There’s a great article by N.L. Kleinfield that appeared in last week’s New York Times highlighting a local price war right here in midtown Manhattan that has broken out among the various ‘pizza-by-the-slice’ purveyors located on Sixth Avenue between 37th and 39th Streets.
Over the past few years, pizza has been sold by most establishments in that neighborhood for roughly $1.50 a slice. The food is certainly not gourmet, but pizza is pizza and when it’s sold by the slice, it’s easy to compare – like comparing “apples to apples” as the saying goes. All that changed about a year ago when, according to Mr. Kleinfield, Joey Pepperoni’s Pizza opened near the corner of 39th and Sixth Avenue and began offering pizza for a dollar a slice. It’s established neighbor a block away, Bombay Fast Food/6 Ave. Pizza reacted to the offer by matching the dollar per slice offer.
Things then got interesting. A newcomer to the neighborhood, 2 Bros. Pizza, opened virtually next door to Bombay/6 Ave. Pizza this past fall. And after a relatively peaceful coexistence with its pizza-by-the-slice competitors, the price war reared its ugly head again. Here’s how Mr. Kleinfield described it:
On Thursday evening a week ago, Bombay Fast Food/6 Ave. Pizza — unprovoked, and without warning — cut its pizza price to 79 cents. The next morning, 2 Bros. retaliated by moving to 75 cents (its owners felt it was easier to make change from a dollar than at 79 cents). Bombay/6 Ave. matched the 75 cents, and that’s where everything sits.
“We don’t sell pizza at 75 cents,” Eli Halali [owner of 2 Bros. Pizza] said. “But if they think they’re going to sit next to us and sell at 75 cents, they’ve got another think coming.”
For his part, Eli Halali made it clear that 75 cents was a temporary price point. He said he could not make money at that level and eventually would return to $1. He said that if Bombay/6 Ave. Pizza went back to $1, he would as well.
If it didn’t, he said, it better watch out.
His father, Joshua Halali, who acts as a consultant to 2 Bros., said, “I suggested to my children to go to 50 cents.”
Oren Halali [Eli’s brother] said, “We might go to free pizza soon.”
Eli said: “We have enough power to wait them out. They’re not going to make a fool of us.”
Meanwhile, Bombay Fast Food/6 Ave. Pizza remains intransigent. “We’re never going back to $1 – we’re going lower. We may go to 50 cents.”
And so begins the death spiral…
Whenever I hear stories like this, I’m always reminded of a story told by Rafi Mohammed in his book, The Art of Pricing.
The intense rivalry between Jay Gould’s Erie Railroad and Commodore Cornelius Vanderbilt’s Central Railroad in the nineteenth century illustrates the pivotal role that competition plays in determining value. These adversaries battled to control livestock transportation between Buffalo and New York City in 1867. The standard price for the route was $125 per carload. Vanderbilt incited a price war by reducing his rate to $100; Gould responded with another $25 price cut. The Commodore reciprocated; Gould struck back by dropping his price to $25. When Vanderbilt set his price to $1 per carload, Jay Gould’s cars ran empty, and Vanderbilt celebrated his victory – given that both railroads offered virtually the same service, why would customers pay more to Gould?
The Commodore’s merriment ended abruptly when he discovered that Gould had purchased every steer in Buffalo and sent them to slaughter in New York on Vanderbilt’s rail cars – yielding large profits for Gould, quite literally at the Commodore’s expense. Moreover, in the process, Vanderbilt’s aggressiveness wiped out a profitable business.
Here’s the takeaway: Quite simply…price wars are a fool’s game.
