Now that we know what supermarkets are and why they became a dominant retail organization, we can move to the next topic, consumer value. Discussion about the emergence of the supermarket gave us a background to understand how supermarkets build consumer value. There are four dimension in consumer value by modern retail. The first dimension is time. As we know, supermarket can meet consumer needs with one-stop shop, services, and convenience. Low price, also, is a key factor in supermarket value strategy. As you remember from module two, value can be roughly represented by the quality over price ratio. By lowering price, we can increase the value. To this purpose, supermarket not only keep low prices, but often offer discounts, say promotion, and many other stuff. Variety, that is the size of the assortment and the wide selection of production, is the third dimension. Note that researchers found that too much variety can be confusing for consumers, who become unable to compare all choices and process all information. This implies that selection is a critical skill for supermarket. And finally, quality is the last, but not the least dimension. From a supermarket perspective, quality is giving consumer what they are willing to pay more for. In fact, the willingness to pay, the consumers signal how much they like a product. In this way, the supermarkets have a clear incentive to quality. So, time, price, variety, and quality are the mix supermarkets used to produce value for consumer. However, the proportion of such mix can differ greatly from one chain to another. For example, a discount retailer such as Lidl put more emphasis on prices even if this means a little bit less services for consumer, has smaller assortment without some important national brands. On the other hand, large stores like Carrefour rely on high quality, service, and assortment to deliver value even if their price is a little bit higher. As we will see in lesson two of this module, the entire organization in the supply chain of all supermarket depends on the choice of the value mix. Let start with normal trade, that is the retail business organization before the emergence of supermarkets. A normal trade supply chain look pretty much like this. We have, on one hand, the farmers and on the other hand the, consumers. By convention, we said that the farmers are upstream and consumer, downstream, as the food flows along the river to go from farmer to consumers. Farmers are specialize. Each one producing only a subset of all products consumer want. Farmers sell their product to a set of intermediaries that aggregate supply. Cooperatives or other middle men take the products from the small farmers and aggregate it. Local processor and short supply chains are alternative outlet for farmer production. Middlemen sell to the so-called procurement market. That is the market where agricultural output are sold. Usually, they are located nearby production area. Buyers in the procurement market include large processors, trade, or exporters. Traders sell their product to the terminal market. That is the market where wholesalers buy. Usually, terminal markets are located nearby cities. Wholesalers sell to shops, who sell to consumers. As you can see, we have three distinctive functions here. Production and aggregation, the green area where agriculture goods are produced and collected. Then, we have transferring where products are transferred from rural to consumption area, the blue area. Then, we have distribution, represented by the purple area, where products are delivered to consumers. Of course, real supply chains can be more complex than this but our simple example is sufficient to illustrate the general principle. Normal trade supply chains have pretty distinctive characteristics. First, their low degree of coordination. Spot markets play an important role here. Remember, for example, the discussion in module 11. Also supply chains are separated and specialized by product. For example, the dairy supply chain is separated from fruit and vegetable. The organization of the two supply chains is different, shops and markets are separated. And also, value is built on margin. This is the well-known principle -- buy low, sell high. Each firm in the supply chain gains profit by adding a mark-up to the production cost. Of course, mark-ups are cumulative, meaning that the final price paid by the consumer is the sum of all the costs and profits along the supply chain. Now, let's compare normal trade with modern retail. In modern retail, many steps of normal trade supply chains are integrated by the supermarket chain. The supermarket buys directly from producers such as farmer, cooperative, middleman, or processor and take it directly to consumers. The functions of transporting and distributing are managed by the single firm, the supermarket chain. Specialized normal trade shops are replaced by the specialized large store. The flow of different products are aggregating the supermarket logistic platform. Inflows are organized by product. Each supplier brings its own product. But outflows, from the logistic platform, are organized by destination. That is, the outgoing truck carries all products that a given store needs regardless of what they are. Modern supply chains are different from normal trade. There is a high