A case about a strategic dilemma
Following the topic of The Key Element of Any Strategy I like to present a case for discussing the basic conflict when we consider a significant change. Please, send me your answers and analysis.
GoodChoice is a chain of small supermarkets throughout the Large-City. It was initiated by Marcello when he inherited the GoodChoice bakery his father built from scratch. Today, ten years later, the overall worth of Goodchoice Chain, including the bakery, which sells its variety of breads through the supermarket chain, is dozen times larger than the business of Marcello’s father.
Should Marcello be proud of his achievements?
He certainly likes to continue to grow. The hard competition with the other three supermarket chains, all of which are larger than GoodChoice, forces relatively low overall profitability of just 1.4% of the sales. The battle with the competitors is on every promotion and on every supplier, causing Goodchoice to pay higher prices to suppliers, while charging the customers lower prices than the competitors.
The marketing message that GoodChoice tries hard to spread is that they choose the items sold in any branch very carefully and guaranty high quality. Every GoodChoice branch holds between 1,500 – 2,200 SKUs. The GoodChoice branches are all located within the city itself, and thus have very limited space and limited parking. A typical branch of the competitors, usually located at the outer parts of the city, where parking is not a problem, carries between 4,000 to 12,000 SKUs.
All three competitors have their own private-labels, covering wide-range of items, with average price of 15% less than the price of the leader brand. Marcello already started his negotiations with various suppliers to establish the GoodChoice private-label. However, he likes to do something quite different and charge HIGHER price, of about 4%, for the private-label!
Marcello also wants to emphasis the message that GoodChoice gives to its customers absolute guaranty on the quality of the private-label products. He thinks of letting customers return even open packages if they claim they don’t like it. This idea invokes many negative reactions from Marcello’s team as they are concerned that too many customers will cheat to get refunds.
What do you think? Should GoodChoice make the change with their new private-label, charge more for an exceptionally strong guaranty policy? Or, follow the norm in the specific business area?
Eli Schragenheim 
GoodChoice has a unique advantage. They are located within the city whereas the competitors are located outside the city. It needs to capitalize on it. GoodChoice can easily give home delivery, take orders online or over the phone and guarantee the supply at a time that is convenient to their customers.
The competition may find it difficult to match since it may be expensive for them. GoodChoice may afford multiple rounds within the city whereas the competitors may not.
I guess the customers may be willing to pay little more for this service. Even otherwise, this service may increase their sales and profits.
If the customers are happy with the current quality, GoodChoice need not worry about it and try to match the competition. Though private labels have their own advantage, the original brands also have their reputation and GoodChoice need not give up on that advantage by way or private labels.
If this online business grows, GoodChoice need not open more branches, they may rather need some warehouses; which will be far cheaper than opening branches. All online orders can be supplied directly from the nearest warehouses. This will enable them to increase the number of SKUs also.
Rajeev
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Good thinking Rajeev. The case does not say whether online business exists or not. Your description of the market segment where GoodChoice has an advantage is good and important.
I still look for responses on the idea of a private-label with relatively high price and the emphasis on the guaranty for quality. When we don’t look for other ideas – are these ideas good? Is the synergy between the two ideas good?
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Hi Eli,
Here are my thoughts on private labels:
1. It is like creating your own brand. So it may take quite some time before people start trusting it.
2. You rely on others for quality but you really do not have any control over it. If the level of quality fluctuates, your risk will be high.
3. You lose the benefit of the reputation of the brands by hiding them under your private label.
4. Unless and until people get confidence in your brand, they may not find any justification for higher price.
5. If you do not have private labels and if there is an incident of bad quality, people know whom to blame. They may stop buying that brand and switch over to another; but they may continue buying from your shop if you are selling other brands also since they know that bad quality was not your fault.
(My personal experience: When I go to a supermarkets, I do find private labels on several products. But I hesitate to buy because I believe that producing those products is not the core competency of the supermarket, they must have outsourced it to various suppliers, so the quality may not be consistent all the time. I do not know whether the price – irrespective of higher or lower than the brands – is really justifiable). If I choose to buy such products, I feel that I am taking a chance.
You may decide to focus on quality if high quality (or certain level of quality) is a significant need of the market and your competitors are not able to fulfill that need. In that case, you need to build mechanism to ensure the desired quality; private labels are just not enough. Private label may just be a small part of the solution. It is not a solution by itself.
However, if it is already established that certain brands have established a consistent level of desired quality, you may buy their products in bulk and sell under your private labels and create your own brand. However, those brands are not really going to like it and they will always look for the opportunity to sell their products elsewhere under their brand name and use you as a place to dump their excess capacity.
Regards,
Rajeev
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People tend to use price as a shortcut for assessing quality, so high prices might work well. The “love it or your money-back!” guarantee also seems to fit with a brand image of high quality by projecting the firm’s confidence in its products.
However, some customers might wonder if they are paying extra not so much for quality but to subsidise other people’s refunds. The people who have the cash to buy high-priced items might not have the time or inclination to claim refunds, especially if there’s a queue. To those people it might feel like they’re paying for insurance that they know they’re never going to claim on.
The high prices in conjunction with real quality might be enough on their own to build the brand. Perhaps the guarantee could be implemented, but not publicized. That way customer who complained could be given a positive experience, without making people think twice about the reason behind the prices. It would also make it easier to deal with “cheats” in a different way without the legal issues of offering a guarantee.
As there are multiple supermarkets in the chain, Marcello could try out variations of the idea in safely – e.g. a few products in one supermarket – before rolling out more widely.
My local supermarket has three levels of pricing – “Value”, Normal, and “Finest” – with distinctive packaging for each range. I assume the idea is to target different segments of the market, but I find I buy products from all the price levels. It’s sometimes exactly the same stuff repackaged. I think that’s quite offensive to customers and ultimately harms the brand. It’s maybe something else Marcello needs to consider. Are his products really worth paying a premium for? Maybe some products should be 50% higher than their competitors while others should be lower. Charging 4% higher across the board may not accurately portray the true differences in quality.
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Thanks for an interesting case, especially that I started with it on Monday morning, before the operation. I don’t have a final thinking completed. Anyway jest wanted to share one thought. At first it resembled typical Harvard-alike business case. My first though was to say: competitive advantage, it they want to lead they can’t follow, etc., etc. Then I thought, well, this is Eli, it could be a trick or at least teaser to implement bottleneck management thinking, maybe 5 steps. It may or may not be a good direction but at least gave me some insight of not jumping into ‘obvious’ conclusions to fast … As per final thought I need to digest it a bit.
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