Roy Den Hollander

1. Roy Den Hollander Economics Super G
Super G is a retail grocery chain with a strategy to expand throughout the continental U.S.
while maximizing profits. Recent industry trends of customers preferring large stores,
consolidation of ownership, increased competition in city markets and the direct relation between
profitability (measured as return on equity) and market share require a change in Super G’s tactics
of entering a new market with small acquisitions, which will influence Warfield’s decision whether
to purchase Big Value Stores and/or Pacific Giant 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% from 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 implies
economies of scale (return or sales would be a more accurate measurement but earnings for the
top 20 are not given), so Super G should avoid acquiring additional stores with sales below
$1MM. Larger stores also mean longer periods of profitable operations.
Consolidation Large chain firms can enter a city market or prevent entry by reducing
price against a small competitor even when 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 can
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 of the market (Exhibit 7), Super G
should exploit its advantages of being a large chain by concentrating on competing in markets that
predominate with small size firms.

2. 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 ROE 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. Beyond that, 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 continue to increase their share by undercutting the many still
existing small independents: drive all the Dobie Gillis’ fathers into bankruptcy. At some point
with the little guys gone and existing overcapacity, the top firms in the market will have created a
barrier to entry, which may enable them to rip off those middle class housewives.
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 an optimal fraction of the 80%
market share held by small firms. Super G should rule out acquiring Pacific Giant because some
of its stores are too small - not even $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.