Tuesday, 13 May 2014

Why Shoppers Like Aldi's Pricing Strategy

There is no stopping Aldi – or fellow discounter Lidl.  Sales in Aldi grew by 36% in the last twelve weeks, and those in Lidl by 20%. And this in a market which grew by just 1.9%, the lowest level for 11 years (Kantar Worldpanel).

We know that shoppers like the discounters’ low prices, but they also like the way they price.

To get value in the “big 4” supermarkets shoppers have to buy what’s on promotion. Often the products on offer are not the ones that they want, or the offer is not in a form that they want. Multi buys like buy 3 get one free, or get the second half price are particularly disliked by shoppers. Fine if the product in question is not perishable and likely to end up in the bin, or if it is something that is regularly bought, but too often that is not the case.

Kantar tells us that 45% of all sales made by the major supermarkets come from promotional offers, up from around 40%. Compare that with Aldi where just 3% of sales are on promotion.

So there is the draw for Aldi customers. Having worked out which products they like they can shop with confidence knowing that the price will be the same day in and day out. Contrast that with other grocers where prices can be hiked for a while just to be able to drop them later, and shoppers are never sure what might be available on promotion on a particular day.

Morrisons, Asda, and Tesco have cottoned on to this, and permanently (they claim) lowered prices.

While price is the main reason to go to discounters, the IGD has done some research on what other aspects shoppers find attractive. Some are surprised by the quality, some like the speed and ease of shopping, and the reduced range, others enjoy finding continental brands that are not available elsewhere. As the IGD says, discounters are moving mainstream. 51% of people have shopped in one in the last month, compared with 41% two years ago and 12% are saying that their main store is a discounter, up from 5%. Hence the worry among traditional grocers and the change in pricing strategy.

Tuesday, 6 May 2014

Plummeting Farmgate Prices for Beef Cattle – Could This Have Been Foreseen?

The farmgate price paid for finished cattle has fallen from £3.85p a kilo in January to £3.55p a kilo at the end of April, and it is causing anxiety among beef producers.

EBLEX has traced the problem to reduced consumer demand, in turn caused by a rise in retail prices, and to a small rise in finished stock brought forward for sale.

It is worth digging a bit deeper. Why would major retailers want to put the price of beef up at a time when consumers are budget conscious and the likes of Aldi and Lidl with their low prices are stealing customers. Why not take advantage of plentiful supply and promote beef to raise sales and become more competitive?

This seemingly odd behaviour from retailers is likely to be part of a long term plan.

For months now, retailers have been watching the rise of the discounters and its effect on their own sales They will have noted in particular the disastrous decline in Morrisons sales, know that Morrisons have to do something radical to stem the decline, and will have been bracing themselves for a price war.

Price wars are expensive, and have a severe impact on profits. No one wins because all the retailers follow each other’s pricing policies, and engage in a futile race to the bottom. So they want to cushion the impact by building a war chest, and one way to do this is to stealthily raise prices where they can, pocketing the increased cash as an insurance against the evil day when the price war starting gun is fired.

The beef market is an ideal candidate for such a strategy. Valued at over £2billion pounds, the money raised from a retail price increase will far outweigh the loss in sales that might result.

Morrisons announced in March that they will be dropping prices, and now the promise has become a reality. One of the biggest price drops announced is on minced beef where a 500g pack will be reduced by 20%.
Mince is a staple, a “known value item”. It accounts for over half of beef sales. Other retailers will follow suit. Consumer demand will pick up. Unless stock available for sale increases dramatically, equilibrium should be restored, and farmgate prices should rise.

And there’s the rub. Beef farmgate pricing is at the mercy of supply and demand. If demand rises, and supply is constrained, prices rise – as they did to over £4.00 a kilo at the time of the horsegate scandal. A couple of years ago, when there was a surge of supply of dairy beef, farmgate prices fell.

We are told that rising world demand for meat means a bright future for farmers. One can only hope so. But there is no sign of accelerating demand yet. Meanwhile, British beef farmers will be at the mercy of short term factors. Some of these are predictable, and bodies such as EBLEX could support producers by being better in tune with market factors.

But there is no silver bullet, and planning beef production where the lead time from putting the bull out to selling the finished article is at least two years is uniquely tricky.