Monday, May 12, 2008

Sunday dollars+sense: Dumb rich shoppers

Wondering where to shop?

The Treasurer has taken time out from preparing the Budget to offer advice.

ALDI has better prices than just about anywhere else (just as Coles has worse petrol prices, according to his Petrol Prices Commissioner).

Here’s Wayne Swan at a pre-Budget press conferences:

“I’ll tell you what, how many people here shop at Aldi?”

“I can tell you this, out there in my electorate, a lot more do. You want to know why? Because they get a better price.”

He is right. Although such plain speaking from the top is unusual.

How does Aldi get its prices so much lower? ...

Partly by stocking only one brand of most of the things it sells – usually its own.

That keeps prices down by cutting shelf space and the floor area that the store needs to rent.

Some big brands it has to stock, such as Nescafe. To many of us Nescafe is instant coffee.

So Aldi has done what any retailer serious about low prices would do and sourced its Nescafe from the cheapest place it could find it.

Which is Indonesia.

It tells people so. It is Nescafe coffee in a Nescafe jar, but just from somewhere else where the maker, Nestle charges cheaper prices.

When it started, Nestle hit the roof. It withdrew its supplies of “Australian” Nescafe and Milo in protest.

Its complaints were comical.

It said the Nescafe sold in Indonesia had “not been blended specifically for Australian tastes”.

Selling perfectly good Nescafe as if it was Nescafe would cause “confusion”.

Its real complaint probably wasn’t as much confusion as knowledge.

When Australian consumers realised how much more they were being charged for a near-identical product they might feel they were being ripped off.

Nestle isn’t alone. Until three years ago Arnotts sold near-identical biscuits to its own cheaply at the bottom of supermarket shelves using the brand “Sunshine”. It hoped its loyal customers wouldn’t notice.

The trick in business is to charge rich customers who want your product a high price while at the same time making big sales to poor customers by keeping another price low.

Economists call it “price discrimination”. Aldi has exposed the way it works.

Sometimes it works even if it is blatant.

Retailers say they can more money selling lettuce by dividing it in two separate bins side by side. One has a high price - for the well-heeled - and the other a low price - for the battlers.

The well-heeled aren’t too bright.