Friday, 23 September 2011

Why grocery stores worldwide are dropping double coupons

Tesco in the United Kingdom joins by discontinuing double points on their Club Card. Back in April Kroger stopped doubling and tripling manufacturer coupons at its Houston area stores. What is going on? One reason manufacturers drop copons is so they can charge lower price to price sensitive customers. Retailers have been piggybacking on this instead of incurring the cost of dropping their own store coupons. They identify price sensitive customers and attract them to their stores by doubling and tripling coupons.

But now they seem to be having second thoughts. Why? It is because of the recession. During a recession, especially one as long and severe as the current one, there are too many price sensitive customers. A better strategy is to lower price to ALL customers then. That is what is going on now. And it has the advantage of not yielding control over pricing to manufacturers. This is a problem that is well known as my research with Krishnan demonstrated in the nineties.


Nanda Kumar said...
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Nanda Kumar said...

I agree that lowering price store wide (rather than dropping coupons) makes sense if majority of the customers are price sensitive.

Once the retailer commits to doubling or tripling manufacturers' coupons there is the risk that, given the large price sensitive segment and the fact that the face value of the manufacturer's coupon is not controlled by the retailer the retailer may have to lower price "too" much. For instance, an increase in a manufacturer's coupon face value of x costs the manufacturer x/redemption but 2x/redemption for a retailer tripling coupons. The manufacturer has an incentive to increase the face value knowing that the retailer is going to bear the brunt of the cost. In a market where the size of the price sensitive segment is large this could be very costly for the retailer. Furthermore, the size of the price insensitive segment paying full price in such markets (where the retailer may make some money) is not large enough to offset the costs of doubling or tripling coupons.

Retailers may prefer to reduce the shelf price (by less than 2x/unit) and come out ahead. Dropping these programs also has the added advantage of decoupling the retailer's price from the face value of the manufacturer's coupons.