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REED SUPERMARKETS: A NEW WAVE OF COMPETITORS

MANAGERIAL COMMUNICATION 1 Submitted to Professor Amarnath Krishnaswamy 7/27/2011

M.Sagarika Roll no: 1111352 Section E

Managerial Communication - I 1111352

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TABLE OF CONTENTS

1. SITUATIONAL ANALYSIS3

1.1 Assumptions..4
2. PROBLEM DEFINITION.4 3. STATEMENT OF OBJECTIVES.4 3.1 Short term.4 3.2 Long term.4 4. CRITERIA FOR EVALUATION.4 5. GENERATION OF OPTIONS..5 6. COMPARATIVE EVALUATION OF OPTIONS6 7. DECISION MAKING7 8. THE ACTION PLAN.7 9. CONTINGENCY PLANNING..7

APPENDIX: EVALUATION OF OPTIONS8 REFERENCES9

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Word Count: 1481 (excluding appendix)

1. SITUATIONAL ANALYSIS[1]:

Reed Supermarkets is a high-end supermarket chain, well known for the quality and exceptionally attentive customer service, with operations in several states of Midwestern United States. A Reed customer was somewhat older, more affluent, and had a smaller household than the typical customer. The median income of a Reed shopper was 12% higher than the typical customer. The Columbus market (with largest share), was relatively stable, but Reed had experienced modest share declines in the past. Reed is facing new threats to its position as a leader among the regions supermarkets and from the competitors like dollar stores and limited-selection stores offering very low, appealing price points. In 2010, Reed led food retailers in the Columbus area with a 14% market share which is slightly lower than the 15% Reed had five years earlier. The company had continued to grow revenues by an average of 1% to 2% per year across its markets. Reed had worked hard to maintain margin over the past decade by adding speciality items, widening the selection of higher-end prepared foods, increasing the private label mix, and using weekly promotional specials to drive traffic. In Columbus, 25 Reed stores were located and the company had added no new stores and none were planned. Reeds CEO had set a Columbus market share target of 16% by 2011. Reed's market research shows that as a result of the economic downturn (2008-2010), customer loyalty is dwindling and consumers are willing to go to multiple stores to get the best deals. In US, the growth of warehouse and superstores had attracted bulk-buying budget shoppers, while the low priced promotions drew consumers to specific supermarkets, discount merchandisers and dollar stores. The private label goods had higher margin potential, and retailers were reasonably effective at shedding the lower quality image of those goods. Also, the American consumers had become more health conscious which enabled the growth of stores like Whole Foods. Reed has launched the dollar special campaign in June 2010 to combat its high price image as the customers valued better prices and discounts the most (exhibit 5&6); with a hope that consumers would use the dollar specials for price comparisons across chains, which in turn would reinforce store loyalty among customers.
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Also, as the food retailer margins were low, individual company profitability depended on maintaining high sales volume and operating efficiency. 1.1 Assumptions
2. The US market has still not completely recovered from the recent economic downturn

of 2008 to 2010 and the customers return back as soon as the economic downturn subsides
3. The customers tastes havent changed 4. Stores have the continuous inventory supply to meet the demand of customers, i.e.,

they are not losing out on customers moving to other stores due to lack of inventory 2. PROBLEM DEFINITION: How should Reed defend against its competitors and meet its target market share of 16% by 2011? 3. STATEMENT OF OBJECTIVES: 3.1 Short term: The objective of the Reed management is to maintain the share position, keep sales growth up and to generate enough profit to keep the shareholders happy by defending itself against the companies which offered attractive price discounts (low prices). In other words, the objective is to reverse the trend of declining market share (14% in 2010 vs 15% five years ago) by winning back the customers they have lost during the economic downturn. 3.2 Long term: The main objective is to meet the set target of 16% market share by 2011. And also, the company should be able to satisfy the upscale tastes of the customers who would return back after the economic downturn. So, the long term objective of the company is to exploit the growth in the purchasing power of customers after recovering from the economic downturn and hence increase its profitability by maintaining high sales volume, increase the market share and build a strong and loyal customer base. 4. CRITERIA FOR EVALUATION: The criteria for evaluation of options in prioritized order are as follows:
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1. Pricing model 2. Brand image 3. Increasing customer traffic (by launching promotional offers) increase sales 4. Profitability, revenue maximisation 5. Satisfy up-scale tastes of customers The constraints are as follows: 1. Offering steep discounts, for example dollar specials campaign, would lead to decrease in the margins and hence the profitability decreases in the short run 2. If the higher end brand image is diluted by introducing low priced goods and deal campaigns, then the Reed will lose out the regular up-scale customers 3. If the higher end brand image is maintained by focusing on the premium products, then Reed will lose out the large middle and lower class customer base 4. Reed cannot expand its market share by adding new stores in Columbus market at least in the next two years due to capital constraints

5. GENERATION OF OPTIONS: The options which can be considered for evaluation by Reed are as follows:
1. Maintain Status Quo: Maintaining dollar specials program and wait for the increase

in the footfall and hence in revenues assuming that the customers change their perception about Reed as a high priced store
2. Expand the low price models: Focus more on wider discounts as customers value

the low prices the most. Expand the dollar specials campaign without limiting it to certain days in a week and certain products, expand the private label brands and introduce double couponing

