-price war. They stabilize prices of commodities and improve their market situation by other

marketing plans. Of course, price factor that has competitiveness should still be considered and price indeed continuously change over time (Stanton, 1992). Morris (1992) believed any price results from supply and demand. The elements of demand include the quantities that customers are willing and able to buy under the condition of various prices, value awareness and psychology. The elements of supply contain the quantities that competitors are willing and able to sell under a number of prices, profits and target of market share as well as related strategies. A part of book Morris published describes the status he observed in the Philippines. Most analyses of retail competition emphasize the change in price of primary competitors and ensure the relationship between present price of a company and general market price. Some enterprises even determine their pricing strategy in accordance with the price of competitors. The above pricing strategies are deemed shortsighted. Actually, companies in each industry must have their own goal, opportunity, market situation, resource, cost structure, target market and overall market strategies different from rivals. Meanwhile, the analysis of competitors should aim to explore the diversity of these elements which will be reflected by the companys price. Wisner (1996) thought retailing, particularly supermarkets, should underscore maintenance, increase or decrease of market share when setting pricing target. Total revenues concern sales units and unit price. Unfortunately, such pricing as maintaining market share and maximizing profits may conflict. Hence, price reduction increases sales units and multiplies revenues but profits may fall, unless costs can simultaneously lower. Companies which set pricing target such as maintaining market share may have to reduce price to sustain great sales performance. In 1994, Webster Jr. stated that market share is strongly linked to investment income probably because companies that raise market share will augment their profitability. According to statistics from horizontal analysis of comparison among many enterprises, it is found the presumption is full of questions. The point explains the change of many single enterprises over time; however, when a companys market share goes up, its experience curve will fall faster than competitors. Also, excellent market share will provide low-cost market situation and competitive advantage (Webster Jr., 1994). However, he also believed that companies should reduce price to advance market share, especially when their product differentiation is not significant, customers may change their preference due to low price. On the other hand, cheap price followed by low profits will make it hard for companies to earn greater average return than high investment in buying huge stock. This problem gets worse particularly when companies are greatly financing for wholesale strategy. In the Philippines, it is rare that retail stores control prices of products on sale because what they sell is bought from the market. The only thing retailers can do is to accept or refuse the market price, and basically they are unable to change product prices. If retail stores reject to purchase goods at the market price, they do not have such products for consumers. This means the stores will suffer great loss even if it is temporary. When customers need the products and cannot restrain their demand, they will patronize other retail stores and further keep transaction with them for several years. In June 2007, a topic on modern supermarkets in Manila was raised. PASI discussed issues related to pricing, inventory management, total profits, and service and image of stores. For almost 70% of commodities, total profit of retailers will be more or less than 5% when the operating expenses of supermarket account 10% of total sales revenues. The remaining 30% of commodities is hard to reach the goal of total revenue at 11%. The condition shows 70% of suppliers hopefully set a pricing target for their products to achieve 5% of total revenue or less. This also makes supermarkets spend less on commercial, promotion, human resource development and other expenditures. Framing superior pricing strategy that fits the capacity of a company will be affected by strategies or policies associated with product, customer, sale appeal and promotion (Miranda, 1994). If a company sells high quality products to certain consumption group, relevant pricing strategy should be different from others aiming to sell products with lower quality to the public. Therefore, the influence of other policies of a company must be taken into consideration when pricing strategy is built. Go (1992) said 3U Marketing is an effective way to maximize a companys sales revenues to obtain more profits and raise its market share. U Marketing focuses on user and usage. Most of the time, marketers often consider 3U:

