Against the backdrop of Britain’s first ever drop in annual consumer spend in food stores, supermarket price wars around the country are becoming increasingly cut-throat. Many industry commentators have seen such battles as simply a “race to the bottom” and note that, aside from the consumer, the only possible winners in this are the very low cost providers. For the supermarkets, these price wars lead to a steady squeeze in profits and a fall in overall sales. Recent UK food retail figures from the Office for National Statistics showed a decline in both value and volume of sales for September 2014, compared with the same month in 2013.
This trend of slashing prices by supermarkets started in the UK in 2009, when supermarkets were warned over slashing the price of bananas. Globally, the trend also occurs in France, Canada and the US – in particular, the speciality organic foods segment. The proliferation of discount general retailers selling food and non-food goods is also increasing the pressure on supermarkets.
The rise of online technologies and the entry of digital innovators has made this problem more acute. Price comparison websites such as mysupermarket.com have empowered consumers by increasing price transparency, further fuelling these supermarket wars and reducing value throughout the supply chain. Digital innovations such as Amazon’s online grocery shopping services, AmazonFresh – soon to be launched in the UK – is another example of the challenges faced within the industry.
Despite the grim outlook, food retailers do have options other than getting drawn into a costly price war, but first, it’s worth noting why it’s smart not to get yourself into a battle over cutting costs.
Price advantages are short lived
Previous experience shows that when one chain cuts prices, all the other players in the market follow suit. As a result, market share barely shifts (unless a competitor is forced out of business).
Customer behaviour changes
Customers will remember the lowest prices associated with certain goods long after the price wars have ended. Subsequently, it gets very difficult to increase prices again.
The brand is devalued and industry profitability declines
Customers tend to become sensitive to price at the expense of value and benefits. In an industry such as food retailing, which has razor-thin margins, this in turn has a detrimental effect on profitability.
IRI’s European Price and Promotion report (pdf) last year revealed the UK as the “promotion capital” of Europe, with 55% of food bought on offer, showing a growing reluctance to pay full price for goods. The impact of this is two-fold: the research showed that while promotions are popular with UK consumers, they are failing to boost sales volumes and are eroding brand loyalty. Put simply, consumers are starting to make purchase decisions based on the best price rather than the product value.
Other ways of competing
So how do you avoid getting down and dirty in a race to the bottom over prices? In such an environment, major supermarkets need to find another way to compete, while keeping their margins intact. There are a few options available to them:
Go multi-channel
Incentivise the use of multiple channels. For consumers, the convenience of online shopping overshadows the appeal of low price hunting. Tesco realised this as far back as the 1990s, when it pioneered online grocery shopping with a web platform and online order management system based on single stores.
Compete on quality
For example, by improving the quality of your private-label goods so that they are no longer “equivalent” in their price comparison, supermarkets could compete on the quality and value of its offer, rather than just price. The German grocer Edeka, for example, is aggressively expanding its own-label manufacturing and production facilities with a view to provide a better range of quality products for its consumers.
Personalise
A switch from mass-marketing to more targeted promotions should be encouraged. This can focus on those customers who most frequently swap between brands, competing for their spending when it suits them best.
Don’t make it easy to price compare
Use complex promotions of bundled products or services to make price-matching by competitors harder. You can see the same strategy in other sectors, such as for bundled broadband, cable TV and phone packages. Similarly, consider incentivising consumers to shop for food and non-food goods at the same time, so that the food basket price is less transparent.
Price comparison and price matching are here to stay. The saying goes: “If you can’t beat them, join them.” In this case, don’t join them at all. The temptation to entice customers through aggressive discounting will only succeed in steadily eroding value throughout the grocery chain and eat into the revenues of supermarkets. Adopting more refined ways of competing is the key to ensuring this doesn’t happen.
Fiona O’Hara is managing director of Accenture Retail, UK & Ireland
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