icantly sell their products much cheaper than the competition. In order for Woolworths to compete with Aldi on price, Woolworths will more than likely have to utilise Breakeven Pricing – the practice of setting a price point at which a business will earn zero profits on a sale. The intention is to use low prices as a tool to gain market share and drive competitors from the marketplace. The danger of breakeven pricing is that a price war would more than likely result. Aldi is in a strong enough position within Australia to consistently beat Woolworths on price, so a price war would be much more detrimental to Woolworths. This is not to say that Woolworths can do nothing in terms of competing on price. There are strategies that Woolworths can utilise to actually beat Coles and Aldi on price as well as achieve the desired profits while doing so. The strategies simply change the focus to maximising value vs. head-to-head competition on price only. However, implementing such a strategy requires a significant amount of business model transformation, vertical integration, supplier relationship management, and innovation. What about differentiation? Woolworths can certainly pursue a differentiation strategy against Aldi and Coles. I believe a key focus area for Woolworths should be on segmenting customers and focusing on price discrimination to extract the most consumer surplus. If a business can identify groups of consumers within their market who are willing and able to pay different prices for the same products and charge the consumers what they are willing to pay, a business can make higher revenues and profits. For example, identify more niche markets and work to satisfy those consumers. Woolworths can also expand product selection within their stores based on customer segmentation. Since Aldi only sells 1350 core items, Woolworths already has a product selection advantage. However, against Coles, Woolworths does not have this advantage. A challenge faced by retailers who attempt to gain a competitive advantage by increasing product selection is tying up working capital in inventory. Expanding product selection only works if an equilibrium to maximise profit and minimise carrying cost can be achieved. Back to the question: compete head-on or differentiate? Differentiation, rather than competing head-on, is the better strategy, but doubts remain if Woolworths can differentiate to such an extent that it reverses losing market share to Coles and Aldi. The reason why I advocate the use of game theory and industrial organisation theory is to provide an additional level of analysis and understanding to Woolworths’ executive team that doesn’t exist today. Woolworths CEO, Brad Banducci Woolworths’ Achilles Heel Corporations faced with declining market share and revenue are often faced with the cold hard truth that they’re too big and too inefficient. Analysts believe that Woolworths has become too large and that opportunities exist for Woolworths to reduce cost and complexity. A favourite saying of mine in business is “Costs are like fingernails, they need to be trimmed constantly”. Woolworths should immediately implement the operating model utilised by 3G Capital, a private equity firm with a laser-like focus on cutting costs, utilising Zero-Based Budgeting, and increasing value for shareholders. If Woolworths gets to the point where they cannot mount an effective strategy against Coles and Aldi, and they choose to entertain discussions with a private equity firm, I strongly recommend that 3G Capital be at the top of the list, followed by KKR. I believe CEO, Brad Baldacci, has every intention of identifying opportunities to reduce costs and increase execution. However, a question that must be asked is will Banducci and the Woolworths’ board be willing to make the massive cuts across divisions and programs that many analysts believe are necessary for putting Woolworths on the path to profitability? Making cuts across Woolworths does not require a scorched earth approach, but I don’t believe Banducci will take cost-cutting lightly. Another area of concern is Woolworths’ supply chain. A review of the supply chain is warranted to identify how to design and implement a low-cost, highly efficient supply chain that can be leveraged to enable growth and provide a competitive advantage based on the changing reality of Woolworths’ operations. There are significant opportunities for Woolworths to optimise its supply chain and logistics; especially procurement, transportation, and supplier relations. The biggest concern is the lack of a well-defined strategy. Yes, Woolworths is the market leader in terms of size in Australia. However, history is littered with the tombstones of large retailers who were one-time market leaders only to see their fortunes declines Woolworths needs to identify a corporate strategy that will allow them to beat Coles and repel the loss of market share and customers to Aldi. Game theory can and should play a role in determining the optimal strategy. Woolworths can’t just cost-cut their way to success; it has to have a viable strategy for achieving and sustaining growth without focusing on price alone. 2020 vision If we fast-forward to 2020, what will the grocery landscape look like, assuming Woolworths maintains the status quo? Based on game theory strategy and modeling exercises, I believe the following will more than likely occur: Aldi will continue to take market share and do so at a pace faster than industry analysts currently predict. Sales will exceed $16 billion in 2020. Unable to face the new reality of grocery retailing and harsh competition, and unwilling to place the required laser-like focus on reducing costs, divesting all but food, fuel, and liquor businesses; and continuing to believe they can invest and compete on price, Woolworths will experience accelerated lost sales, lost market share, and a falling share price. With no other options, Woolworths will be acquired by a private equity firm no later than 2020. If 3G Capital or KKR acquire Woolworths, they will implement strategies and cost-cutting measures similar, if not identical, to what I have outlined. Amazon has not announced they’re rolling out Amazon Fresh in Australia. However, if Amazon Fresh becomes a reality in Australia, I am confident that Amazon Fresh, just like Lidl, will take market share thus increasing competitive pressure on Woolworths. Unfortunately for Coles, their world is going to grow much darker. Aldi, Lidl, and Costco will mount an extensive price war against Coles; a price war that will severely impact Coles. In fairness to Coles, it has a strong leadership team that will not make it easy for any retailer to take market share. However, when confronted with three retailers utilising harsh competition, Coles will be the underdog. I do not take pleasure in what I have written about Woolworths, but without drastic changes, such things will more than likely come true. But they certainly don’t have to Brittain Ladd is a business strategist and retail commentator and can be contacted atbcladd48@gmail.com. This column is part three in a series discussing game theory and how it could aid Woolworths’ turnaround strategy for its supermarket business. This column can be read in its entirety by visiting https://www.linkedin.com/pulse/beautiful-way-save-woolworths-brittain-ladd?trk=prof-post . 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