Cost Leadership One of the key requirements for achieving success as an ongoing price discounter is to create a cost leadership position. That means that the firm has built some cost advantages over their competition. This activity quickly highlights some of the practices that Aldi Supermarkets (a relatively new discount supermarket in Australia) have adopted to achieve a cost leadership position and provide ongoing longer prices to customers. ACTIVITY/TASK

General Instructions:

The following pages are mini cases which you need to comply as the final requirement. You are tasked to answer each case problem’s discussion questions (do not follow the standard case analysis report format). Each mini case problem answers will be worth 10 points each. The mini-case problems were selected randomly for you.

If you are using another software other than MS Word, e.g. MS Excel for the calculation problems, highlight the table then paste on the last page of the answer sheet as a picture.

Write all your answers in a separate file and then save the file as a PDF file and rename the file using the following format: YourSLMISNum[CaseProblems] e.g. 123458CaseProblems.

Format for your answer sheet will be:

Name of Student

Title of the mini case

Discussion Questions Answer

Upload the file using the assignment link in e-Learn.

Cost Leadership

One of the key requirements for achieving success as an ongoing price discounter is to create a cost leadership position. That means that the firm has built some cost advantages over their competition.

This activity quickly highlights some of the practices that Aldi Supermarkets (a relatively new discount supermarket in Australia) have adopted to achieve a cost leadership position and provide ongoing longer prices to customers.

ACTIVITY/TASK

Some of Aldi’s Practices – Designed to Reduce Costs

1.They do not pack the groceries into bags – you have to pack yourself

2.They do not provide free plastic bags – they sell plastic bags (for about 5 cents each)
3.Most of their stores are in ‘low-traffic’ locations, which enables cheaper rent

4.They do not spend much money on the look/design of the store
5.They tend to operate their stores with a limited number of staff

6.Most of their stores have little/no shelving (reducing set-up costs)

7.They have limited packing/handling of merchandise (often leaving products on pallets)

8.Most of their stock consists of lesser known (and therefore cheaper) brands
9.They sometimes buy and resell liquidated ‘clearance’ stock

10.The store manager tends to have a ‘hands-on’ role (such as helping sort merchandise).

QUESTIONS

1.Do you agree with Aldi’s cost leadership strategy or was there a better entry strategy that they could have adopted?

2.What else could they do to strengthen their cost leadership position?

3.Do you think that their approach is simply a price penetration tactic and they will increase their prices over time?

4.Do you think that the local major supermarket chains would be concerned about Aldi (either now or longer-term)?

5.How can the local major supermarket chains defend against Aldi’s threat to their ‘budget-conscious’ shoppers?

What Price Markup is Needed?

Many consumers are surprised at the (profit) margin that some retailers make on their sales. However, they do need fairly large margins to cover their significant rent and staff costs that they incur. In this activity, your task is to determine what average prices will need to be charged by these small retailers so they end up making a good weekly profit.

ACTIVITY/TASK

What price for chocolate?

1. Rent (per week) 1,000.00
2. Staff costs (4 staff X $12.50 p/hr X 50 hrs pw) 2,500.00
3. Depreciation of store fit-out pw (over a 5 year lease) 1,000.00
4. Total Weekly Fixed Costs
5. Forecasted Weekly Sales (units) 1,000
6. Average chocolate unit cost 3.00
7. Total Weekly Costs (Fixed and variable)
8. Weekly profit Target 1,000.00
9. Total Revenue Required
10. What average chocolate unit price would you set?

11. Therefore, what % mark-up should you use?
What price for a haircut?

1. Rent (per week) in a major shopping center 1,500.00

2. Staff costs (5 staff X $14 p/hr X 50 hrs pw) 3,500.00

3. Depreciation of store fit-out pw (over a 5 year lease) 1,000.00

4. Total Weekly Fixed Costs
5. Forecasted Weekly Sales (haircuts) 500
6. Commission paid to hairdresser per haircut 2.00

7. Total Weekly Costs (Fixed and variable)
8. Weekly profit Target 2,000.00

9. Total Revenue Required
10. What average haircut price would you set?

QUESTIONS

1.Complete the above tables.
2.If the retailer sets the price too high, will they be able to achieve their expected sales?

3.Would they be better off to try and increase sales volumes in other ways so that they could be more price competitive?

4.What costs could they look to better control?
5.Do you think that they will be competitive at the price that you have determined?

Pricing against aggressive competitors

ACTIVITY/TASK

Greg:

At this meeting we need to make a decision on the way forward with our pricing. Ever since the major supermarket chains started providing their customers with discount coupons for gas/fuel purchases (after spending $30 or more at their supermarkets), to use at our competitors, our sales have fallen by about 20%. We need to do something about this!

Gianna:

Well, why don’t we just match them?

Gary:

Because there are only a few major supermarket chains and they have already formed alliances with our competitor chains. So there aren’t really any significant alliance opportunities left for us.

Gianna:

OK, how about this approach, but why don’t we just honor their offers. That is, give anyone who has one of these competitive coupons a discount as well. We’ll make less money, but we’ll defend against these aggressive competitors.

Gail:

And we could improve our margins by adding a small amount to our prices across the board before the discount. These consumers just want the ‘perception’ that they are getting a good deal. So we add a little bit first and then give the coupon customer’s a discount.

George:

But either way we’re just reducing our margin. I think that we should forget about the coupons and the paperwork and simply give a gas discount if the customer spends $5 or more in our store. At least that way we get some extra sales out of it.

Gloria:

Actually, I would like to see us adopt a different pricing approach. I think that the market is getting cluttered with all these deals and special offers. So let’s just simplify things. Let’s be the chain that offers gas at a constant discount. This deal is for everyone, every time, with no receipts and no catches. I really think that the simplicity and ongoing value will appeal to a lot of consumers.

Greg:

OK team, we’ve got a variety of good ideas before us – so let’s what we should do.

QUESTIONS

1.Outline the benefits and risks of each of the pricing options discussed.

2.What would be your pricing recommendation? Why?

3.What general advice would you have for any firm/brand that is facing significant price competition?

Cost Leadership One of the key requirements for achieving success as an ongoing price discounter is to create a cost leadership position. That means that the firm has built some cost advantages over their competition. This activity quickly highlights some of the practices that Aldi Supermarkets (a relatively new discount supermarket in Australia) have adopted to achieve a cost leadership position and provide ongoing longer prices to customers. ACTIVITY/TASK
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