new user (product user?), new usage (purpose to use the product?) and higher utility rate (time and occasion that the product is used?). Dacanay (1996) discussed studies on retailing in Manila. She found retailing is one of the few industries which have rapidly grown since 1986. Especially the retail pattern such as supermarket demonstrates the highest productivity. In 2009, Ditas carried out a research on the Manila supermarkets. He tried to analyze supermarkets commodities and inventory control strategy which were found strongly related to the pricing strategy of supermarkets. In addition to the above, supermarkets have to consider other elements for inventory control including inventory level, merchandise turnover, commodity strategy and store layout. Over a long time, price is the primary point of negotiation between manufacturer and retailer, which has never been changed. Heinegiann (1994) thought that the importance of other elements is rising, but price and total profits are still the focus of most buyers. From the perspective of salespeople, price is a complicated, interacted and essential element when brand is provided to target consumers. It is a value indicator and a status symbol relative to other competitors brands. Under this circumstance, manufacturers cannot control the final consumer price of goods anymore; retailers can take advantage of price as a sharp weapon, and timely increase and reduce the prices of certain brands that manufacturers are unable to achieve. Hanan (1991) also pointed out that when you know your own value, you can take advantage of it as a competitive niche, that is, give it a price. The pricing of your value determines how much a company can gain from it, which anticipates the return of investment in buildup of a companys capacity. If pricing is not based on your value, your price will be set according to your costs or costs of competitors leading to a too low pricing. You abandon your value the only stuff you can sell. When the cost is set as basic price, plus fair profit, a company will choose the lower one from the two prices as pricing benchmark. The method is used because the value of a companys product must be higher than production or supply cost, otherwise the company cannot survive. The difference between value and price represents the opportunity loss of a company. The higher the opportunity loss, the higher the unretrieved value when company sells products each time. Nagle & Holden (1995) thought pricing must become a prerequisite of strategy instead of hindsight to achieve excellent and stable profitability. Is strategic price not only a price level set for covering both cost and profit? With the price level a market can reach, the affordable costs and obtainable profits are considered? Does strategic price stress which value our products create for customers and how we communicate this value to rationalize the price, instead of emphasizing the price customers are willing to pay? When the value of a product is unable to persuade some customers into accepting its price, strategic price is impossible. At the time, it will be considered how to segment market with different commodities or through distribution channels in order to supply those customers and not damage the perceived value of other customers. Are levels of sales or market share that are easier to achieve never pondered when using strategic price? In 1994, Montgomery studied customer-based consumer products in retailing in place of unified pricing strategy for all stores. The result showed the improved pricing strategy would raise profits by more than 20%. To effectively respond to competition pressure and customers feedback, enterprises should limit revenue and average price level. Those restricted microeconomic pricing strategies increase profits by 3-4%. Retailers in traditional markets gain less than 3% of returns after the cost of goods sold is deducted. When scholars learned microeconomic profit from marketing can enhance current profit level after comparison, they found microeconomic pricing strategy significantly influence the profitability of retail stores. In 1993, Wasudev studied the trend that average people determine quality of a brand by price. It indicated the personal difference in customer's knowledge level or conception plays a partial role in the diversity of dependence on price. The so-called conception is formed by one who had the knowledge of the relation between price and brand. This point will interact with new information gained from various consumption phenomena and further influence ones dependence on price.

