Losing the price war? Change the battleground
By Chris Donnelly, managing director for retail, Accenture Strategy
What do supermarkets have to gain from a price war? Judging from the battles that have been raging around the world of late, the answer is--nothing. Experience shows that they are truly a “race to the bottom”--aside from the consumer, the only possible winner is the lowest cost provider. Food retailers, however, have options for how to avoid getting drawn into a costly price war.
In the US, price wars are not yet as severe as they have become in many other parts of the world. Combat has been fiercest in the UK, where the major grocery chains have been slashing prices since 2009. Warfare has also broken out in France, and skirmishes are now turning into battles in Canada. There are indications that the same kind of dynamic is headed into parts of the US. Several major chains are currently slashing prices in the specialty organic foods segment, for example. Discount general retailers selling food and non-food goods are also entering the fray, increasing the pressure on supermarkets.
While customers gain from these bruising encounters, the industry itself typically suffers. In the UK, retail food sales in July 2014 showed a decline in both value and volume terms from the same month in 2013, according to Office for National Statistics, the first year-on-year fall since 1989. Not surprisingly, some of the major chains have recently reported profit warnings.
A battle best avoided
The reality is that most supermarkets have little to gain from engaging in price wars. Only companies whose business models are fundamentally built around a low-cost delivery model can hope to come out (relatively) unscathed. There are four main reasons to avoid price warfare:
1) Price advantages are short lived. Judging from historical experience, when one player cuts prices all the other players in the market follow suit. As a result, market shares barely shift (unless a competitor is forced out of business).
2) Customer behavior changes. Customer expectations become distorted as they remember the lowest price as the benchmark long after the war has ended. It is very difficult to increase prices again.
3) The brand is devalued. Customers tend to become sensitive to price at the expense of value and benefits.
4) Industry profitability declines. In markets with razor-thin margins such as food retailing, profits are extremely sensitive to changes in price.
Alternative means to compete
Within the US, some supermarkets are reasonably well positioned to survive a price war, whether thanks to an extremely low-cost operating model, geography and/or very large scale. Most, however, need to find another way to compete lest their margins be destroyed. Some options are available to them:
• Compete on quality and/or value. A supermarket can improve the quality of its private-label goods such that they are no longer “equivalent” in their price comparison. This will take time, but the company can start by emphasizing the quality and value of its offer rather than just its price.
• Get personalized. Switch from a shotgun-style mass marketing approach to promotions and instead embrace more targeted 1:1 promotions. This can especially be focused on those customers who most frequently swap between brands, competing for their spending when it suits you best.
• Don’t make it easy to price compare. Use complex promotions of bundled products or services, which make any offers of a price guarantee much harder to be triggered. The same strategy is effectively deployed in other sectors, such as for bundled broadband, cable TV and phone packages. Similarly, consider incentivizing consumers to shop for food and non-food goods at the same time, so that the food basket price is less transparent.
• Go multichannel. Incentivize the use of multiple channels, as for consumers the convenience of online shopping overshadows the appeal of low price hunting. And those shoppers who spend across multiple channels with a retailer tend to spend more than those who only buy in-store.
Given the inexorable march of consumer technology, price comparison and price matching are here to stay. As such, the temptation to entice customers through aggressive discounting will remain ever present. But only the industry will lose if the price wars continue, even if individual players make some specific advances. Adopting more refined ways of competing than the price bludgeon will ultimately benefit all its players.
Chris Donnelly is managing director for retail within Accenture Strategy. Contact him at [email protected].
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