Kelvin Teo
"Prices of Tim Tam chocolate biscuits sold at a local supermarket exhibited a cyclical pattern of non-discounted and discounted prices
When I was younger, I used to follow my father during the eve of Lunar New Year to Chinatown close to midnight. Lunar New Year celebrations is considered a vital part of our chinese culture within our part of the world. What happens during the Lunar New Year pre-holiday season is that roadside stalls will be set up at the street lanes that ply along the shophouses of Chinatown. Such stalls sell anything from dried food and Lunar New Year goodies to clothing, apparel items and popular play things for children, especially the “pop pop” pellets (the one that children hurl on the floor and on impact, makes a “pop” sound). By the time we reached Chinatown, a large crowd had already gathered.
Basically, the crowd at Chinatown can be said to comprise of two kinds of shoppers. One who are doing their last minute shopping before Lunar New Year, and the others, are discount hunters. We counted ourselves among the latter. When the clock strikes midnight signalling the first day of the Lunar New Year, owners of the roadside stalls will dramatically reduce prices of their wares in what appears to be clearance sales. The eve of Lunar New Year is the last day for stall owners to ply their trade. Due to the fact that street lanes that intersect parts of Chinatown are closed to vehicles during the pre-holiday season, stall owners have up till the end of Lunar New Year eve to sell their wares, after which the roads will be re-opened to vehicles. The discounts could go as low as about 10% of the pre-holiday prices. This is the moment discount hunters have been waiting for – when stall owners give huge discounts in an attempt to clear their wares.
When I was older and living in a foreign country, being the avid discount hunter that I always was, I would observe the temporal (time) patterns of prices and discounts of one of my favourite nibbles – Tim Tam chocolate biscuits. The usual non-discounted price is around $2.90 (in Australian currency). The biscuits are priced at $2.90 for around one-and-a-half weeks, after which it will be reduced to $1.70 per packet. The expiry date for the Tim Tam chocolate biscuits was around 6 months away, so we can rule out quickly expiring biscuits as the basis for discounts because one-and-a-half weeks wouldn’t make a large difference in terms of storage time anyway. The same went for the supermarket brand of chocolate biscuits dubbed “Coles”. The usual price for one packet of Coles chocolate bisuits is $2.30. Discounts for the biscuits have been consistent at $1 per packet after one-and-a-half weeks.
The interesting question is what theories underlie the time patterns of discounts? The answer could be found in the field of behavioural economics which attempts to analyse consumer behaviour. From my observations, there are two types of consumers – the loyal type who loves the product, and more importantly, is willing to pay non-discounted prices for the item. It must also be pointed out that certain situations lead to such loyal customers forking out non-discounted prices for the items, and a good example of which is when they can only go on certain days to the supermarket or retail outlet. Thus, for example, it could be that friday is the day when prices of the items are reduced, but monday is the usual shopping day, which means they end up paying non-discounted prices for the item.
The second type of consumer is the discount hunter. Such consumers although can be considered to enjoy the product are not willing to pay non-discounted prices for them. They usually wait out for reduced shelf prices for the product before making purchases. Furthermore, these are the people who make trips to the supermarket or retail outlets only on days when shelf prices are predicted to be reduced.
Thus, what circumstances, or rather essential requirements lead to discount prices for products? First and foremost, there must be an excess in supply of such products. There must be two types of consumers, in which the loyal one exhibits constant demand for the product. The second type of consumer, the discount hunters, only exhibit demand for the product only under certain circumstances – when prices for the products are given discounts. Besides the requirement of the two consumers, there is a second important one – a pressure on the retailers to clear their shelves. The pressure to clear wares manifested during my experience in Chinatown during Lunar New Year eve where stall owners have to clear out everything by the next day, and gave discounted prices at the last moment to attract discount hunting consumers. A more extreme example happened during my experience in Queensland. A packet of mixed rice, meat and vegetables typically costs 10 – $11 from a food retail outlet in Brisbane’s CBD. When it was forecasted that a flood would hit the CBD, the prices of packed food dropped to as low $3 per packet – the food retail owners wanted to clear their wares and their outlets to avoid the floods. The floods did indeed hit the CBD!
However, in the supermarket’s case, the pressure to clear shelves is attributed to space constraints, especially when new stocks come in and space has to be made for them. The issue is that regardless of the reasons to clear shelves, the main aim is to entice discount hunters to purchase the items so that the shelves can be cleared. Thus, overall, the pattern of consumption is like this – consumers with constant demand for the product will purchase it even during periods of non-discount prices from the time the product hits the shelf. As time goes by, with what seems to be excess supply followed by the retailer’s desire to clear the shelves, dramatic discounts can be given, and this is where discount-hunting consumers come into the picture, although consumers with constant demand may get lucky on a discount day and purchase the product at discounted prices.
Basic economics tells us that when there is excess supply over demand, prices of the good will be lower, and if there is excess demand for a good that is in limited supply, prices will go up. In the case of discounted goods in retail outlets, there must initially be a huge supply of the good. Two types of consumers exist – one that exhibits constant demand for it, and is willing to pay non-discounted prices, and the second one, the discount hunter. However, if there is an excess supply of the goods, supply alone does not account for dramatic reduction in prices as observed in clearance sales. The pressure to clear wares is another important factor, and dramatic discounts are given to target discount-hunting consumers.
