The price war and the practices of price predatory are well-known phenomena in various economic sectors, and the catering sector is no exception.

These strategies, although potentially beneficial in the short term for consumers, may have significant repercussions on the market, competitiveness and the diversity of available offers.

So in other words, these phenomena can not only affect businesses in the long term, but also consumers, by reducing the diversity of the offer, in affecting creativity which is the fruit of emulation and competition, and ultimately resulting in a reactionary price rise.

This is precisely what we will see in this article in which I reflect on these mechanisms, the motivations and consequences of these practices particularly in the sector of Restoration, encompassing restaurants, cafes, as well as street food concepts and lunch canteens.

First of all, let's define what are the price war as well as predatory prices, which are two mechanisms known in economics, before introducing other more or less hypothetical notions which are the fruit of my reflection, and which according to me could also influence a bad market, namely:

• the price of acceptability;
• the drop in perceived value;
• artificial survival through debt;
• and the irrational setting of prices due to ignorance of the profession.

The price war

Definition : Price war refers to intense competition Or companies continually reduce their prices to attract customers, eliminate competition, increase their market share.

This sometimes happens to the detriment of their margins, and this manifests itself through price reductions, frequent promotions, or special offers.

Typically, it can be BOGOFF offers in delivery suggested by marketplaces, promotions offered by restaurant reservation platforms for example in order to be highlighted, but also indirectly sponsored posts and others paid ways to thwart algorithms and get ahead of competitors.

All of this reduces the margin like a skin of sorrow, and to remain competitive, other competitors unfortunately have no other choice than to align on prices and offers offered by their competitors, which leads to a collectively almost suicidal price war.

The “fake” competitive price then becomes the new price standard, until a player decides to offer an even more aggressive offer, which continues to lower the price, to the greatest short-term pleasure of the consumer.

Price predation

Definition : Predatory pricing is a strategy where a company fixes its prices below the cost of production to oust competitors from the market. Once competition is eliminated, the company can then increase its prices to maximize its profits, since it finds itself in a monopoly, duopoly or oligopoly situation.

In the catering sector, this can translate into extremely low offers on certain dishes or drinks, often impossible to sustain in the long term without significant financial losses. Large fast food chains may have to practice this type of strategy to oust a competitor or reduce its market share, and we have also seen this in food delivery on marketplaces but also in passenger transport companies (VTC). ).

Once competition has been eliminated, the main actor or actors end up agreeing more or less consciously on much higher prices, to the great dismay of the consumer who will have benefited from false prices or promotional codes in abundance during the period of competitive instability.

The price of acceptability

This third notion, partly inherited from the previous two, is defined as the psychologically acceptable price that the consumer is willing to pay for a given product. It is therefore a notion which is linked to the perceived value of the product or service.

In a context of price wars and/or predatory prices, the consumer thinks that the false price is the norm, and so it adapts to this standard. Therefore, any player who attempts to correct the price in order to cover its costs will be accused of being “too expensive”, even ill-intentioned, or even a falsely premium product.

Which brings us to the perceived value of a product, versus its real value.

The decline in the perceived value of a product

A restaurant is made up of a part linked to service, and a part linked to food. Everything also includes a dimension linked to marketing positioning, geographical position, space allocated to the room, etc.

Or, a sandwich containing beef or chicken fillet with vegetables will have almost the same cost as a plate container containing the same products. Except that the end customer could perceive the plate as much more rewarding, therefore its acceptability price will be much more elastic.

In the same spirit, a pint of beer will sometimes have the same perceived value, whether it is served at the bar without prior washing of the glasses, without service, with a long waiting time and questionable quality, as a beer brewed on place, served at the table, by a trained waiter, etc… However, the final consumer could be put off by a higher price for what he considers to be the same product.

Therefore, there is an issue linked to the experience and the way of making the customer understand why this sandwich costs as much as a dish, or why this drink costs more in this place than in another.

Thus, in a context where false pricing becomes the norm, it becomes particularly difficult for a business whose the raw product as well as its processing are expensive, to align with the prices of businesses whose food cost costs much less. And if the place which has a very low food cost offers service, at false prices or in any case very low prices, the “qualitative” business (to be put in quotation marks, because it is sometimes a question of point of view) will end necessarily by closing, which also results in a reduction in the diversity of the offer, to the detriment of the consumer.

Finally, a final hypothesis could explain the extent to which a market can be affected and lead to the bankruptcy of many of these players: artificial survival, which is more relevant than ever with the various bank debts incurred after 2020.

Artificial survival through debt

I broadcast here the hypothesis that many companies survive by debt, which certainly makes it possible to diversify the offer and emulate a market, but which has the disadvantage of leading to tough competition on a financial and economic basis which would be chimerical. And this can equally concern companies boosted by investment funds, as well as indebted VSEs which survive due to the effect of inertia.

Thus, in a context of price war, we can imagine that a certain number of very small companies and independents practice aggressive prices based themselves on false initial prices, “waiting for better days”, in order to convince the end customer to consume their products, and this without being profitable, thus surviving for several years both on debt and on personal sacrifice (working time, no private life, etc.).

