Undercover Economist

Why we should be grateful to Granny

The Undercover Economist – FT Magazine, 29 October 2005

Woe betide the supermarket shopper trapped in a queue behind coupon-clipping Granny. As the bundle of coupons, held together with a clothes peg, rises from the handbag, and the negotiation with the checkout boy begins, you know it’s going to be a long wait.

But we should blame those coupons for more than just a few delays, and we should also be grateful to Granny for saving us from our own laziness. Granny plays a vital role in the competitive ecosystem. Unlike her richer, lazier, busier descendants, she actually looks at the price of products and bears it in mind when making her choice. The result is a more competitive retail industry, and the rest of us reap the benefits.

Imagine a town where a Tesco supermarket and a Sainsbury’s supermarket compete for the business of a young, rich, careless generation, with few grannies around to keep them on their toes. If the supermarkets offer similar goods at similar prices, local shoppers will simply split down the middle and go to whichever store is nearest. If one week Tesco offers a sale, the grannies will shuffle over there and the rest of us won’t bother. Sainsbury’s loses a handful of customers that week; Tesco gains a handful but has lower margins. Sainsbury’s managers aren’t likely to worry.

Now imagine a seaside retirement town bursting with grannies. If Sainsbury’s offers a sale around there, they’ll be flooded with bargain-hunting pensioners. Tesco, suddenly deserted, will have to respond with its own price cuts. The “silver savers” keep the supermarkets honest, while the rest of us hardly need to bother.

A little bit of extra competitive pressure can go a long way. If Tesco worries about losing customers and cuts its prices, Sainsbury’s will also want to cut prices in response. If Sainsbury’s cuts prices then Tesco will have to cut prices further. This process doesn’t feed itself forever, but in the right circumstances a few more careful shoppers can substantially cut shopping bills for everyone.

You can guess what comes next, of course: the supermarkets want Granny out of the way. As long as she is roaming the aisles and scouring the shelves for bargains, she forces them to keep their prices low. Without her they could take advantage of our laziness and vacuum the cash out of our wallets.

This is where the coupons come in. Like a whistle that only dogs can hear, the coupon is a special offer to Granny that the rest of us do not notice and scarcely understand. If the supermarkets want to fight a price war over the population of price-sensitive grannies, they can do that perfectly well with their coupons. At the same time they can keep their standard prices high. The rest of us, who were going to ignore any price war anyway, do not notice the coupons and pay through the nose. If you thought the coupon should be blamed only for long lines at the checkout, think again.

In reality, of course, the world does not divide neatly into grannies and the rest. Each of us displays a different degree of price-sensitivity; one that varies from hour to hour. The expert retailer devotes great energy to devising schemes to offer low prices to grannies and high prices to playboys, trophy wives, expense-account holders and anyone else with no sense of the value of money.

Every shopper who wanders around, carelessly waving someone else’s credit card, is softening the competitive environment for the retailers and raising prices for the rest of us. We always knew there was a reason we should hate the playboys, but we should be a little more tolerant of Granny the next time we are stuck behind her at the supermarket checkout.

Financial Times, October 29th