degree of vertical integration. The role of spot market here is really limited. Such integration, of course, require much capitals. Also, retail industry is highly consolidated. Few bandits control the vast majority of the production. For example, in Italy, food bandits trade the 75% of food. Also, the supply chain is de-specialized, meaning that many different products follow of the same logistic path. And finally, shareholder value is built on three factor: time, margin, and variety. Margin was just as in normal trade. Only here, margin are less important. Time is a driving factor. When you shop at supermarket, usually you pay for the goods cash. Unlike normal trade, supermarket do not grant consumer credit. Instead, supermarket's pay their suppliers with 30, 60 or even 90 days of delay. This means that efficient supermarket cash the sell price before they pay for the supplier for the good. This part has important implication. Revenues are available to supermarket for a given amount of time. This means that all this cash can be invested in financial activities or other profitable activities for a time going, from the day the sell price has been collected to the day the purchasing price is paid. In this time, the supermarkets gain financial interest on the entire revenue. This is a terrific competitive advantage. In principle, a supermarket could sell a product for a prize that is equal to the purchasing price and still get a profit from financial interest. The importance of time requires that product must move fast from the supplier to the consumer. A key consequence of this principle is that modern retail run all of their inventories, high stocks of product means that there are goods that are sitting in a warehouse without generating cash flow. Large inventories are therefore missed profit opportunity. We will see in lesson two the important implication of this principle for supply chain coordination, but now, let's see how supermarket build value on variety. To understand the role of variety, let's remember that modern retail supermarkets are one-stop-shops selling to basket shoppers. Basket shoppers are consumer who buy a large number of products at the same store. For example, their entire weekly grocery shop. Supermarkets objective is to maximize the profit from the entire basket. They do not care about the single product if the total product is maximized. This implies that supermarkets primary concern is the maximization of store traffic. That is the number of consumer shopping at the store. The more is the traffic, the more consumers would spend their money at the store. No traffic means no product to be sold. Traffic is built on consumer expectation. Consumers shop the store they think will give them the higher utility. The choice is based on expectation regarding price, all of these services assortment, and so on. In general, we might say it's the expectation of consumer, the driver of consumer value. Supermarkets can affect this expectation in many ways. For example, with promotion of sales or advertising. Of course, if a consumer, after driving to the store, discovers that in the reality is that expectations are not met, he will drive away to the next store. In this regard, consumer bounded rationality gives supermarket's some degree of freedom in their strategy. In fact a one-stop-shop carries thousands of products and consumers cannot process this much information in a quick visit to the store. Price and quality perfection are particularly important, as you will learn in module six with Professor Lee. This is how it works. First, the supermarket divide the product into two groups: drivers and complements. Drivers are the product that attract consumer to the store. You can find many example of drivers in any supermarket flyer in your mailbox. The consumer drives to the store because he wants to buy the driver for a cheap price. Supermarkets compete to attract consumer to the store using the drivers. For example, they can advertise that the driver is sold for a price that is lower even than the production costs, the so-called loss leader. Complements are all other product. The consumer goes to the store to buy the cheap driver product, but in order to save time, he will buy the entire basket including complements. A strategic pricing of complement can make sure that the supermarket makes a good profit. If the store manager is good, she will use limited price perception to make sure that the consumer do not even notice the increase in the complement prices. The setup technique used to achieve the maximization over the entire basket is called category management. The name indicates that products are managed as a category. So altogether, not individually. This is how supermarkets use variety to build value. As you can see, the supermarket acts as a monopolist with the constraint that the consumer must have incentives to drive to the store. As a retail manager say, competition end at the parking lot. Once you convince your consumer to drive all the way to your store, you can squeeze all possible profits out of him. Of course, shoppers came away. Well, this concludes lesson one in module 12. Thank you for watching this video. In lesson two, we will cover supply chain coordination, a very important topic and a good complement for today's lesson. Goodbye and-
