Retail FPI | Supermarkets Slash Food Prices to Gain Market Share
Having experienced a temporary 1% spike in August, food prices are going down again. In the second week of September, ISET’s Retail Food Price Index dropped 0.7% m/m (compared to August 2016) and 2% y/y (compared to September 2015).
IN THE SPOTLIGHT
Compared to the end of August, the biggest prices declines were observed for coffee (-17%), apple (-15.5%), and rice (-14.3%). Prices moved up the most for the following food items: peach (35%), cucumber (17.2%), and eggplant (14.3%).
It can be noticed that 4 out of the 6 largest price changes were recorded for seasonal food products such as fresh fruit and vegetables. Rice and coffee are interesting exceptions.
IT’S COMPETITION, STUPID!
The primary cause of the movements in the prices of rice and coffee appears to be related to the competitive strategies employed by Georgian supermarket chains, three of which (Carrefour, Goodwill, and Spar) are included in our survey.
As discussed in one of our previous publications, supermarkets compete by using some of the staple goods as so-called “loss leaders”. Thus, the entire 14.3% biweekly decline in the price of rice is the result of one supermarket slashing the price of domestically packaged Supremo rice by more than 30%, from 2.50 to 1.65 Lari.
Similarly, the same supermarket started offering a more than 10% discount on Jacobs coffee, selling it at 10.55 GEL as opposed to 11.80 GEL the previous week. By selling rice, coffee (and, possibly a few other key staples) at or below cost, the supermarket in question may be hoping to attract bargain-seeking customers, who, once lured inside, are quite likely to purchase other products as well.
As a result of more aggressive pricing employed by some of the supermarkets, after a few months of convergence, we begin to observe a gradual divergence between the minimum and maximum Retail Food Price Indices, increasing the payoffs of those Georgian consumers who are willing to invest a bit of their time in bargain-hunting.