Supermarket price wars have changed the shape of the retail market like nothing else. Price matching has become a public promise that has seen retails fall faster than you could shout “snap”. Half-price, two-for-£X and cross-category deals make up some of the weapons that the big four retailers - Tesco, Asda, Sainsbury’s and Morrisons - use to fight each other for market share at a time when shoppers are rethinking their spending.
But now there are signs that the major multiples are changing tack. The UK grocery market is moving on and it has learnt that its fierce reputation has seen growers and exporters from key sources divert their offer to more lucrative alternatives. There has been a realisation that if retailers are going to be able to secure consistent availability, they will have to up their prices.
So what’s next for fresh produce pricing and where does this leave growers and suppliers?
The situation can be traced back a few years to the height of the recession, when price tickets became most important and UK number-one retailer Tesco repositioned itself as “Britain’s biggest discounter” amid a flurry of reports that the masses were flocking to discounters Aldi and Lidl. The price-matching frenzy that followed meant that the top retailers cut prices like never before and even premium retailers joined the fray, with Waitrose unveiling its Essentials range and pledging to price match Tesco on 1,000 items, while Marks & Spencer introduced the Dine in for £10 deal and spurred a raft of copycat offers.
Fast forward to the present, and a sense of balance is returning. The mainstream retailers are again working to broaden their appeal and those at either end of the retail spectrum are establishing their specific offer.
The intense pressure that took hold this time last year has faded, but it is not forgotten. The big four are still wrestling to win market share and of course, their pricing strategies will be a key factor in securing future growth.
Sainsbury’s came out on top as the only outlet to increase market share, from 16.3 per cent a year ago to 16.6 per cent, in the Kantar Worldpanel rundown for the 12 weeks to 23 January 2011. Tesco and Asda matched market growth and held onto share, while Morrisons slipped from 12.5 per cent to 12.4 per cent, but following a record performance last year.
Interestingly, observers say that Sainsbury’s has moved away from price matching unconditionally at the same time as others are considering different approaches.
“Sainsbury’s has stepped out of it,” says one former buyer. “Its strategy is to match on price where it needs to match but if the returns aren’t there for the grower or the retailer, they will remain within 10-15 per cent of the others - which, to be fair, in some cases is just a few pence. It’s quite savvy really.
“The clever one to look at is Morrisons because it packs its own lines, has the capacity to reduce prices in house and can fluctuate bag weights to reduce price points,” he continues. “A bag of Maris Piper potatoes, for example, might be 2.5kg at the other retailers but Morrisons can switch to 2.35kg and most consumers won’t even notice because they shop on price.”
This comes as the two biggest UK retailers have chosen very different tactics in order to appeal to consumers in a further signal that the market is evolving. Tesco, for example, has moved away from its claim to be “Britain’s biggest discounter” and is now putting increasing emphasis on its Finest range. At the same time, Asda has got backs up with its price guarantee to be 10 per cent cheaper than its competitors. The move has been branded by rivals as “misleading” and a “gimmick”, but it is widely considered to be a marketing exercise rather than a pricing strategy.
In fact, the premium offer is making a comeback across the big four as a means for them to reposition themselves, attract consumers with a higher basket spend and add margin and value.
But the value offer is still key and each of the major multiples have five or six core fresh produce items such as potatoes, carrots and onions that are available as a value line nationally, while the remainder of the low-priced offer is targeted at what are classed as price-sensitive areas in a bid to drive market share in a more targeted way.
Ed Garner, communications director at Kantar Worldpanel, maintains that the big four players are responding to their rivals even as their priorities shift and prices remain “within spitting distance” of each other. He describes shoppers as members of “two nations”, as the two ends of the market show the strongest growth while the mainstream players perform more of a balancing act in their big to appeal to the masses.
“Tesco has moved away from positioning itself as Britain’s biggest discounter because it saw that it was losing business from high earners and secondly, it realised that this self-imposed price deflation was devaluing the brand,” says Garner. “With a third of the grocery market, Tesco has to be something for everybody and not everybody is the same. Some of its shoppers are obsessed with price, while others trade up and have seen the Finest range enjoy mid double-digit growth. Tesco knows that if it can make shoppers trade up, it will make more money and what is has done since 2008 is completely change tack.
“Interestingly, the three fastest-growing grocers are Aldi, Lidl and Waitrose. As niche operators, the potential for growth is stronger. However, the top four have to have an element of balance.
“Morrisons is one to watch,” he insists. “The Market Street concept is very important and it is expanding its fresh and chilled offer as well. In a few years, it might be more of a fresh and chilled outlet than Sainsbury’s - fresh and chilled is key to its point of difference and it is moving slightly more upmarket.”
But as retailers strive to adapt to the changing market, it isn’t all clear cut and some policies seem at odds with each other. The Co-operative is a case in point, having rolled out its Big Deal point-of-sale material to 2,656 stores nationwide at the beginning of the year before revealing its Ethical Operating Plan, which promises that “if it can be Fairtrade, it will be Fairtrade” and that 90 per cent of all primary commodities sourced from the developing world will be certified to the standard.
“There’s a huge conflict in The Co-operative,” admits one of its suppliers. “They don’t know if they want to be Fairtrade or if they want to be cheap and this is something that we will have to work out with them.”
Across the board, there is a recognition that the players in the UK grocery market must improve relations with growers if they are to secure supplies in the long term. This is seen in the moves by almost all the major retailers to source from growers directly and with that comes a better understanding of their options and limitations.
“The retailers have realised that having availability is paramount over price competitiveness,” says one importer. “There has definitely been a lift in prices to the grower - for example, grapes were being sold at 450p a kilo recently, which are high values. They now know that they have to pay that kind of price to secure the product rather than just matching other retailers.
“The multiples can’t afford to have the message bouncing around that they don’t pay well and starting a direct dialogue with growers is focusing their minds like never before. In fact, importers will lose lumps of business if they are not careful and we know that.
“But in paying more money, the retailers want better quality and the pressure is almost becoming more acute because that is the trade off for them and a way to rationalise it - they will pay more, but they want better quality.”
So given that the multiples are rethinking their pricing strategies, which promotions work best? Price versus volume is an issue, while the retailers are exploring new ways for special offers to link products and boost sales. Crucially, any kind of offer will only work on pre-packed fresh produce, as consumers will shy away from calculating their own discount.
“Half price drives volume, always,” says a supplier. “All the retailers are pretty much keeping away from buy one get one free, but Sainsbury’s has an offer to buy two and get a third free, which it is using across categories.
“All the retailers are trying to introduce more cross-category multibuys so shoppers can purchase all their key items together. Meat is promoted together with vegetables at key times of year, while bagged salads and prepared vegetables are now included in meal deals in the big four retailers’ equivalent of M&S’s Dine in for £10 promotion.
“Price is important, but what is more important is how it is highlighted at the point of sale,” he continues. “When people see a promotion, they think they will only have it for a limited time but the reality is that there is a different promotion on every week. They have to be different because you can’t run an offer for longer than two or three weeks maximum as you won’t get the cut through.”
It is clear that shoppers are wising up to retail strategies so in future, it will be up to the retailers to get creative in order to win business. This could mean anything from thinking up new special offers or coming up with fresh points of difference. Whatever they choose, the power of UK retailers and their determined pursuit of customers means that they will continue to study everyday activities in order to inform their overall pricing strategies.
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