This phenomenon could lead to other players to do the same in order to remain aligned with the market price, which would therefore create a vicious circle leading to cascading bankruptcies, both for “zombie” companies and for companies that practice the “real” price based on a calculated cost price, on the timely payment of their charges, and on minimum compliance with social law, to the best of the equitable aspect of their supply. Indeed, these companies that we would consider in this reflection as “square” companies, to speak vulgarly, would in fact no longer be competitive.

One last factor can negatively influence an economic market like that of catering, and it is probably the factor most underestimated by most entrepreneurs who would like to launch into such a sector, it is the setting of prices. risky by economic actors, for an unsuspected reason: ignorance.

Irrational pricing due to ignorance

When a new entrant starts his activity, a fortiori a VSE, there are strong reasons to believe that the setting of its prices is hazardous. The first reason is of course linked to the fact that it is a new entrant who therefore wishes attack a market by offering aggressive prices to begin with, even if it means rectifying later, and the second reason is linked to his lack of knowledge of the market, hidden costs, and the sacrifice that this or that activity can represent.

Typically, a newly installed restaurant can practice a price that is too low without knowing that it will not cover its costs, and telling himself that he will see later. This lasts for years, the company survives through debt or personal sacrifice while being more or less profitable, and the entrepreneur ends up stopping his activity either because it is not profitable, or most often because it is not profitable enough so that the entrepreneur can lead a normal personal life.

In the meantime, other new entrants did the same, have aligned themselves on the same prices, and the “zombie” companies follow one another and look alike in a sort of generalized Ponzi, with the majority of them, the same disastrous fate.

In this specific case, the consumer can actually benefit, because he unknowingly benefits from low prices (objectively low with regard to the rules of profitability, I am not talking here about the purchasing power of the consumer), and which can be maintained only because new entrants perpetuate these prices at the cost (it's fair to say) of a long-term cessation of activity, and of a personal sacrifice over several years.

Moral and ethical questions then arise as to whether it is good to consume the products or services of companies which interpret social law in their own way, which find ways to pay less contributions, or which would source products whose manufacturing is not very fair.

Consequences of false prices

For Consumers :

• Benefits : In the short term, consumers benefit from lower prices, which increases their purchasing power and access to a variety of products and services at a lower cost. We saw this in particular with the launch of food delivery marketplaces.
• Disadvantages : In the long run, if competition is eliminated, prices may increase significantly, reducing benefits to consumers. We saw this in particular when restaurants adjusted their sales prices on the platforms, taking into account the marketplace commission.

For companies :

1. • Small enterprises : Small businesses often suffer the most, because they don't have the same financial resources as large chains to support low prices over a long period of time.
   • Large companies : Large chains can benefit from their ability to absorb losses in the short term, but they also risk seeing their profit margins decline sustainably.
2. For the Market :
   • Market Concentration : A prolonged price war can lead to increased market concentration, where a few large companies dominate, thereby reducing diversity and innovation.
   • Barriers to Entry : New businesses may be discouraged from entering the market due to the difficulty of competing with artificially low prices.

Adaptation Strategies

So how do you deal with what I call “false” prices when you are an entrepreneur? The task is frankly very complicated. Here are some commonly accepted ideas:

1. Differentiation : Rather than competing on price, companies can focus on the differentiation of their offer, by highlighting quality, customer experience, or unique products. Here we come back to the concept of perceived value, which must be able to be improved. However, beware of the rejection of offers deemed to be “snobbish”, which are increasingly frowned upon in the current context of economic crisis.
2. Loyalty of the clientele : By creating loyalty programs and by providing exceptional customer service, businesses can encourage long-term loyalty, thereby reducing customer price sensitivity. It is therefore a question of concentrating a large part of the efforts on the customer experience, on the quality of the product, and on the control of the value chain. So, for a café for example, a customer will be more inclined to return to consume at the same place even if they pay more than elsewhere if they have a good memory of the experience, from the welcome until the moment to pay.
3. Innovation : Innovation in menus, service methods, use of technology, economies of scale, use of production machines, negotiation with suppliers, means of constantly monitoring costs, etc. … All of this can enable competitive advantages and internal optimizations without having to lower prices, or by lowering them a little if necessary, if we manage to cut costs, particularly hidden costs.

Conclusion

The price war, predation by prices, perceived value at half mast, subsistence through sacrifice and debt and haphazard pricing are all factors that can affect several sectors of goods and services, particularly the catering sector.

They may certainly provide short-term benefits to consumers, but they also involve significant risks for diversity, the health of the market, the maintenance of employment and the maintenance of ultimately consistent prices.

As an entrepreneur, it would be good to think carefully about pricing strategies, balancing the appeal of low prices with the need to maintain profit margins and to ensure fair competition. And there is on this subject, in my opinion, real collective work to do.

In a particularly difficult and aggressive context like the one we have been experiencing for several years, particularly in catering where no training is necessary or required to get started, there is some coping strategies, like those that I was able to state here, but they remain simple reflections which still deserve to be looked into, and which are not necessarily a panacea.

Among them, we find in particular differentiation and innovation, which can offer alternative paths to succeed in a competitive market without resorting to destructive practices, but also communication in order to improve the perceived value of the product or service, management training for the entrepreneur, training teams to raise their awareness both about management but also to improve the customer experience, and finally the hunt for hidden or dispensable costs.

Photo illustration source