Retail FPI | Georgian Consumers Outsmarting Supermarket Managers?

The ISET Economist, a blog about economics in Georgia and the South Caucasus by the International School of Economics at TSU (ISET)

Seasons change, and so do Georgian food prices. In the second week of June, Georgia’s major food retail networks (Carrefour, Goodwill, Fresco and SPAR) lowered their prices by an average of 3.9% y/y and 1.8% m/m. Compared to the end of May, prices moved the most for the following food items: eggplant (-21%), pasta (-10.3%) and coffee (-5.7%); wheat flour (+11%), buckwheat (+10.5%) and garlic (+6.8%).

THE LAW OF ONE PRICE … WHAT LAW?

Why should exactly the same product sell at dramatically different prices in different shops? It shouldn’t. At least that’s what the economics “law of one price” says. The reality – in Georgia and elsewhere – is, of course, different. Very different. Let’s take a quick look at some of the most common grocery items sold in major Tbilisi supermarkets:

As is easy to see, there is very little difference in prices of some items, say, Koda and Dila eggs, which sell at 30-32 tetri. Yet, how come one supermarket is offering exactly the same 1kg package of Makfa flour for 1.55 GEL while another is pricing it at 2.05GEL (a difference of more than 32%)? Makfa flour may be an extreme case, but there are significant differences, well above 10%, in the prices of most grocery items.

One possible explanation is that supermarket managers don’t know what they are doing and base their pricing decisions on greed rather than calculation. Greed, however, may be a poor guide for profit-making. Once bitten, consumers may get twice shy about shopping at greedy outlets. With competition among Georgian supermarket chains increasing over time, greed and stupidity will be quickly punished.

Another possibility is that some supermarket chains are better than others in securing low prices from their local and international suppliers. For instance, this is the reputation of the largest US retailer, Wal-Mart. If this is the case in Georgia, we should observe some supermarkets being consistently cheaper than others in most food categories.

Finally, supermarket managers may be very smart guys who know how to lure consumers into their establishments. One common trick is to use so-called “loss leaders” – the term for goods advertised or sold at or below cost price. As explained on thekrazycouponlady.com, “the objective behind having a few of these for a sale period is to “lead” customers into the store with the premise that, once inside the store, the customers will also purchase full-priced items, making up for the profit loss.”

It is indeed quite common for shoppers to succumb to the impulse and fill up their shopping carts once they get into a store. But smart shoppers – hopefully, there are some of them in Georgia – can do much better!!! Why not hunt for “loss leaders” and stockpile items that are sold at rock bottom sale prices? Outsmart supermarket managers, buy cheap and avoid paying the full price every time you run out of a product!