RESEARCH METHODOLOGY Information quoted in the research is primary and secondary information. Primary information is obtained through questionnaire survey while secondary information is collected from data of 2004-2008 from varied sources including Securities and Exchange Commission (SEC), PASI, PAGASA, Philippine Stock Exchange (PSE) and National Statistics Office (NSO). Purposely selected, the interviewed enterprises are outstanding in the supermarket industry. The selection criteria are compiled as follows: 1. Listed as the Philippine enterprises and ranked in the Top 5000 announced by the Research and Communication Center during 2007-2008. 2. Included in the list of large supermarket enterprises published by PASI and PAGASA in November 2008. 3. Ranked Class A, whose total annual operating income more than 32 million Pesos, with total sales area of 3500-100000 m2 and 12-40 cash desks. 4. Supermarkets situated in Manila region. 72 supermarkets comply with the above criteria, only 62 of which accepted to be the subjects of the research. Only 5 supermarkets are independent and the others are the members of PASI and PAGASA. The questionnaire of the study is divided into two: (1) the first part contains background of the interviewees and their companies; (2) the second part includes their countermeasures taken during financial crisis. As for pricing, the interviewees were asked to answer factors affecting the pricing strategy and goal of supermarket. Structural design was adopted in the questionnaire making it easier to be answered and reach high return rates. Interviewees were requested to reconfirm certainty of answers and add some new information after each question. Pre-test was performed on five PASI supermarkets, but they were not included as subjects in the final official interview. Based on the organizational structure of supermarkets, employees participated in the research include: VP manager, marketing supervisor, merchandize manager, regional manager, branch manager, finance manager and financial secretary. RESULTS The study focuses on the pricing of supermarkets responding to the economics. Next, it thoroughly investigates the pricing target, principal strategy and target customers of an organization. Finally, the comparison between the effect of strategy and the initial sales anticipation was made. The survey demonstrates different combination of local and imported goods in percentage in the attended supermarkets: 10 supermarkets sell 80% of local commodities and the other 20% are imported; 12 sell 75% of local products and 25% of imported; 17 vend 70% of local merchandise and 30% of imported; 6 sell 65% of local commodities and 35% of imported; 12 show the percentage of 60 to 40 regarding local against imported. Almost 40% of supermarkets considerably decreased imported products on shelf 2 months after the burst of financial crisis. Although in depressed economy, 12 supermarkets said they had stable circulation of 900,000 products annually; 30 expressed almost 700,000 to 1,000,000 commodities circulate in their supermarkets each year; 15 showed circulation of 300,000 to 700,000 merchandise per year. With regard to sales amount, only 10 supermarkets expected 300 million Pesos; 15 estimated around 200-300 million Pesos; 20 claimed they fortunately achieved 100-200 million Pesos. Others satisfied with the result reaching less than 100 million but over 60 million Pesos. It is estimated that 10 participants in the study have about 200 million Pesos in total profit, 6 around 75-100 million Pesos, 20 about 51-75 million Pesos, 15 nearly 25-51 million Pesos; 6 claimed they made profits less than 25 million Pesos. The interviewees thought their pricing targets include advance in sales volume, increase of profit, certainty of adequate return, enhancement of market share, competitiveness, as well as supply of best goods and services to consumers.

Notwithstanding each supermarket individually plans its promising future, they regard supplying consumers with prime products and services as essential goal (scored 91). Next is increase of sales volume and profits scored 90. The third is to maintain sustainable competitiveness in the industry and enhance market share which are scored 83.4. The last is to ensure appropriate returns scored 51. The amazing results are probably because organization values service more than profits. Information on target markets of interviewed supermarkets is compiled in Table 1 according to the economic condition of customers. Table 1: Customers Economic Status Economic status High society (AB) Middle class (C1C2) ABC class BCD class ABCD class Total Number of supermarkets 12 12 10 15 8 57

The pricing strategy taken by a supermarket depends on product category. Generally speaking, there are 7 kinds of products in supermarket: grocery, meat, produce, dairy product, bread, frozen food and non-food. Strategies applicable to each product are compiled as Table 2. Table 2: Pricing Strategy by Product Category Pricing strategy Second but better, Flexible pricing Flexible pricing Everyday low price, Flexible pricing Everyday low price, Flexible pricing Everyday low price Flexible pricing Flexible pricing, Second but better

