Opinion

Why ‘price investment’ is a flawed retail policy

26 February 2015

Jim Prevor - PBUK

If we could ban one phrase from the lexicon of retailers, it would be “price investment”. This awkward nomenclature is what retailers like to call it when they accept lower margins to remain competitive.

Theoretically, one could imagine circumstances in which the term makes sense. If, for example, there is a new store opening, a retailer might offer exceptional bargains to attract clientele, knowing that after six weeks the store will end its “grand opening special” and charge normal margins.

Today, however, retailers use this phrase in the context of competing with the growing discount segment. Since the discounters won’t be ending their discount strategy anytime soon, “price investment” is not an “investment” at all; it is just an acknowledgement that the competitive environment has changed and that, permanently, prices must be kept at lower levels. Unless expenses also drop, it means that profits will also be squeezed.

In the period ending January 31, the United Kingdom supermarket scene hit a milestone. The Food Retail Equity Research Team at Barclays is headed up by James Anstead, who appeared on the “Thought Leaders” panel at The 2014 London Produce Show and Conference. Here was Barclays’ take:

Discounters Aldi and Lidl now account for more than 10% of all grocery sales in the UK, according to Nielsen market share data released on Friday. Aldi’s sales surged by 17.3% y/y in the 12 weeks ending January 31, while Lidl’s jumped 13.8% in the same period.

In contrast, total supermarket sales rose just 0.7% during the 12-week period, and Morrisons was the only big four supermarket to increase sales in the four weeks ending January 31 – potentially in part thanks to the launch of its Match & More loyalty card/price match scheme. Nielsen’s UK head of retail and business insight commented that “Initially built on the premise of saving money, the new wave of discounters are now a regular part of grocery shopping and have changed shopping habits forever”.

He also noted that nearly half of those cost-savvy consumers will continue to shop at discounters even when economic conditions improve, while the discounters now endeavor to promote the quality of their offerings to appeal a wider range of consumers.

The big supermarket chains in the UK have responded to this threat with lower prices, but they have no way of matching the expense structure of the discounters. So this approach is unlikely to work.

It is an odd thing about large supermarket chains all over the world that they are extremely vulnerable to new formats.

In the United States, when Wal-Mart started rolling out supercenters across the country it was a well observed phenomenon. Every supermarket in the country sent staff to observe those early supercenters and, because Wal-Mart was already a substantial company and Sam Walton had served on the board of Winn-Dixie, the strategy soon became clear.

The roll-out across America took 20 years and is still going on in parts of the country. Yet in all this time, and in all the geography of America, no supermarket ever responded by deciding to roll out its own supercenters. Indeed, even when Kroger actually purchased a supercenter chain – Fred Meyer in the Pacific Northwest – and virtually everyone in the industry expected Kroger to start rolling out this format across the country, it never happened.

The big UK supermarkets are multi-format operators, but these formats currently revolve around store size – Tesco Express, Tesco Metro, Tesco Extra, Tesco superstores etc. – but the differentiator is not necessarily size, it is function and type.

Waitrose, for example, has been doing well – sales growth of 4.9% year on year for the period ending February 1. Yet, no major UK supermarket has done what HEB, a conventional supermarket operator based in Texas did: Create a whole new Central Market banner, which gives all experiential retailers a run for their money.

It is well noted that the ethnic composition of the London market has changed, but where are the ethnic-oriented banners such as one created by Publix, another conventional supermarket chain, which has opened several Publix Sabor stores?

When this columnist was growing up in America, we had three television networks. Today, cable and satellite bring us hundreds and hundreds of networks, and the trend of the entire society is toward specialisation. Just as in the old days, television aimed to adequately please a large number of people, whereas today channels aim to delight those of more specialised interests. So the very notion of giant supermarkets serving great cross-sections of the community is a dated concept.

When Tesco was busy building its Fresh & Easy concept in America, we all but pleaded with the bosses to abandon this “one-size-fits-all philosophy”. We pointed out that there are two concepts in America that profitably fill Fresh & Easy size boxes – deep discounters such as Aldi’s US version and Save-a-Lot, and an epicurean concept known as Trader Joe’s. We recommended a split of the failing Fresh & Easy stores, using demographics to repurpose the stores into discount or epicurean concepts. But the instinct to serve everyone was too strong – so they wound up serving nobody.

People are going to eat just as much as they ever did, so there is no reason why the big multiples have to see their sales decline. And pricing to be competitive with discounters is an unforced error that will depress profitability.

The segmentation of the world doesn’t mean lower profits. It means that the same customer at different moments will buy at Aldi to save a quid, at Waitrose to impress the new boss when preparing for a dinner party, or at Whole Foods because the new girlfriend or boyfriend is into healthy eating. The same consumer will buy online, at a specialised Asian concept, from a warehouse club, at a massive supercenter, at a convenience store that sells petrol and in many more specialised concepts. Because these concepts are narrowly tailored to delight a customer at a certain moment of his life, they actually can keep costs lower through hyper-specialization and charge more because the customers are so delighted.

Trying to stem this tide is not likely to be more successful than trying to have one TV network appeal to all. The challenge for retailers is how to deconstruct and both delight and profit from consumers by appealing to their specialized interests at different moments in their lives.

Failure to do so… well, that means lots more “price investment” for many years to come.

Produce Business UK welcomes letters to the editor and other input from the industry. If you wish to respond to an article on Produce Business UK or join the conversation on any industry issue, please send your thoughts to [email protected]

6 comments

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  1. Leroy Smith | Mar 24, 2015

    Hi Jim 

    I do value the identification of the fact that at different time and periods consumers will shop at different formatted stores. I for example when making use of public transport here in South Africa would shop at a retailer called Cambridge due to its proximity and great pricing. Closer to home on the weekend I tend to shop at Pick n Pay. 

    The hyper specialisation principle is great because us as consumers will be able to access more efficiently what we "really" want.

    Great piece!

  2. Jimmy | Mar 18, 2015

    "But the instinct to serve everyone was too strong – so they wound up serving nobody."

    Nicely said.

    That could be the quote attributed to the downfall of all too many businesses who hire consultants and then don't listen, or keep asking for "change advice" but never seem to actually agree to do anything that would actually matter.  The mindset gravitational pull towards "serve everybody" and refusing to identify a target market seemed too strong for a number of clients we had when I was in marketing.

    Maybe some change of execs was the only way forward it seemed.

  3. Om Prakash Tamboli | Mar 07, 2015

    Good Morning,

    At present Online Retail is growing very, very fast in the Indian market. People are taking interest in purchasing via online portal because today time is very valuable and many people no longer have time for personally shopping from Retail Stores.

  4. Arjen van den Berg | Mar 05, 2015

    Good day Mr. Prevor,

    If we ever meet ,(I hope we do) we have not much to say to each other .

    On all subjects we seem to agree.

    From de Lier

    Holland

    Arjen van den Berg


     

  5. Dudu Ivri | Mar 05, 2015
    Great analysis Jim. it's really a segmentation approach, always a big challenge as more investments leading us to try to mach more and more clients - but sure can't have them all and satisfied.
  6. Michelle | Mar 03, 2015

    Good morning Sir,

    Must say interesting way of thinking.  Makes a lot of sense to me also!

    From Montreal

    Michelle

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