Price wars in the UK grocery market:
Price wars are a phenomenon that occurs in companies in various industries throughout the global economic system. In an oligopolistic market structure, players closely monitor each player’s prices and respond to any price reductions. This article seeks to explore the strategic business methods employed in the British grocery oligopoly and determine their effects on the economy using a game-theoretic model. I will conclude that such price wars will drive independent retailers out of business, leading to a consolidated industry dominated by no more than four UK supermarket chains.
By definition, price wars indicate a state of intense competitive rivalry accompanied by a multilateral series of price reductions. In the short term, price wars can be ‘good’ for consumers due to a lower price structure in existing product offerings and ‘bad’ for competing companies due to declining profit margins as well as potential threats to their survival. In the long term, the dominant companies in the industry could benefit as smaller and marginalized companies cannot compete and go out of business. However, it could be bad for consumers, as the remaining companies may agree to raise prices, possibly in collusion even beyond the price set before the price wars.
Major Players – Tesco and Asda:
In the UK grocery industry, both Tesco and Asda have used similar discount strategies to gain market share. Prices in both stores have been practically the same since the spring of 2005. Tesco’s market share in 2002 was 27.1% and Asda’s 16.9%, according to a study in BusinessWeek magazine. Sainsbury’s, an upscale supermarket chain that in 1995 was the UK’s largest supermarket chain, has fallen behind to third place with 16.1%. Safeway has a small presence in the market with a 12.4% market share. The dominant players in this market are Tesco and Asda, both of which are committed to price reductions, especially for non-food items. Both Tesco and Asda have a target of opening 10 to 12 new stores per year across the UK.
Tesco was founded in 1924 in north London by Sir Jack Cohen with profits he made from Army services in the First World War. As of 2005, the company is an international supermarket and retail chain with 2,365 stores worldwide and a workforce of approximately 367,000 employees. Tesco has had steady growth in profits and sales over the last five years to 2005, and ten million customer visits per week to its stores. Tesco has four core businesses; its core UK business, non-food business, retail services and its international business. Tesco’s main market is in the UK
Asda was acquired by Wal-Mart in June 1999. There are 265 supercenters and 19 warehouses across the UK and approximately 122,000 employees in company operations. Grocer magazine named Asda “Britain’s Best Value Supermarket” five years in a row until 2005. Since 1999, there have been over $915 million in price cuts (adjusted from British pounds to US dollars). Growth in non-food items exceeded expectations, with 5,000 new general merchandise lines added since 2002, including specialty items in drugstores, opticians, jewelry stores and photo departments.
Game Theory – Strategic Game “Hawk-Dove”:
It appears that both players in the UK grocery market are involved in a strategic game that is similar to the Hawk-Dove Game, coined and named by Maynard Smith and Price (1976). This game has been a very important tool in understanding the role of aggression between players in economic systems. The Hawk-Dove game has been studied in many settings across various academic disciplines and has been instrumental in the area of evolutionary game theory.
The idea here is that Hawk is a very aggressive player, always fighting for some resource; the Dove is a pacifist, he never fights for that same resource. The object of this game is to choose between the two strategies to determine how to share a common resource.
Other assumptions in the Hawk-Dove game are as follows: (1) fights between Hawks are brutal; (2) the loser is the first to be injured; and (3) the winner takes exclusive possession of the resource. Each Falcon has a 50% chance of winning over another Falcon. The Dove retreats in any conflict with a Falcon and therefore always loses. When two pigeons interact, they both share the resource.
This game has two pure strategy Nash equilibria, which determine the dominant strategy: one chooses to be a hawk and the other chooses to be a dove. There is also a mixed-strategy equilibrium, in which each animal chooses a hawk with one-third probability and a dove with two-thirds probability. This is indicative of a distribution of strategies in a population where Hawk is played one-third of the time and Dove is played two-thirds of the time. In other words, playing exclusively with Hawk or Dove, or in any other ratio, would be evolutionarily unstable.
Actually, Tesco and Asda have been playing the Hawk strategy. Why would this be when it is not an equilibrium of the game, and is in fact the least optimal outcome? It is possible that neither of the two companies knows that it is playing this game. A more likely explanation is that both companies are willing to sacrifice short-term profits in order to be the dominant players in the UK grocery industry in the long term. Public records show that Tesco executives see Asda as a major threat, despite Tesco’s quarterly sales being 1.5 times higher than Asda’s. Tesco is very focused on this price war environment, and the company has even displayed the listed prices of its products against Asda and Boots, a pharmaceutical chain in the UK, on its grocery shelves.
This defense has apparently paid off for Tesco, as it remains the market leader in terms of market share and net income in the UK. In addition, the company has been following a unique marketing strategy based on a rich database of ten million customer surveys, customer panels and mailed questionnaires with the aim of engaging consumers in the power of redesigning Tesco for better meet your needs and expectations.
Meanwhile, Asda has been growing at 10% a year and is a viable competitor to Tesco. Another player, Sainsbury’s, has been in continuous market share decline since 1995 due to its failed execution of a high-priced alternative. Safeway, another major player and household name in the UK grocery market, filed for bankruptcy in 2005 and subsequently merged with William Morrison. These four players together represent 72.5% of the industry, as of 2005.
Concluding thoughts:
The price wars in the oligopoly of the British grocery market have not only affected Tesco and Asda. Both companies have been playing a strategic Hawk-Dove game, in which both players act as Hawks. His resulting actions have damaged the business prospects of independent retailers such as local supermarkets and food stores, many of which have closed as a result. In addition, local businesses across the UK grocery industry value chain, such as suppliers and distributors, have also been negatively affected.
Tesco and Asda have been pursuing this strategy since Asda entered the market space in June 1999. Such actions are likely to result in continued consolidation within the UK grocery industry, with no more than four dominant players in this space. , with the largest market share in progress. to Tesco and Asda.
