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 leading a reactionary price rise.
This is precisely what we are going to 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, 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 market in trouble, namely:
- the acceptability price;
- 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 with prices and offers offered by their competitors, which leads to a collectively almost suicidal price war.
The “false” competitive price then becomes the new price standard., until an actor decides to propose an even more aggressive offer, which continues to lower the price, to the great 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 the competition is eliminated, the main actor or actors end up agreeing more or less consciously on much higher prices, to the great displeasure of the consumer who will have taken advantage of false prices or promotional codes galore 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 it therefore adapts to this standard. From then on, any actor who would try to rectify the price in order to cover its costs, will be accused of being "too expensive", or even of having bad intentions, or even of a falsely premium product.
Which brings us to the perceived value of a product, versus its real value.
The decrease in the perceived value of a product
A restaurant is made up of a part related to service, and a part related to food. The whole also includes a dimension related 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 price 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 vein, a pint of beer will sometimes have the same perceived value whether it is served at the bar without prior cleaning of the glasses, without service, with a long waiting time and questionable quality, as a beer brewed on site, served at the table, by a trained waiter, etc. However, the end consumer could be put off by a higher price for what he considers to be the same product.
So there is a challenge related to the experience and how to make the customer understand why a sandwich costs as much as a dish, or why a 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 and its processing are expensive, to align with the prices of businesses whose food costs are much less expensive. And if the place that has a very low food cost offers service, at false prices or at least very low prices, the "quality" business (to put in quotation marks, because it is sometimes a question of point of view) will inevitably end up closing, which also leads to a reduction in the diversity of the offer, to the detriment of the consumer.
Finally, one last hypothesis could explain to what extent 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 on debt, which certainly allows for the diversification of supply and the emulation of a market, but which has the disadvantage of leading to fierce competition on a financial and economic basis which would be chimerical. And this could just as well concern companies boosted by investment funds as indebted VSEs which would survive through inertia.
Thus, in a context of price war, we can imagine that a certain number of very small businesses 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 would practice the "real" price based on a calculated cost price, on the timely payment of their charges, and on the minimum respect of social law, at best of the fair 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.
A final factor that can negatively influence an economic market such as that of catering, and it is probably the factor most underestimated by most entrepreneurs who would like to launch themselves into such a sector, is the haphazard pricing by economic players, 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 hazardousThe first reason is of course linked to the fact that this 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 too low a price without knowing that he will not cover his 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, either most often because it is not profitable enough so that the entrepreneur can lead a normal personal life.
In the meantime, other new entrants have done the same, have aligned themselves with the same prices, and the "zombie" companies follow one another and resemble each other in a sort of generalized Ponzi, with the majority of them having the same disastrous fate.
In this specific case, the consumer can actually benefit, because he unknowingly benefits from low prices (objectively low in relation to the rules of profitability, I am not talking here about consumer purchasing power), and which can be maintained only because new entrants perpetuate these prices at the cost (it must be said) of a cessation of activity in the long term, 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 that interpret social law in their own way, that find ways to pay fewer contributions, or that source products whose production is not very fair.
I speak of all this coldly, but certain choices made by the consumer are obviously understandable and dependent on their purchasing power, and on many other factors linked to economic reality.
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 costWe saw this in particular with the launch of food delivery marketplaces.
- Disadvantages : In the long term, if competition is eliminated, prices can increase significantly, reducing the benefits for consumers. This has been seen in particular when restaurants have adjusted their sales prices on platforms, taking into account the marketplace commission.
For companies :
-
- Small enterprises : Small businesses often suffer the most because they don't have the same financial resources as large chains to sustain 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.
- For the Market :
- Market Concentration : A prolonged price war can lead to increased market concentration, where a few large firms dominate, reducing diversity and innovation.
- Barriers to Entry : New firms may be discouraged from entering the market because of the difficulty of competing with artificially low prices.
Coping Strategies
So how do you deal with what I call "fake" prices when you're an entrepreneur? The task is frankly very complicated. Here are some commonly accepted ideas:
- Differentiation : Rather than competing on price, companies can focus on the differentiation of their offer, by highlighting quality, customer experience, or unique products. We return here to the concept of perceived value, which must be improved. However, beware of the rejection effect of offers judged to be "snobbish", increasingly frowned upon in the current context of economic crisis.
- Loyalty of the clientele : By creating loyalty programs and by providing exceptional customer service, companies can encourage long-term loyalty, thereby reducing customer sensitivity to price. This means focusing a large part of the efforts on the customer experience, on the quality of the product, and on controlling the value chain. For example, for a coffee shop, a customer will be more likely to come back to consume at the same place even if he pays more than elsewhere if he has a good memory of the experience, from the welcome to the moment of payment.
- 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 allow competitive advantages and internal optimizations without having to lower prices, or by lowering them a little if necessary, if we manage to cut costs, especially 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 the catering industry where no training is necessary or required to get started, there are some coping strategies, like those that I have been able to state here, but they remain simple reflections which still deserve to be considered, and which are not necessarily the panacea.
Among them, we find in particular differentiation and innovation, which can offer alternative ways 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, team training to raise their awareness both in management and to improve the customer experience, and finally the hunt for hidden or dispensable costs.
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