Indian Institute of Management Bangalore

Reed Supermarkets: A New Wave of Competitors- Case Analysis

(Word Count- 1,351)

Kartik Yeleswaram Roll No. 1111348 Section-E E-mail id: kartik.yeleswaram@iimb.ernet.in

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Reed Supermarkets: A New Wave of Competitors

Introduction
Reed Supermarkets is a grocery retail chain established in 1939. Its headquarters are located in Kalamazoo, Michigan and as of 2010, the firm encompasses 192 retail stores, two regional distribution centres and 21,000 employees in five states in the Midwestern United States. The current CEO of the company is Jack Morrissey.

Situational Analysis
The city of Columbus, Ohio is one of Reeds largest markets and contributes significantly to its overall revenue. Reed has 25 stores in Columbus and is currently the market leader with the highest individual share of 14%. But it has experienced modest share declines in the past owing to intense competition in the grocery retail business from other conventional supermarkets, supercenters, warehouse clubs, dollar stores & limited selection stores. We describe below each of these competitors in some detail: Traditional Supermarkets: Traditional Supermarkets operating in the Columbus area such as Reed and Delfina are the longest established operators in the grocery retail business. They distinguish themselves by offering the largest selection of products in a wide-range of departments such as in-store bakeries, seafood, meat, produce, packaged foods, cleaning products, health & beauty products and many others. They provide the most value to weekly shoppers. Supercenters: Supercentres such as Walmart encourage bulk-buying by offering large discounts. As such, they are famed for offering prices below conventional supermarkets. Warehouse Clubs: These stores merchandise products straight from the manufacturers packing crates. They generally offer a limited selection of brands of each product type but offer prices as much as 20% below supermarkets. Dollar Stores: Dollar stores are among the more recent entrants into the grocery retail business and generally devote a small portion of their store space to items like cereals, canned meats, packaged foods and frozen foods, avoiding perishables such as produce and meat. Their speciality lies in offering low prices to consumers by sourcing a large proportion of their merchandise from closeouts & overstock and low operating costs. Dollar stores generally maintain net margins of over 8% as opposed to 2% for most supermarkets.
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Reed Supermarkets: A New Wave of Competitors

Limited Selection Stores: These stores specialize in offering private label food items as opposed to major brands- about 85% to 95% of items are private label. Limited selection stores such as Trader Joes and the Aldi chain pride themselves on having the highest sales per square foot of store space and are famous for their lean operating model based on efficiency and large volumes.

Reeds CEO has set a Columbus market share target of 16% by 2011. The 2% increase in market share translates to roughly $94.3 million increase in sales revenue, a daunting task in an increasingly competitive environment. In response, Reed conducted a survey of 250 noncustomers in November 2010 to find the reasons for their not shopping at Reed. The primary reason appeared to be the pricing at Reeds and its image as an upmarket retail store. The dollar special campaign was launched by the company in June 2010 to change its high price image. This involved Reed offering about 250 items at large discounts each week. Although the campaign increased same-store traffic by 3%, it seemed that many consumers picked just the discount products from Reeds and sourced the rest of their needs from elsewhere. The campaign also risks tarnishing Reeds reputation of being a high-quality
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Reed Supermarkets: A New Wave of Competitors

retailer. Adding to Reeds managements woes is the fact that one of its major competitors, Aldi, is scouting for more locations in Columbus to setup additional units. Thus, it is imperative for Reed to come up with a new business strategy, and fast.

Problem Statement
Develop a business strategy for Reed Supermarkets to achieve its market share target of 16% in the Columbus market by 2011 while ensuring sales growth and maintaining margins. Deal with the ever-increasing threat of competition in the grocery retail sector.

Problem Analysis
Reeds current position in Columbus: As of 2011, Reed Supermarkets has the following points in its favour Maintained 14% market share for last two years; doesnt face an immediate challenge to its number one position. Sustained revenue growth of 1-2% per year across markets. Among the older and well established grocery retailers; benefits from economies of scale in purchasing, distribution & marketing. Rated highly on quality index for three consecutive years; renowned for quality and range of products, store design & customer service. Traditional supermarkets continue to be preferred over dollar stores & limited selection stores for regular stock-up trips of consumers; more conveniently located than supercentres. Benefits the most from an improving economy given its array of higher-end consumer products; such items have greater margins and contribute significantly to company profits. The following points can work against Reed Customer loyalty dwindling; consumers drawn to dollar stores and limited selection stores for fill-in trips. Risk of aggressive expansion by Aldi; Aldis sheer volumes & increase in perceived quality of private labels can dent Reeds sales.

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Reed Supermarkets: A New Wave of Competitors

Perceived (and actual) price of products is higher than non-conventional retailers; major deterrent for low and middle income groups. Risks being severely undercut by dollar stores & limited selection stores in the event of an economic crisis.

Objectives: Short term Achieve Columbus market share target of 16% by 2011 end. Sustain sales revenue growth & improve/maintain overall margins.

Long term Clarify position in the grocery retail market. Consolidate customer base & build on the Reed brand.

Criteria for evaluation

Brand Image (20%): how customers perceive the company Price of products (30%): lower prices score higher on this index Quality/Selection of products (20%): is the range of brands narrow or wide; are the available brands low-end, high-end or diverse Effect on overall margins (15%): will the option increase or decrease margins Sales revenue growth (15%): will the option bring about increase in revenues

Generation of options/alternatives
The following options are available to Reed to achieve its business objectives: 1. Continue Dollar Campaign; offer large discounts on specific items on a weekly basis. 2. Smaller, everyday discounts on a large range of items; offer several brands below the list price 3. Reduce purchase costs; expand selection of products by including more private label items.

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Reed Supermarkets: A New Wave of Competitors

Evaluation of Options
The three options generated in the previous section are rated on a scale of 1-5 against the set criteria and the weighted total is estimated taking into account the percentages allotted to each criterion: Option 1- Continue Dollar Campaign; offer large discounts on specific items on a weekly basis. Brand Image (20%) 2.5 3 Price (30%) Revenue growth (15%) 3

Quality/Selection Margins (20%) 3 (15%) 2

Weighted Total 2.75

Option 2- Smaller, everyday discounts on a large range of items; offer several brands below the list price. Brand Image (20%) 5 4 Price (30%) Revenue growth (15%) 4

Quality/Selection Margins (20%) 3 (15%) 3

Weighted Total 3.85

Option 3- Reduce purchase costs; expand selection of products by including more private label items. Brand Image (20%) 3 4 Price (30%) Revenue growth (15%) 4

Quality/Selection Margins (20%) 5 (15%) 4

Weighted Total 4

Selection of best option

Based on the above analysis, Reeds best option is to focus on reducing purchase costs while simultaneously expanding its product mix to include more private label items.
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Reed Supermarkets: A New Wave of Competitors

Implementation of Action Plan Reduce purchasing costs- Bargain with existing suppliers to get the best deals on
merchandise. Timeline- Immediate, 1-2 months

Expand product selection: Introduce more private label brands while maintaining
existing brands; serve both ends of the customer spectrum. Timeline- 3 months

Contingency measures
The following are issues that could possibly be encountered during implementation of the action plan along with measures to combat them: Reluctance of suppliers to reduce costs- Offer special long-term contracts to existing suppliers to create a win-win situation; expand supplier base by looking for alternatives. Issue with lower-quality image of private labels- Although this is no longer a general concern, Reed can aggressively market private labels by offering free samples/low-cost deals to instil consumer confidence in these brands. Once this is achieved, prices can be raised to sustainable levels.

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