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In a British supermarket, I saw the prices of Christmas chocolate gift boxes being cut dramatically (£1.50 to £0.15, and £7.50 to £0.22). I don't quite understand this behaviour, where the chocolate boxes are sold (presumably) below cost.

I've learned that this sort of strategy could be used to eliminate competitors and strengthen monopoly, but I don't think that's quite relevant for this case. It seems more of a clearance to me. What is the motivation behind such behaviour? Why don't the supermarkets just continue selling them at a low price, but not so low? Is it simply for saving warehouse costs?

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    $\begingroup$ Bear in mind that the chocolate would probably not last until next Christmas season, especially if storage conditions are less than ideal. $\endgroup$
    – Hot Licks
    Jan 4, 2021 at 23:27
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    $\begingroup$ They urgently have to clear warehouse and shelf space for chocolate eggs and bunnies. $\endgroup$
    – user_1818839
    Jan 4, 2021 at 23:31
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    $\begingroup$ @BrianDrummond Our local shop has chocolate reindeer and rabbits from the same luxury manufacturer with the same gold wrapping and red ribbon and weight adjacent to each other. In early January the rabbit prices are $5$ times the reindeer and selling much more slowly. $\endgroup$
    – Henry
    Jan 5, 2021 at 2:18
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    $\begingroup$ There is an old saying in the UK farming community, where profit and loss can be affected by weather and other things that can't be controlled: "The first loss is the cheapest loss". If the supermarket can get rid of the Christmas stock for £0.15 today, that is a cheaper option than storing it for a week or a month (which costs money in warehouse space) and then selling it even cheaper, or throwing it away. Of course this "loss" is also covered by increasing the profit margin on the items before Christmas! $\endgroup$
    – alephzero
    Jan 5, 2021 at 2:37
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    $\begingroup$ Beware the Sunk Cost Fallacy! The fact that the purchase price was X was relevant when the decision to purchase was made. It is irrelevant now. What's relevant is the cost/benefit calculation of selling vs. retaining now. $\endgroup$
    – Kilian Foth
    Jan 5, 2021 at 7:47

2 Answers 2

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Is it simply for saving warehouse costs?

Probably yes, holding onto inventory is very expensive. You have to pay for warehousing of the good, it takes the spot of some other inventory that might be in high demand. Food is also perishable so it cannot be stored indefinitely.

Stores have to always guess what demand for their products will be, sometimes they get it wrong and order excess inventory. It can often be more profitable to sell excess inventory below the production cost or many times even just to throw it away to make space for new products. Holding onto it would be a sunk-cost fallacy. The costs are already incurred in the past, even if they were a result of a mistake it does not make sense to try to double down on the mistake and hold onto them. It is more profitable to ignore the sunk-costs of getting them and make new decisions of what to do with the inventory based on new information.

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    $\begingroup$ Waste disposal also costs businesses (even if the packaging can be recycled and the food waste turned to energy, someone would have to unpack it). Even giving it away free could save money, but selling dirt cheap is probably easier. The inventory aspect applies more to non-perishables, and they sell wrapping paper very cheap at the moment. Of course transporting back to the warehouse isn't free even if there's a lorry going the right way - loaders' wages $\endgroup$
    – Chris H
    Jan 5, 2021 at 10:55
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    $\begingroup$ And this was probably even more true after Christmas this year in the UK, with warehouse space at a premium in the UK as companies stockpiled goods they expected to be in demand to mitigate risks from brexit and pandemic related supply disruptions. $\endgroup$
    – bdsl
    Jan 5, 2021 at 16:48
  • $\begingroup$ @Chris Even giving it away free could save money, true, but unfortunately "free" attracts vandalism :( $\endgroup$
    – Peter
    Jan 5, 2021 at 18:24
  • $\begingroup$ @Peter sure, I was asking my "easier" to carry a lot of meaning $\endgroup$
    – Chris H
    Jan 5, 2021 at 19:11
  • $\begingroup$ This is also why (durable - it won't spoil!) Christmas wrapping paper goes on sale in January: to clear the shelves. $\endgroup$
    – RonJohn
    Jan 7, 2021 at 4:44
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It's not about saving warehousing cost. They can't sell 12 months old Christmas chocolate next year, so they have to sell it in the next few months. Their options are to either sell it to customers, sell it to a business, or pay to throw it away. The price indicates that they think selling it very cheaply to customers is the most profitable option, all things considered.

Another way of thinking about it is that you don't want to avoid selling below cost - instead you want to sell at or above value. And the value of Christmas chocolate in January is significantly below the value of Christmas chocolate in December. With that perspective, the loss isn't made when the chocolate is sold below cost at 15p in January, instead it's part of the accumulated profit and loss created by the entirety of purchasing and advertising decisions of the chain for Christmas chocolate 2020.

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    $\begingroup$ Indeed. You buy a hundred chocolate Santas in November for £1 each, sell 90 for £2 each and remainder off the rest for 50p each. Your losses are factored into the profit margin because customers love a bargain. $\endgroup$
    – Richard
    Jan 5, 2021 at 23:50
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    $\begingroup$ While I agree with the rest of your answer, "It's not about saving warehousing cost" is false, because warehouse space most certainly is a factor: there's no room for chocolate bunnies if the chocolate reindeer are still sitting there. $\endgroup$
    – RonJohn
    Jan 7, 2021 at 4:42
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    $\begingroup$ @RonJohn It is a factor that's irrelevant because it's overshadowed by other factors. It's not about the bunnies. Christmas chocolate in April has significantly less value than Christmas chocolate in January. Stale 4 month old Christmas chocolate doesn't sell well at any price, and might even lower customers' perception of the store's quality. Unlike warehouse cost, shelf space is a relevant factor. $\endgroup$
    – Peter
    Jan 7, 2021 at 12:43

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