| Date | November 2020 | Marks available | 4 | Reference code | 20N.2.SL.TZ0.4 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 4 | Adapted from | N/A |
Question
Nigris & Speroni (NS)
Nigris & Speroni (NS) is a national grocery store chain. In the tertiary sector, it benefits from economies of scale, including purchasing economies of scale. Its stores use sophisticated computerization to manage stock and monitor customers’ purchasing habits. NS is currently experimenting with cleverly placed products and short-term promotions to increase impulse purchases, which occur when a customer makes unplanned purchases. Something in the store – a smell, a vivid display, samples of products – triggers a customer’s desire for items.
NS has above-average prices compared to the industry average, but at least one other chain is more expensive. The grocery store industry is competitive and grocery stores use many different pricing strategies. NS is considering adopting an online ordering and delivery service for customers, which would operate from its stores.
Each of NS’ stores is given a number to identify it. Store number 507 is called NS 507.
Table 3: Selected financial information for NS 507 for 2019
On 1 January 2020, an organic grocery store, U-Foods, opened near NS 507. U-Foods sells high-quality foods, including organically produced fruits and vegetables, organically raised meats and sustainably sourced seafood (not from fish farms). It charges higher prices than NS 507 and has higher margins. The few processed foods that it sells are organic and low in salt. Unlike NS 507, U-Foods does not sell cigarettes or high-sugar beverages and cereals. It is also not considering an online ordering and delivery service like NS is.
In the first six months of 2020, however, NS 507 lost market share. Sales revenue was 12 % lower than in the first six months of 2019, even though the number of customers and transactions did not change.
State two types of business, other than grocery stores, that operate in the tertiary sector.
Explain two elements of U-Foods’ marketing mix other than price.
Calculate, for 2019, NS 507’s gross profit margin (no working required).
Calculate, for 2019, NS 507’s net profit before interest and tax (no working required).
Explain one economy of scale, other than purchasing economies of scale, from which NS might benefit.
Discuss two possible methods that NS 507 could use to regain lost market share.
Markscheme
The tertiary sector is the service sector of an economy, including retail outlets.
Candidates may name any type of service sector business. Do not give credit for “online grocery stores” but award a mark for convenience store (or some other small shop where some grocery items might be sold).
Award [1] for each type of business in the service sector identified up to [2].
The four Ps of the marketing mix that candidates may write about are place,
promotion, and product. In the stimulus, place and product can be identified:
- Place: retail stores.
- Product: According to the stimulus, U-Foods sells all-organic foods. High-quality, all-organic products are its USP.
Award [1] for identification of one of the three Ps and an additional [1] for application to the stimulus and explanation.
Mark as [2 + 2].
N.B. If the candidate mentions promotion, award a maximum of [1], as nothing in the stimulus would allow for application. Thus, if a candidate explained promotion with some theoretical types and, then correctly explained and applied product, the total mark would be [3]: [1] for promotion and [2] for product.
Gross profit margin is
Award [1] for the correct answer.
Net profit before interest and tax
Award [1] for the correct answer.
Other economies of scale from which NS might benefit include:
- Marketing economies of scale
- Financial Economies of scale
- Managerial economies of scale
- Human resources economies of scale
- Network economies of scale
Accept any other relevant economy of scale.
Award [1] for identification of an appropriate economy of scale and an additional [1] for appropriate application to and explanation of the stimulus. Maximum award: [2].
The stimulus provides some guidance to the students on ways to recover lost market share. The fact that sales revenue is down 12 % suggests that NS 507 has lost some sales to U-Foods. Given that the number of transactions has remained the same suggests that some customers continue to shop at NS but also go to U-Foods for certain items. One way that NS could attempt to recover those lost sales is to determine which specific items have seen their sales go down. It is likely that, for these items, shoppers are going to U-Foods. Once NS has identified which items customers are going to U-Foods for, NS can make modifications: improve the product, alter the price, or have better promotions. A disadvantage to this strategy is that it may not work or may be too expensive to work. For example, some customers are probably going to U-Foods for locally produced organic meats. However, probably few opportunities exist for economies of scale when U-Foods (or NS) purchase this type of meat. For U-Foods, passing on high costs to customers is probably not a problem. U-Foods is more expensive than NS and customers expect that. For NS customers, however, prices lower than U-Foods is the expectation. Were NS to start charging more, many customers may resist.
Another strategy is to use more aggressive pricing. NS is a huge firm, and it could lower its prices to try to gain more customers. Predatory pricing is probably illegal, but NS 507 could, with the backing of the whole organization, be very aggressive in its pricing – just short of predatory – to win back customers or the specific purchases that are going to U-Foods. The problem with this strategy is that NS already has thin margins – typical of the grocery store industry – and lowering prices even further may be a problem.
A third option is to start allowing customers to order online and have home delivery. This option would be expensive to set up and operate, and NS would lose impulse sales.
Accept any other relevant way that NS 507 can recover lost market share.
Examiners report
Many candidates could state two types of business, other than grocery stores, that operate in the tertiary sector.
The only real problem issue on this question was that candidates did not read the question carefully and applied the question to NS rather than U-Foods. When that occurred, the maximum mark was two rather than four marks.
Most candidates choosing question 4 answered 4(c)(i) correctly.
Most candidates choosing question 4 answered 4(c)(ii) correctly.
Candidates in general knew what an economy of scale is, and many could effectively apply that knowledge to the stimulus.
In general, candidates could argue for two methods, with application to the stimulus, and most candidates seemed to understand the expectations of the command term.
