Supermarket Price Guarantees – and then there were three

(by Morten Hviid) Sainsbury’s has now joined its two larger rivals, Tesco and Asda, in offering consumers a price guarantee with an associated possible refund. An interesting aspect of the three guarantees is that they differ on fundamental aspects. Asda promises to beat the rivals by 10% and the guarantee is valid even if Asda has the lower price, so long as this is not 10% below the lowest price rival. Tesco for a short while offered to refund double the difference, though they have now restructured the offer to simply match. Sainsbury’s also promise to match, but their added twist is that rather than the consumer having to do something actively, such as getting onto a website to key in details about their receipt, the refund is printed out at the till when checking out. Sainsbury’s guarantee thus takes the direct hassle out of claiming any refund. The indirect hassle of actually storing and remembering the coupon still remain.  What are the likely effects of the guarantee introduced by Sainsbury’s?

The lack of direct hassle removes any concern that the guarantee enables the stores to discriminate between those consumers who cannot bother to use the guarantee and those that a more active. On the other hand, one of the many restrictions on the guarantee relates to the use of the coupon which is printed out automatically at the check-out. Not only is this coupon not redeemable until the next time the consumer shops, but it is also only valid for two weeks. Hence only those who shop often and who remember to bring the coupon with them will actually obtain a discount.

The guarantee may signal to consumers that Sainsbury’s have low prices. But then the other big supermarket chains are sending the same message about their prices. The guarantees generally relate not to the individual products, but to the basket bought by the consumer. This is a feature not allowed for in any of the current theoretical models. The fact that more than one product is involved allows “swings and roundabouts” to mask any difference in individual prices. When this is combined with differences in shopping patterns between loyal customers of the different supermarkets, it is perfectly possible for Asda to be 10% cheaper than rivals on the products which are typically purchased by its core customers and Sainsbury’s to have similar prices to Asda for the products typically purchased by its core customers. But where does that leave the consumer?

As is so often the case with these guarantees, Sainsbury’s comes with a large number of restrictions. Indeed the terms and conditions for the guarantee run to seven pages. It is reasonable to expect these to be designed to guard against surprises in rival supermarkets pricing patterns leading to large pay-outs. Sainsbury’s guarantee is no exception. For example for promotions at rival supermarkets such as multi-buy deals, the consumer needs to know exactly what form these take. The implied price of a two-for-one offer is only relevant to Sainsbury’s price guarantee if the customer in fact purchased at least two units. Secondly, the cap on the refund at £10 per shop offers the ultimate protection for Sainsbury’s. The cap in combination with the coupon not being valid until the next shop raises an interesting question about consumer behaviour. To obtain the refund, the consumer, who has been over-charged, has to return to store it now has proof is more expensive. If the consumer always remembers to bring the refund and this is less than the £10 cap, one imagines that every time the consumer returns to the store, it will get a coupon and so it is unaffected by the higher prices. If the refund is more than £10, matters may be different.

So what is the likely effect of the guarantee? It really depends on how consumers react to be given a coupon. If they infer that Sainsbury’s is a more expensive place to shop, they may decide to go elsewhere in the future. If they feel reassured, then they may shop there more. If consumers are dispassionate, they will buy any brand they need since they can be reassured that they cannot get a better deal at another large supermarket chain. This essentially takes branded goods out of the decision on where to shop. However, if Sainsbury’s consumers no longer worry about the posted price of branded goods, why would Sainsbury’s ever have the lowest price on these brands? For branded good where the price guarantee is not activated, Sainsbury’s could benefit by at least matching its rivals. This will ensure that the customers paid as much as possible without the rivals offering a better deal. And this does not even allow for the added benefit that where the rival was cheaper, the consumer is offered a coupon which requires the consumers to return to the store in the future. If they forget to redeem the coupon, more will be sold at the higher prices without the associated later refund. If in addition consumers are susceptible to impulse purchases, the coupon may simply pay for itself in the revenue obtained from those extra sales.

It may all sound a bit complicated to analyse, and  there are a lot of uncertainties in how consumers will react to the coupons, but it is difficult to see what incentive Sainsbury’s would have to keep prices on branded goods low. These guarantees may reassure consumers that they are getting the best deal and they are likely to be right. But the best deal is not the same as a good deal. With the guarantees in place across the majority of chain-store food retailers, if they really reassure the loyal customers and thereby stop them looking for better deals elsewhere, then supermarkets have little incentive to set low prices.

One Response to Supermarket Price Guarantees – and then there were three

  1. ueanbs says:

    Hi! I found this post really interesting and thought I should mention that Professor Paul Dobson from Norwich Business School held a lecture in November about how while the rise of supermarket special offers is positive for the consumers, they also carry the risk of promoting the unhealthy options. I can see from the post above that the price guarantee with a possible refund is a good scheme, but will these lowered prices that they are competing with be on the healthy foods? Here is the Youtube advert: http://www.youtube.com/watch?v=LBXjX80bKbs

    Please take the time to read a few of our blog posts as well: http://www.ueanbs.wordpress.com

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