Product Category Grocery Meat Produce Dairy product Bread Frozen food Non-Food

Due to indefinite time, nearly 76.7% of supermarkets will no longer evaluate their pricing strategies each month they used to do. Instead, they make evaluation when it is necessary. Almost 62.1% of supermarkets express the prices of their products the same as others; 52.3% say their prices are lower than others, and only 7.2% claimed their prices are higher. Regardless of economic condition, supermarkets often adopt the method of increase and decrease in price which is considered necessary marketing measures. However, there is no certain proportion for price increase. 21 supermarkets raise price by 25% while most of them (31 supermarkets) by 2.5%-5%. Price increase catering to the demand of customers ranked Class A is around 6%-10% in proportion. When price decrease is necessary, 32 supermarkets reduce price by less than 3.9%, 12 by 3.7% to 7%. 13 interviewees never take the price reduction measure. According to those interviewed supermarkets, they encounter some problems when working out a pricing strategy. In rationalizing pricing strategy, the most critical problem is the pricing strategies of competitors. The interviewees think competitors pricing strategy should be first considered during rationalization of their own price strategy. Next is the low purchasing power of consumer and the inconsistency between supply and demand on market. Finally, the location of supermarkets must be taken into account because it is highly related to contact with target markets and visit of customers. To avoid the management getting stalemated, supermarket managers often use promotion and commercials to advance the quality of their products. Development of permanent good customer relationship is the third method to solve problems. However, it relies on choosing the right target market and understanding the demand of target customers along with the capability for supply behavior.

Lastly, to explore the efficacy of the strategies adopted by supermarkets during global financial crisis, the study utilizes variance analysis and group supermarkets into four units per total sales revenues. Each group contains five supermarkets at least. The first group including 12 supermarkets mainly service AB-class customers and 10 of them are the biggest supermarkets in Manila. With 21 supermarkets, the second group focuses on all consumers. In this group, two are independent in management. The third group containing 10 supermarkets targets bourgeois consumers. The fourth group targets consumers ranked BCD class; most supermarkets are the members of PASI. The study result shows that the performance of the first group is greatly affected by location and imported merchandise assortment. Factors such as high percentage of price increase and nonuse of price reduction have no significant influence on achievements. Even so, the change to small packaging slightly impacts the performance. But compared with the influence of small packaging on achievements of the third and fourth group, the effect is smaller. The frequency that customers patronize supermarkets is not affected, but the selling unit increases by 15%. The environment of supermarket and quality of product are factors that customers targeted by the first group will ponder. Increase of daily buying volume indicates the prices of some commodities are anticipated to be raised. Consumers of this group buy a great deal of merchandise due to their strong purchasing power. The second group features flexibility and is the first to decrease the percentage of imported merchandise assortment. Two supermarkets of this group have the lowest percentage of imported products among all interviewees. Supermarkets often package their merchandise in three different specifications. Groceries with high mobility are the major goods they display. Variable price and the second-but-better principle are the strategy often adopted by supermarkets of this group to grocery and dairy product. They seldom raise price but often use price reduction to facilitate product flow. The target market of this group is consumers sensitive to price. Brand-switching cost is high and has something to do with product price. Basically, the said customers purchase less and less each time, but the trend slows when they trade at the supermarkets as often as possible. Supermarkets of the third group have similar marketing strategy to the second group, but they are different as the former uses middle packaging more. They lower the price of produce and dairy product every day and apply flexible pricing strategy to meat and frozen food. Like customers in the second group, the buying volume of customers in the third group is decreasing but the frequency of patronizing supermarkets at night increases. To deal with such purchasing pattern, some supermarkets are managed 24 hours. Different from the second and third groups, the fourth group has pricing strategy for non-food. Supermarkets in this group adopt flexible pricing and apply the second-but-better strategy to frozen food; everyday low price is used on bread and produce. Concerning management, the second-but-better method is used by supermarkets in this group which hardly raise price of grocery. All of the said supermarkets provide a local-imported merchandise assortment by a ratio of 70 to 30 percent. Three of them are run 24 hours. CONCLUSION AND SUGGESTION As a part of marketing mix, pricing strategy is essential to the goal achievement for company. In regard to the economic status of customers, supermarkets targets mostly bourgeois. This is because in Manila area the population of high society is low compared with the population of the middle class and the lower classes. In the period of financial crisis, destroying the pricing strategies of market leader is considerably effective for grocery, produce and bread, but market penetration pricing is barely important. Pricing strategy is appropriately revised, changed or adjusted based on the actual condition of the market.

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