Carrefour vs Exito: Who will win?

Since last March, Colombian consumers have witnessed a no-holds-barred war between the two most important retail chains in the country: Carrefour and Exito. It all began with the aggressive comparative advertising launched by the former as part of its new campaign “Lowest Price Guarantee.” Beyond the legal disputes triggered by Exito’s defensive reaction, it is interesting to analyze this situation through the lens of pricing strategy concepts: What are Carrefour’s true intentions? How does this move affect the competitive map of hypermarkets in the country? Who has the upper hand?

Promotion war
Since Carrefour’s arrival in Colombia in 1998, the fight to position itself in consumers’ minds as the cheapest hypermarket had been waged using the traditional weapon: periodic price promotions. Each chain has traditionally had its own calendar of thematic promotions (anniversary, special price days, Mother’s Day, etc.) and also made sure to respond to the competitor’s promotions. This has meant that almost all year long, both chains have some type of promotion running, offering discounts on some of their product lines. These promotions increase customers’ price sensitivity and destroy value in the market, since most consumers postpone purchases to promotion days and stock up on non-perishables, generating a later fall in sales on non-promotion days. In fact, according to a study conducted by McKinsey for the Coca-Cola Retailing Research Council of Latin America, hypermarket price promotions explain only 8% of the perception of economy that customers form about a given store. The remaining 92% comes from staple product prices (destination categories), price variety, store atmosphere, and communication.

Everyday low prices
And everything indicates that Carrefour realized this. In early 2007 it decided to focus on an “everyday low prices” scheme to build the perception of being the cheapest, instead of continuing the practice of periodic price promotions. This shift in its pricing strategy has included activities such as direct price comparisons with Exito in stores, and virtual price comparisons with several competitors on its website quieneselmasbarato.com. But perhaps the most representative element of its new strategy is its low-price commitment, where—through a customer service hotline called the “red phone”—it promises to refund the difference if a customer finds the same product cheaper at another store.

Faced with this new playing field, what can Exito do? Its initial reaction was to respond in kind, copying the giant receipt comparisons at the entrance of its stores. However, it decided to discontinue this practice and sue Carrefour for misleading communication. It even created a website called quienterespeta.com, in response to its competitor’s equivalent, explaining why it decided not to keep responding to the aggression of comparative pricing. But what lies behind these reactions from Exito? In general, no category can sustain two players competing profitably with the same cost-leadership strategy. When this happens, the situation becomes what is known as “competitive convergence,” in which two or more competitors fight to consolidate the same market segments by adopting the same strategy. And in the cases where this has occurred, a price war followed, with the surviving company being the one with the best cost advantage.

Carrefour was the first to publicly commit to offering the lowest prices always. This means that regardless of how aggressively Exito responds, Carrefour will do whatever it takes not to disappoint its customers by failing to fulfill its promise. Had Exito continued its eye-for-an-eye response, the price war would probably have become frontal, long, and costly for both companies. And who knows which of the two French chains would have won, depending on who held the greater cost advantage. Apparently, Exito has decided to avoid this competitive convergence and has focused its communication on its philosophy of excellent customer service and constant willingness to help.

What will happen?
It is still too early to predict how this war among Colombia’s large retailers will end. Although things seem to have calmed down somewhat for now, only Exito knows what its strategy will be in the near future. What is certain is that if the battle to be perceived as the cheapest intensifies, the only winners will be consumers. Carrefour is betting on being recognized as the cheapest always—and it will do whatever it takes to defend that position. Exito must decide whether to adapt, giving up the most price-sensitive customers, or whether to return to its differentiation strategy based on superior service and strengthen its position among value- and relationship-driven shoppers. At this moment, the decision is in its hands. If it chooses to enter a price war, there will be only one winner (the customer) and one runner-up (the one who survives the war). But if Exito decides to reposition itself and consolidate in other segments, both chains could win. Time will tell.