Roy Den Hollander

1. Roy Den Hollander Economics Super G
Super G is a retail grocery chain. Super G’s strategy is to expand throughout the
continental U.S. and maintain maximiziation of profit. Recent industry trends of customers
preferring large stores, consolidation of ownership, increased competition in city markets and the
direct relation between profitability (measured as a return on capital) and market share require a
change in Super G’s tactic of entering a new market with small acquisitions, which bears on
Warfield’s decision whether to purchase Big Value Stores and/or Pacific Grant or neither.
Consumer Preference The percentage of industry sales from large, high-volume stores
($1MM+ sales) grew at an average annual rate of 3.5% from 1948-54 and 3.25% 1954-58 (the
good old days). While the rate appears to be decreasing, chains with over 101 stores garnered
94% of their sales from large stores. The increase in sales with store size indicates economies of
scale of Super G should avoid acquiring additional stores with sales below $1MM. Larger stores
also meant larger periods of profitable operations.
Consolidation Large chain firms can enter a city market or prevent entry by reducing
price against a small competitor even if the rational action within that market is to maintain the
price level. When looking over many city markets, it is profit maximizing in the long run for the
chain to maintain a reputation of undercutting smaller rivals. Large, consolidated firms will drive
smaller rivals out, but such practice would not be rational against large rivals that compete in
many of the same markets. Top 20 chains could also effectively undercut the smaller chains and
unaffiliated independents because of cost advantages in large scale buying and merchandising.
Since firms with 5 stores or less account for 50% of the sales (Exhibit 7) of the market, Super G
should exploit its advantages of being a large chain by concentrating on competing in markets that
predominate with small size firms.
Concentration As the top 20 firms rush to the city markets, over-capacity may result
which would deter possible entry by Super G later on. In this sequential competition, Super G
would be best served to enter markets without excess capacity so when over-capacity occurs,
Super G can benefit from that entry barrier.
Profitability Super G’s profitability as ROC depends on its market share within a
particular city. As market share increases, profitability increases but at a decreasing rate. The
optimal area appears between 15% and 20% of market share. Increased market share will still
increase profitability but by a smaller amount.
Although 51% of the Atlantic City market is controlled by top 20 chain firms, implying
that Super G will not have an advantage over large firms as it does over firms with 5 or less
stores, the acquisition of Big Value will still provide Super G with 10% of the market. Super G
and the other top 20 chains could increase their share by undercutting the many small
independents. Above all, Dobie Gillis’ fathers into bankruptcy. A share of around 15% would be
optimal for Super G on a return on capital basis. Perhaps an additional acquisition or two to
assure Super G’s contribution to overcapacity and with the little guy gone, the top firms in the
market will have created a barrier to entry.
Bakersfield, however, is nearly virgin territory for the top 20 chains. Super G could enter
this market and use its advantages as a large chain to pursue a signficant fraction of the 80%
market share held by small firms. Super G should rule out acquiring Pacific Grant because some
of its stores are too small - not evern $1MM in sales. Other top 20 chains will most likely enter
allowing all to create overcapacity which could act as a future barrier to entry.