Organized retailer’s big advantage over small stores- Loss leader strategy

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Now, coming back to retailers, loss leader (keep in mind, they are products) must have some characteristics,

1. A loss leader should never be placed near to entry point of store or section, may be placed at the back of a store, so that buyers walk past racks of other displayed goods which have higher profit margins. Here, in order to access mangoes, buyer has to go through many vegetables and food racks available in section.

store on road

2. Usually low priced products those are purchased frequently works as loss leader item. The reason is very simple; these products provide maximum foot falls to stores. And, they are kept with other products for which buyers do not think much before purchasing. So in our example, mango is right cost leader, as while visiting for cheap mangoes, buyer will also purchase banana or apples without much thinking. But same is not true for refrigerator, as buyer will take discounted refrigerator, without considering normally priced TV or washing machine. Another reason for choosing this kind of products it that consumers are aware of the usual price and can easily figure out that the offered price is a good bargain.

3. Items offered as loss leaders are non durable in nature and often limited in number, which discourages stockpiling by customers. A retailer must subscribe to this method of selling on a regular basis in order to compel customers to make repeat visits.

4. Cost leader may be bundled up with other normally priced products.

Now I come to advantage to big retailers over small mom & pop (kirana) stores, this strategy can be taken up by those with,

1. Deep pockets so that they can wait for some period when profits remains low or even small loss to develop customer base.

2. Large number of assortments (products), so that consumer can buy many other things of his need along with loss leader

vegetables at small store3. Relatively large stores, where consumer himself walks through product racks and picks them up himself instead of asking seller for particular products

Now our kirana stores possess none of these characteristics, they are neither wealthy enough to hold inventories of large number of assortments nor they have large enough space to let customer move through store aisles to stimulate buying. It is extremely difficult for any retailer to complete with store perusing loss leader strategy. If it goes in price war with later one, both will loose, but swallowing these losses will be tough for small store.

In USA, some small retailers tried to compete with loss leaders by purchasing these low margin goods from competitor’s store itself and to sell in their own shop at no profit or very small. In addition, they can provide some services over big retailer e.g. home delivery etc. to make profit also. In this case, by purchasing only loss leader goods, they hit at very core of strategy which seeks to make money through sell high margin goods along with loss leaders. This strategy got some successes in US to counter big retailers, though I am not sure about India how this strategy and counter strategy will shape up.

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