Determine what would be the most likely sales revenue and the associated margins, both for if the store does bring in the private label and if it doesn’t.

Superior Supermarkets: Adding a Line of Private Brands 1

For Sam Harris, Jr. (Sammy), tomorrow’s meeting with his father, Sam, Sr., promised nothing but unpleasantness. Actually, during the past year, most meetings of the management team of Superior Supermarkets had been unpleasant for Sam, Jr., as he and his father had openly disagreed about every store policy that had come up for discussion during the weekly business meetings attended by all store managers, the advertising specialist, the controller, and Sam Harris, Sr. In fact, Sammy wondered whether he should simply resign as manager of the east-end store now, rather than struggle with evaluating the data spread out before him on his desk. As usual, he had only limited information and very little time within which to make a recommendation, even though the decision to be made tomorrow on adding private brands to normal shelf stock was very important and had long-run competitive consequences.

Sam Harris, Sr., began his career in the food industry in 1947 with two grocery stores, which had been liquidated through involuntary bankruptcy procedures. Since that time, Superior Supermarkets has enjoyed phenomenal growth and prosperity. According to Sam Harris, Sr., the success of his supermarkets can be summed up in three concepts: convenience, service, and national brands. However, Superior Supermarkets has also been an outstanding member of a well-known national franchise for supermarkets since 1952. In addition, Sam, Sr., has been a prominent member of the community—contributing generously to local charitable organizations, serving on the board of a local bank, participating in many local activities and clubs, and donating free food to a local church-sponsored nursery school for disadvantaged children.

Superior Supermarkets is one of four major chains in Dixie Town. The competitive position of the four supermarket chains as of last year is shown in Exhibit 1.

In the past five years, competitive strategies and market shares for the four chain store groups have been somewhat stable. For instance, Colonial Food Stores has consistently featured a low-price theme in its weekly newspaper ads. The state chain, Big Bear Grocery Marts, stocks a distinct product mix with unusual items and brands that can often not be found anywhere else. Big Bear Grocery Marts also offer more convenience foods and prepared foods than the other chain stores. One of the Big Bear stores has a complete in-store bakery. Both Superior Supermarkets and Old South Super Savers have the best store locations in the area. Both regularly advertise more food specials than either of the other two chains. However, Old South Super Savers allocates a lot of advertising space to its private brands, whereas Superior Supermarkets normally features several well-known national brands as “loss leaders” in a single

This case was prepared by J.B. Wilkinson, Youngstown State University, and J. Barry Mason, The University of Alabama. The authors 1 wish to thank Harmon Looney, vice-president of Piggly Wiggly, Tuscaloosa, Alabama, for his advice on the financial data used in the case. Revised by Dr. Tim Christiansen 2014.

�1

ad. Moreover, Sam Harris, Sr., is an avid believer in the psychological aspects of loss leader selection, frequently selecting such items as sugar or soft drinks as loss leaders for the week.

Dixie Town is considered by the industry to be very competitive for its size with respect to food stores. The SMSA population for Dixie Town is 175,000; yet, in addition to the fourteen supermarkets affiliated with one of the four chain store groups, a warehouse grocery and a natural foods consumer cooperative are present. Sales revenue by supermarket or chain store groups is shown in Exhibit 2.

About six months ago, Sam, Sr., announced to the management team of Superior Supermarkets that the national franchise association had requested cooperation from its members

Exhibit 1 Chain Store Market Shares

Dixie Town

Chain Number of Stores Percent of Sales

Superior Supermarkets 5 31.6%

Old South Super Savers (regional chain/local franchise) 4 25.4%

Colonial Food Stores (national chain) 3 16.1%

Big Bear Grocery Marts (state chain) 2 11.2%

Wally’s Warehouse Grocery 1 8.5%

Natural Way Food Cooperative 1 7.2%

100.0%

Exhibit 2 Sales Revenue by Supermarket or Chain Store Group

Firm Sales Revenue

Superior Supermarkets $26,662,500

Old South Super Savers $21,431,250

Colonial Food Stores $13,584,375

Big Bear Grocery Marts $9,450,000

Wally’s Warehouse Grocery $7,171,875

Natural Way Food Cooperative $6,075,000

Total $84,375,000

�2

in distributing a major line of private brands, which would be identified with the franchise trademark. Distribution was not mandatory, but each group of stores under one ownership was expected to make a decision about stocking the private brands for a minimum of five years. Furthermore, the decision had to be made for the entire group.

At the time of the announcement, Sam, Sr., expressed an adverse reaction to the idea of private brands. In his opinion, private brands were not quality products and therefore not suitable for the clientele of Superior Supermarkets. In his words, “Both Colonial and Old South Super Savers already offer private brands. If our customers wanted private brands, they would shop there!” Sam, Jr., counter-argued by pointing out that rising food prices had “changed the picture” and that private brands were gaining in popularity as consumers at all income levels sought to maintain purchasing power. At this point, the controller quietly asked Sam, Sr., about the general price level and gross margin for the proposed line of private brands relative to national brands. Sam, Sr., replied that it was his understanding that the new line of private brands would be priced 10 percent less than national brands of comparable quality. The gross margin on the new line would be anywhere from 20 to 30 percent, compared to 17 to 21 percent for national brands.

The manager of the northeast store expressed concern about the space requirements, since his store had a chronic crowding problem. Sam, Sr., agreed that the space problem was “a very serious drawback to stocking the new line because it would require approximately 10 percent of each store’s shelf capacity.” Sammy angrily protested, stating, “Space is not important if the products are well received by our customers. What we need is a consumer survey. No good decision can be made without some insights into customer preferences.”

