Big 4 Grocers Pricing Strategies - Who is Winning?

Latest Kantar worldpanel data for 12 weeks ending 22^nd May 2016 shows Tesco sales “stabilising”, Sainsbury falling and Asda falling disastrously.  Morrisons is difficult to read because of their store disposal programme.

Each has adopted a different pricing strategy in an effort to hang on to their customers and fight Aldi and Lidl, who are still showing double digit growth.

Tesco continues to promote with offers like buy x number for £y, and buy one get one free. It has rebranded its fresh product value lines, turning them into the “Farms” range, and calling them nice, rural British sounding names like Boswell Farm beef, and Woodside Farm pork products.

Questionable as this move may appear, given that these farms are entirely fictitious and the produce often comes from abroad, Dave Lewis the Tesco CEO has spent vast sums of money on developing the range and is convinced that it allows Tesco to compete with discounters but with consistent quality. So Tesco continues with a mix of pricing approaches, most notably continuing with heavy promotions.

Asda by contrast is totally committed to everyday low pricing (EDLP) with few or no special offers. They are convinced that this is what consumers want but their sales decline is accelerating with the latest 12 weeks data showing a drop of 5%.

Sainsbury also reckon that consumers do not want promotions, preferring instead to know that prices will be consistent week after week. Sainsbury are in the process of transition to their new EDLP strategy, but sales dropped by 1.5% in the recent 12 weeks.

Overall, it is a patchy picture, but the evidence so far suggests that abandoning promotions leads to a drop in sales.

The fact is that what consumers want and what they say they want are two totally different things. Any change in strategy, particularly in an area as sensitive as price demands a thorough understanding of consumer behaviour.

Making the right decision is made more challenging when a strategy plays into the hands of competitors. Both Aldi and Lidl follow an EDLP strategy, but the flaw in Asda’s approach is that they will never be as cheap as Aldi or Lidl, and adopting EDLP makes the price comparison totally transparent. Transparency is of course to be welcomed, but shoppers need to be offered something which in their mind offsets the price differential. It could superb quality, or a range more tailored to their needs than a discounter can offer.

And to the point that price is not everything, the Kantar data also tells us that Aldi’s premium own label brand Specially Select grew by 15%in the latest 12 weeks, and Lidl’s deluxe range has grown by 65%.

None of the pricing strategies adopted by the “Big 4” seem to be proving outright winners in the fierce competition to grow sales.

Consumers Unwilling to Splash Out on Groceries– Even at Christmas

Perhaps the most surprising feature of Xmas trading results from the major supermarkets is that even at this traditional “throw caution to the winds and spend” time of year, shoppers were not prepared to loosen their purse strings when it came to food and groceries.

We do not know yet what total supermarket sales were like over Xmas, but given Tesco’s 0.3% decline in like for like sales, Sainsbury’s 1.7% drop,  a not unexpected plummet of 3.1% from Morrisons, and a disappointingly flat performance from Marks and Spencer who are supposed to be immune from penny pinching habits, the picture is unlikely to be rosy. Waitrose fared a little better, recording a 2.8% increase, and discounters Aldi and Lidl are both claiming their “best ever” Xmas, but as the combined market share of these three companies is just over 13% their better numbers will not compensate.

Hence the racheting up of price cutting announcements from the “Big 4”.  In a time of low inflation with shoppers just not prepared to spend on food, the only way for grocers to grow is by stealing market share. Tesco is to drop the price of 350 core lines, and claims that over Xmas some of its vegetables were cheaper than Aldi.  Asda is to spend £300m on cutting prices in the first three months of this year, and Sainsbury £150m.

Where will it end? Many in the industry are saying that prices generally will need to be rebased  regardless of the impact on profit margins. Morrisons chief executive, the second CEO, after Philip Clarke of Tesco to lose his job due to poor performance,  has declared that the only way forward is to “neutralise on price”, and then find ways to differentiate from the competition.

The big grocers will be able to manage their way through price wars more or less unscathed through a combination of slashing costs and offloading real estate. They can cherry pick which products to price reduce, and the scale and duration of any cuts. They can, and will, raise prices on many goods to offset reductions on others.

The unknown and little discussed issue is the knock on effect to others in the supply chain, many of whom are small businesses, already operating on wafer thin margins.  The drop in commodity prices will help. And there may be a boost to demand. Consumption of beef and lamb for example has dropped due to high retail prices. If, on the other hand, goods are already being produced at below cost, as in the case of some dairy farmers, then a boost to consumption does not help at all.

What is clear is that a low price, low growth , low profit world is here to stay for those connected with the grocery supply chain.