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3. Differentiation based on value and services: Maintain the high end brand image by

scraping the dollar specials and appealing to customers who are looking for a quality shopping and who are ready to pay a premium
4. Increase footfall by adding new stores: Adding new Reed stores in the areas with

potential population growth and in locations where there are no or not many supermarkets
5. Differential segmentation: Experiment by dedicating separate stores where Reed can

concentrate only on the price sensitive customers by moving to daily low priced models. Maintain the high end image in the other stores (preferably in the affluent areas)
6. Variety/ One stop shopping: As dollar stores supply only limited items, Reed can

focus on moving towards one stop shopping by increasing its variety

6. COMPARATIVE EVALUATION OF OPTIONS: The evaluation of the various options on the selected criteria is summarized in the table below: Table 1: Comparative evaluation summary

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OPTIONS CRITERIA

REVENUES No effect run in on

PROFITABLITY

BRAND IMAGE

LOW

END

HIGH

END

MARKET SHARE

CUSTOMERS

CUSTOMERS

MAINTAIN STATUS QUO

short

No effect in short run, might increase in long run Diluted

overall revenues, might increase in long run

Low favourable impact

Possibly unfavourable impact

Slightly increase

EXPAND

LOW

PRICE MODELS

Increase Low in short but when

Increase

Totally diluted

Increased appeal

Negative impact

Increase

DIFFERENTIATI ON BASED ON QUALITY SERVICES AND

run, probably increase economic downturn subsides

Low in short run, but increase subsides Decrease capital due costs to in but Intact, scope for increase Slight Unfavourable probably when Increase Unfavourable

Retained, increase economic downturn subsides

can when Retained, can increase

economic downturn

INCREASE FOOT FALL ADDING STORES DIFFERENTIAL SEGMENTATION VARIETY/ONE STOP SHOPPING BY NEW Increase

shortrun, long run

Increase

Increase

probably increase in

Increase

High Profits likely

dilution of brand

Positive impact

Retained, scope for increase

Increase

Increase

Likely to increase

Increase

Slight impact

positive

Positive impact

Increase

The detailed evaluation summary of each option is given in the appendix. 7. DECISION MAKING: Based on the evaluation of the criteria, the option to adopt differential segmentation approach coupled with increase in variety is chosen. This choice is justified as is evident from the table 1 that it leads to an increase in revenues as well as profits without any compromise on the brand image of Reed Supermarkets. Also it would attract mass middle class customer base as well as the affluent customer base. 8. THE ACTION PLAN:
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Keeping in mind the capital constraints the Reed supermarkets management should adopt the option of differential segmentation approach by initially renting or converting the existing stores or collaborating with other low end stores. They should make use of its economies of scale, and by reducing the maintenance costs (payroll etc.) try to offer attractive prices than the existing low end stores. The economies of scope can also be exploited by offering more variety as other companies like Dollar stores offer only limited variety of items. They should advertise extensively about the new strategy to avoid confusion among the customers about its brand image and to attract more customers. Thus, building the brand image and customer loyalty as well as maximising revenues and market share is a priority. Once the stability is achieved in the market, Reed can expand its market share by adding new stores in the areas with potential population growth. 9. CONTINGENCY PLANNING:

If the management still feels that they are unable to attract enough customers or if they are facing capital constraints, then they can collaborate with or acquire the already existing low end stores in the market. This would decrease the risk of losing out the entire investment made.

APPENDIX: EVALUATION OF OPTIONS 1. Maintain Status Quo: The dollar special campaign has increased the store traffic by 3% and during a typical week, 4% of the sales were for dollar special items. This shows that the campaign was successful in attracting more price sensitive customers, especially the middle and lower class customers and hence resulted in increased sales.

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However, on an average, the items selected for dollar specials had the same overall margin as total sales. As the campaign seemed to be too close to dollar stores, this might confuse the consumers in terms of Reeds image, and the affluent customers might move away from the company. Assuming that the consumer changes his/her perception that Reed is high priced, this model might result in increased revenues and market share in the long run.
2. Expand the low price models:

As customers cited that better prices (75%) and the discounts and coupons (62%) are the most important factors in Exhibit 6, Reed can consider expanding the dollar special model to a daily based model which covers almost the entire range of products by reducing the maintenance costs(which include employee salaries etc.). This model helps in attracting the large middle class customer base and results in increased revenues and market share. But, the affluent customer base who value quality shopping would be lost almost completely. 3. Differentiation based on value and services: Reed is perceived as the high quality supermarket (quality index of 8.4 in 2010, exhibit 3). Reed can focus only on their affluent customers who are ready to pay a premium for the quality based shopping experience, hoping that the customers would return back when the economic downturn subsides. The brand image is retained. But, Reed would be losing out the larger middle class customer base that is price sensitive and this would decrease the market share.

4. Increase footfall by adding new stores:

To achieve the long term objective of increasing the market share and position itself in the lead, Reed should add new stores where there is potential population growth to combat the rapidly expanding low end stores. Due to the capital constraints, Reed
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cannot add new stores in the next two years, but it think about collaborating with any lower end stores or renting stores. 5. Differential Segmentation: Reed supermarkets can either rent some new stores, or convert some of the existing stores or altogether collaborate with low priced stores to focus exclusively on the price sensitive customers. On the other hand, it can focus only on the premium customers in the remaining stores (located preferably in the affluent areas) to continue attracting its high end customers and retain its high end brand image. Implementing this plan requires some initial capital investment and might lead to dilution of the brand image and confusion in customers in terms of Reeds market position for a certain initial period. REFERENCES:
1. Reed Supermarkets- New wave of Competitors, Harvard Business Review,

http://hbr.org/product/reed-supermarkets-a-new-wave-of-competitors/an/4296-PDFENG last accessed at 0523 hrs, 27th July 2011 IST 2. Discussed the case analysis and approach with classmate Ananya Manna

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