At the request of several members of the management team, Sam, Sr., agreed to delay the decision for six months. During that time, each member of the management team was to prepare a comprehensive recommendation.

Sammy was now struggling with whether he should recommend stocking the line of private brands. He was concerned not only with the potential effect on profit, but also on whether it was a good strategic fit for the store. He knew that this was going to be an important decision and he wanted to make sure that whatever his recommendation that it provided a solid foundation in planning for his family’s stores in the future.

(See Appendix A for Sammy’s memo and Appendix B for the controller’s memo.)

�3

Appendix A

MEMORANDUM

FROM: Sammy Harris

TO: Ray Becken, Advertising Specialist

SUBJECT: Consumer Survey

The data attached to this memo should be of interest to you (seeTables A-1 through A-6). Most of the data come from that consumer survey idea I mentioned in a management team meeting we had several months ago. I feel reasonably comfortable about the survey. It was designed and carried out by a marketing research class at the university here. The sample size (500) seems adequate, and the students who did the work tell me the sample is representative of the area. Since only food shoppers who bought most of their groceries at one of the four chain store groups in town were interviewed, all 500 food shoppers in this survey either shop at one of our stores or at one of our competitor’s stores. The questionnaire used in the survey had questions that provide information about several issues of immediate interest to us in making this difficult decision about the proposed line of private brands.

1. Customer loyalty. 2. Patronage motive. Shoppers were asked for the most important reason

they go to the store where they buy most of their groceries. 3. Price knowledge. Food shoppers were scored on their confidence and

ability to judge whether each of thirty-two commonly purchased food items had a reduced or regular price. Half of the thirty-two items were listed at a reduced price. A separate list of the same products was prepared for each chain so that regular and reduced prices on the list reflected the actual prices charged at that chain. High scores indicate high price knowledge.

4. Opinion about the following strategies for reducing expenditures on food: a. Buying larger sizes of items. b. Buying advertised specials. c. Buying private brands. d. Purchasing cheap cuts of meat.

In addition to the consumer survey, I personally established a fifty-item market basket cost for each chain store group. Prices for both a designated national brand and the lowest cost brand (if available) for each item specification in the market basket were obtained. As you can see from Table A-6, Superior Supermarkets is the most expensive store in town!

�4

Table A-1 Percentage Distribution of the Supermarket Chains Patronized*

Supermarkets Patronized by Customers Percent

Colonial Food Stores 27.0

Big Bear Grocery Marts 13.3

Superior Supermarkets 30.5

Old South Super Savers 29.2 *Food shoppers named the supermarkets at which they bought most of their groceries during the previous month. Five hundred people were surveyed.

Table A-2 Customers’ Responses on Whether They Bought Groceries from More Than One Chain or

Supermarket During the Preceding Month

Percent

Customers of Major Supermarkets Yes No

Colonial Food Stores 45.9% 54.1%

Big Bear Grocery Marts 73.3% 26.7%

Superior Supermarkets 52.2*% 47.8%

Old South Super Savers 50.0% 50.0%

Number 265 235 *Customers of Superior who shop at other stores shop at Old South Super Savers (50%), Colonial (40%), and other miscellaneous stores (negligible percentages at any one store).

�5

Table A-3 Primary Patronage Motives for Supermarket Most Often Patronized

Primary Percent Distribution for Supermarket Patronized

Patronage Motives Colonial Big Bear Angleo’s Old South

Convenient location 34.4% 43.3% 39.4% 45.5%

General price level 42.6 20.0 10.1 21.2

Selection of products/brands 11.5 20.0 13.0 16.7

Advertised specials 10.0 8.7 1.5

Friendly personnel 4.9 6.7 10.1 4.5

Food stamp redemption 1.4

Frequent buyer card 4.3 3.0

Appearance or atmosphere 3.3 8.7 1.5

Services offered 1.4

Other 3.3 2.9 6.1

Table A-4 Price Knowledge for Chain Store Customers

Customers of Major Supermarkets Price Knowledge Score

Colonial Food Stores 105*

Big Bear Grocery Marts 95*

Superior Supermarkets 100*

Old South Super Savers 101 *Differences significant at the 0.01 level A price knowledge score of 100 means that the customer was about average in correctly identifying prices of items from the store. Higher scores showed better knowledge, lower scores weaker knowledge.

�6

Appendix B

Table A-5 Shopper Opinion About the Most Economical Food Strategy

Percent Distribution for Supermarket Patronized

Strategies Colonial Big Bear Angleo’s Old South

Buying larger sizes 44 19 20 14

Buying advertised food specials 12 29 28 51

Buying private brands 40 30 32 35

Purchasing cheap cuts of meat 4 22 20 0

Table A-6 Market Basket for National Brands and the Lowest Cost Brands by Chain Store Group

Firm National Brands

Lowest Cost Brands

Colonial Food Stores $44.66 $41.24

Big Bear Grocery Marts $44.88 $43.20

Superior Supermarkets $45.93 $43.97

Old South Super Savers $44.13 $39.63

MEMORANDUM

FROM: Jack Randall, Controller

TO: Sammy Harris

SUBJECT: Proposed Line of Private Brands

I called Ed Davis at the regional office yesterday to ask a few questions that came up in a recent discussion among you, Ray, and me about the proposed line of private brands. In his opinion, private brands do not attract customers from other stores, except perhaps through advertising. He also said that we could expect sales of the proposed line of private brands to be anywhere from 2 percent to 15 percent of our total sales revenue (7 is “average”). Since customers tend to substitute a private brand for a national brand, we could expect our anticipated sales revenue of $28 million for next year to be somewhat less should we decide to stock the new line.

�7