Iceberg lettuces and pineapples for 50p each, bananas for 39p a kilo, a punnet of premium strawberries for less than a couple of pounds - supermarkets’ attempts to keep food affordable over the recession have brought prices that growers thought had disappeared decades ago.
One of the big talking points over the last two years has been whether retail promotions have kept the fresh produce category afloat or irreparably damaged values and margins for all concerned. A look at recent company accounts shows the effects that both the recession and retail pricing have taken, with companies with turnovers in the tens of millions or more often revealing pre-tax profits of under a million pounds. The margin between success and failure has never been closer.
But a ‘new normal’ could be about to emerge, with tightening supply across many categories, sterling’s relative weakness versus its previous strength and the fact that new markets look ever more favourable meaning foreign suppliers are seriously reconsidering the value of the UK market. So does that mean supermarkets will have no option but to re-evaluate their promotional strategies?
New figures from Nielsen show the long-term trend of selling on offer is still increasing in fresh produce, even if it has dropped slightly from the highest points of 2009 - in January 2008, only 17 per cent of fruit and veg was sold discounted, but by September 2010 that figure had risen to 24 per cent.
Volume growth outstripped values in many areas as round pound price points became the fashion on lines such as exotics. Bananas continue to be the promotional donkey that supermarkets flog every few months, with Tesco and Asda currently selling them for 55p/kg - well below the
98p/kg they started the year with. Sainsbury’s, with its 100 per cent Fairtrade offer, seems to have given up trying to stay with its competitors for now and is selling for 67p/kg.
Suppliers may feel that their products are being mercilessly discounted but, in fact, fresh produce remains the lowest promoted category across the fast-moving consumer goods category. While alcohol is unsurprisingly the most discounted line in the supermarkets, other short-life fresh foods such as meat and fish
(41 per cent sold on deal) and dairy (27 per cent) are sold on the cheap much more regularly.
Nevertheless, there is a feeling that the increase cannot continue. One retail analyst believes supermarkets have no option but to scale back, though he qualifies that by stressing they are still putting considerable pressure on suppliers. “Something’s going to go pop very soon,” he says. “Now they are asking suppliers to margin maintain promotions as well. There are suppliers now closer to the brink than ever and promotions are not having the cut through. They will have to scale back and choose their promotions more carefully. I think we’ll see fewer promotions but deeper cuts.”
Certainly, there is a feeling that supermarkets will have to pick their battles a little more carefully in the coming months. “The retail pricing is beginning to wear thin for growers,” says one leading supermarket supplier. “They are voting with their feet. Options for growers are continuing to expand and volume is starting to become an issue for retailers.”
Suppliers often point to the fact that commodities are relatively price inelastic. Bananas may have been sold at half price, they argue, but sales did not go through the roof. Neither did lemon sales dry up when the price soared from 19p each to 39p.
Supermarkets will continue to offer promotions to give the consumer the impression that they are still getting bargains, but on closer inspection these discounts may not be as generous as they once were. “The promotional mechanics will always be there, whether it’s 33 per cent free instead of 50 per cent free, or three for £5 instead of £4,” the supplier says. “But that situation can still be manoeuvred with higher prices. If not, we won’t get the product because we are competing with the Far East, who are paying more.”
Another leading fruit supplier argues the discounts have even done few favours in terms of getting new consumers into the category. “The level of promotions in retailers have been high and addictive, but any short-term efficiencies from volume uplift are more than offset by the long-term devaluation of the category,” he says. “So as a supplier, we look forward to the time when the level of promotional activity is reduced or normalised and the fair value of products is restored in consumers’ minds.”
The extent to which promotions either enhance sales or erode category value often depends on the product in question. When Jersey Royals were sold at a lower price than standard unbranded potatoes this season, it appeared to undermine all the good work that had been done to build up the cachet of the brand. On the other hand, lower prices helped resuscitate sales on some tropical fruit lines, which suffered huge drops as the recession kicked in.
Asda, with its reputation for being the lowest-priced UK supermarket, often leads the charge on promotions, but even the Leeds-based retailer is rethinking the way it approaches discounting. “We will continue to invest more into an EDLP [Every Day Low Pricing] position and balance out the level of high/low promotions we are doing,” explains Nick Scrase, managing director of Asda’s International Produce Ltd. “Produce is different because of the seasonal nature of the product, the high fluctuations of supply and demand, so I think it will always be a little bit different, but I’ve no doubt the rebalancing that’s gone on this year will continue to go on. It’s about making sure we give customers value in core commodities such as bananas and we give it to them every day, consistently throughout the year, rather than this up/down position that some of our competitors in particular engage in.”
But Scrase strongly denies any supplier would ever foot the bill. “We don’t ever, have not ever in my time, gone back to a grower or an importer and said we want money [for a promotion],” he insists. “We just don’t. We understand the banana market really well, the social implications of growing fruit, the sustainability issues, the shipping. So when we drop the retail price to support customers in this market, we do not go back and ask for more money.”
It’s not just the retail sector where the value of promotions has been called into question. New research from market analyst Horizons has indicated that restaurants are wasting their time by issuing discount vouchers to try to tempt in diners.
The research reveals that 55 per cent of consumers do not base their decision to eat out on the availability of a money-off deal, with only 17 per cent even using offers or vouchers at all. Only a quarter of the diners who use discount deals said they would have eaten elsewhere had the deal not been available, with 20 per cent staying at home.
“Vouchers are untargeted in that while they persuade a percentage of consumers to dine somewhere, they are also being used by more loyal customers who would dine in that restaurant anyway and don’t need to be persuaded with money-off vouchers,” says Horizons’ development executive Paul Backman. “Deals in the eating out sector have become much more sophisticated over the past 18 months, but operators still need to work harder at attracting new customers, rather than purely rewarding existing ones.”
Two-for-one offers are the most common eating out vouchers used by diners, the research found, followed by money-off coupons and meal deals.
There’s no question deals and promotions are here to stay. With a recent FPJ/England Marketing survey showing 87 per cent of consumers claiming more promotions and special offers would encourage them to buy more fruit and veg, the challenge for retailers is how to give them the feeling of getting a bargain while still securing supply from an increasingly disgruntled and cash-strapped supply base.
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