Winners and Losers in a Major Price War

Journal of Marketing Research (JMR)

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Published 10/1/2008

Author: Harald J. van Heerde, Els Gijsbrechts, and Koen Pauwels

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Executive Summary
In the early 2000s, the leading Dutch supermarket chain Albert Heijn suffered from an unfavorable and deteriorating price image, which was especially troublesome in the light of the rise of hard discounters (Aldi and Lidl) and worsening economic conditions. After several years of a sliding market share, on October 20, 2003, Albert Heijn decided to slash its prices for more than 1000 products. Although Albert Heijn’s operation to decrease prices was undertaken in complete secrecy, within two days, all major competitors matched or even exceeded the price reductions. The price war that followed was nationwide, entailing an 8.2% reduction in food prices and resulting in the lowest inflation level in 15 years. The loss in added value for the Dutch retailing industry is estimated to be €900M in one year, and more than 30,000 employees in the grocery industry lost their jobs.

The authors study the consequences of the Dutch supermarket price war on consumer purchase behavior. They analyze how the price war affected two major components of purchase behavior: store visits and spending (money spent per store per week). In particular, they investigate whether the price war led to more shopping around in the short run and to decreased spending in the long run. Furthermore, they test the hypothesis that the price war made store visit decisions and spending decisions more sensitive to weekly prices and price image. To examine these issues, the authors estimate a multivariate heterogeneous Tobit II model for the six largest retail chains, using a unique data set that combines consumer hand-scan and perceptual data for a national panel of 1821 households, over a period of 90 weeks before and 114 weeks after the price war began.

The authors find that though the price war initially entailed more shopping around and increased spending, spending per visit ultimately dropped because consumers distributed their purchases across stores. The price war made consumers more sensitive to weekly prices and price image, which helped both the player that showed an improvement in price image (the price war initiator) and the players that already had a favorable price image (hard discounters). The price war initiator managed to halt the slide in its market share, and its stock price improved. The losers are the rival mid-level and high-end chains; unlike the initiator, their price image has not improved, and they suffer from the increased price image sensitivity. These results should be generalizable because the Dutch grocery retail industry is representative of many Western markets on several key indicators, including price elasticity. Thus, the consequences of the Dutch price war may hold lessons for retailers facing a similar situation.

Biography
Harald J. van Heerde is Professor of Marketing in the Waikato Management School, New Zealand. He has a PhD (cum laude) from the University of Groningen, the Netherlands. His research examines the of building econometric models in domains such as sales promotions, pricing, and loyalty programs and is branching out into new areas, such as building brand equity, private labels, assortment optimization. and price wars. Harald’s work has appeared in Journal of Marketing Research (JMR), Marketing Science, Quantitative Marketing and Economics, and International Journal of Research in Marketing. Harald has received the 2004 Paul Green award for the best paper in JMR. He is an editorial board member of JMR and an area editor of the International Journal of Research in Marketing.

Els Gijsbrechts is Professor of Marketing at Tilburg University, the Netherlands. She received a PhD in Applied Economic Sciences from the University of Antwerp, Belgium, and previously held positions at the University of Antwerp and the Catholic University of Leuven. Her research focuses on modeling consumers’ shopping behavior and their responses to retailer and manufacturer decisions and characteristics, such as stockouts, shelf layout, price (promotions), branding, and assortment decisions.

Koen Pauwels is Professor of Marketing at Ozyegin University, Istanbul, and Associate Professor of Marketing at the Tuck School of Business at Dartmouth, where he teaches and researches marketing, statistics, and return on marketing investment. He won the 2007 O’Dell award for the most influential article in Journal of Marketing Research and built his research insights in industries ranging from automobiles and pharmaceuticals to business content sites and fast-moving consumer goods. His current research projects include the predictive power of market dashboard metrics, performance turnaround strategies, and retailer product assortment and price wars. Professor Pauwels received his PhD in Management from the University of California, Los Angeles; won the EMAC 2001 best-paper award; and has published in Harvard Business Review, Journal of Marketing, Journal of Marketing Research, Journal of Retailing, Management Science, and Marketing Science. He serves on the editorial boards of International Journal of Research in Marketing, Journal of Marketing, Journal of Marketing Research, and Marketing Science. Koen is also a reviewer for these journals, as well as for Management Science, Marketing Letters, Journal of Retailing, Journal of the Academy of Marketing Science, Journal of Advertising, Statistica Neerlandica, and International Journal of Forecasting.

J Marketing Research, Volume 45, Number 5, October 2008
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