Thus, how discounts work is simply the interplay of goods supply, consumer behaviour and retail factors that determine prices over time. As it is, if one wants to enjoy discounts, it is obvious that his shopping trip has to coincide with the period of discount. Come too early, one has to pay non-discounted prices for the product. Come too late, the shelves would have been cleared by other discount hunters, or cleared entirely from the shelves by retailers to make space for new stock.
I think there is another factor to be considered: competition. One supermarket chain may slash the price of one product to entice shoppers, in hopes that they would spend money on regular items. In Australia, there are two major chains of supermarkets, and drastic discounts can be a method to grab shoppers who would otherwise visit the other chain.
It has been pointed out to me (though I have never made the effort to verify it) that one chain would give a discount that is similar to one made by the other chain the week before. I’m not sure of the rationale behind this though.
THe main two are Coles and Woolworths. I have been to both, but I noticed that the discounts came at different periods.
I was actually making an assumption of no competition because the Coles and Woolworths though in a suburb are actually quite far apart, I would estimate about 2 km away from each other.
And the discounts are actually staggered. It maybe that Woolworths have discounts for certain products, but Coles do not have. The rationale is clearance because the new stocks arrive weekly. There is no pattern to the discounts, and it has more to do with stock clearance more than anything else.
In any case, in an isolated case of a retail outlet without any competition, it will be consumer behaviour and pressure to clear stocks that determine discounts.
In the Lunar New Year example, the fact that the prices dropped simultaneously when the clock struck midnight indicates the pressure to clear wares.
Actually it is only when supermarkets are in close proximity to each other that they plan discounts one week after another. If not, they will go into a cut throat!
I delayed commenting because I wanted to watch The Gruen Transfer first (which has just finished airing), since they were going to talk about Coles and Woolies. I’m not sure if you can catch it on ABC iView where you’re at, but it would be worth a watch since it’s quite relevant to the discussion.
One statistic that was mentioned in the show was that 10% of shoppers would select which chain to shop at based on the discounts. If true, this may constitute a considerable amount of customers, and thus competition is a factor not to be dismissed in supermarket discounts.
As mentioned in the programme, one of the biggest advertising campaigns by Coles recently was their “permanent” price slashes (e.g. reducing milk to A$1 per litre). I’m not sure if this counts as discount (after all, it is probable that the prices will rise again… but in times of months), but no doubt they’re trying to force out competition, both against Woolies and other smaller grocery shops.
I don’t rule out factor of competition, but in my article, it is in reference to stand-alone shops servicing one area and more than one supermarket in competition with each other.
Either way, supplies versus demand, retail pressure to clear stocks and consumer behaviour (discount hunter versus cosntant customer demand) holds true for both cases of stand-alone retail outlet (without competition) and even with supermarkets close to each other (with competition).
You see, I am not surprised that 10% will select which chain to shop at based on the discounts, if I conduct a survey, i wouldnt be surprised to get that margin.
But there is a concept known as perfect information in economics, that allows consumers to make the best purchases, provided they have the best information. The question is yes, 10% responded they would select supermarkets based on the best discounts but how many would have that perfect information?
Which is why I pointed out that competition may be more relevant when supermarkets are close in proximity, and residents are better exposed to quality information, e.g. by phamphlets distributed by supermarkets to word of mouth about latest discounts from neighbours who have been to both supermarkets.
Otherwise, if supermarkets are far apart from each other in my case, we do not have enough information to select which supermarket has the better deal.
In the example of supermarket I am studying, residents do not have information on the discount patterns of both supermarkets. Me and my housemates included.
Although 10% would select the chain to shop at based on the discounts, not all 10% will have perfect information. At best, they will end up as opportunistic discount hunters where they hit a supermarket and cross their finger for a discount.
I did consider competition, but it can be clouded out by uncertainty of information, imperfect info on discounts, and secondly unpredictable fluctuations with time. And is only applicable if supermarkets are in close proximity. I am not saying it is not important, but it is only in certain circumstances that competition is a factor in determining discounts. I have no idea how to model this…for something quite unpredictable
Okay, maybe it’s just me being Singaporean, but I’d download the discount flyer online each week to find out the discounts in the supermarkets. Or at least, I’d scan through the relevant post in OzBargain, a website that has regular posts on discounts in Australia and certainly a post each week on the top discounts of supermarkets.
But it is unlikely that many people would do what I do, so your point about proximity for pamphlets will apply to a considerable portion of shoppers, thereby diluting the effects of competition.
By the way, I think NAR should change the CSS and fix the colour scheme for links. Both read and unread links are the same colour as the text, so it is not clear at all if there is a link.
Hi Jackson Tan,
We have already updated the CSS weeks ago. The colour for both read and unread links is blue. Maybe you can check out our other articles to verify this. If the same ‘problem’ persists, try purging your browser cache. You should be able to identify 3 links in this article: http://newasiarepublic.com/?p=30835
Okay, the links turned up alright for me there in the linked article, but the links in the comment are still black, e.g. the very link you posted in your comment.