Playing Catch-up: Jump Starting Cascades with Massive Investment
In order to supplant companies currently providing a set of goods or services, it is necessary for a new company to attract some threshold critical mass of support to survive initially. This can be very difficult if consumers are well served by the existing options. As a result, in industries with high barriers to entry and relatively small variations in the level of service that can be provided, it is not unusual to see one main provider be allowed by potential competitors to take over a certain “territory.” This strategy allows this initial company to do quite well (assuming they are competent) due to the absence of major competition while would be competitors allow the initial company to incur the substantial costs associated with determining the local market tolerances for changes in variable and vendor behaviors. Only once the initial company begins to become complacent do other firms circle about and invest the capital required to enter the market. Now, however, the initial company can be caught hopelessly underdeveloped; they’ve not been able to develop their approach to the market with the same vigor as their new competitors because they’ve been concerned with running the business and have been liable for all associated costs. To survive in the new market, the initial company often has to expend great resources to maintain or regain customer loyalty.
Grocery stores often follow this narrative fairly closely. A small number of grocery stores can be supported in a given region and, despite advertisements claiming otherwise, no grocery store can deliver a product in the same region for a price substantially different than any other. So, assuming geographical barriers are surmountable (a reasonable assumption given the infrequency of grocery store trips), consumers are relatively indifferent and will gravitate strongly toward the most popular store. Word of mouth plays an important role. Of course, as this store grows in popularity, it becomes able to invest further in providing better service and products in a more welcoming environment. Whichever store this is can quickly become a runaway favorite. Other stores can quickly become lackluster. The trouble is, people are unlikely to change a habit like the location of their regular grocery shopping. They are even less likely to change it twice. To make matters worse, most everyone is already a grocery store customer; there are almost no new customers to attract to the industry. The original company has to win back its customers from its competition. It’s very difficult to begin this cascade for the reasons outlined above. As a result, initiating such a cascade requires massive investment in making a store more attractive.
This is currently playing out at Price Chopper, a grocery store chain in the northeast. For decades, the chain has experienced great success and has grown tremendously since the firm’s inception. In recent years, however, a once loyal crowd began to have growing complaints about the store. In my own home town (which happens to be the founding location of Price Chopper and the location of its corporate HQ) and in others, stores such as ShopRite and Trader Joe’s have moved into areas once controlled by Price Chopper. Now, Price Chopper has seen corporate layoffs and is working to win customers back in a big way. To this end, they have just announced a re-branding effort along with a revamp of stores which will cost the company about $300 million.
The following is a short article about the effort: http://alloveralbany.com/archive/2014/11/11/price-chopper-is-rebranding-itself-as-market-32