With consumers across the board feeling the pinch of rising prices, retailers should remember that value for money need not mean cheap, writes George MacDonald

Other than the credibility crisis engulfing prime minister Boris Johnson, one other troubling news story is dominating headlines: the cost-of-living crisis. 

Inflation is rocketing to such stratospheric heights that companies and consumers alike are reaching for the financial oxygen masks.

This week, according to the Office for National Statistics, inflation reached a 30-year high of 5.4%. The last time it was that high, John Major was PM and Whitney Houston was top of the pops with I Will Always Love You.

Now business costs from energy, commodities and wages are on the up. Consumers are bearing the same burdens – surging utility bills, in particular, are likely to weigh heavily on their spending power this year.

Some retailers have already raced to seize the high ground on price. Aldi pledged last week to “always offer the lowest prices for groceries, no matter what”, while Iceland unveiled a one-year price freeze on more than 60 items in its £1 value range.

It is a testament to the positioning of value grocers such as Aldi and Lidl that they have established a near-unparalleled reputation on price.

According to a Sainsbury’s graph accompanying its Christmas trading update, leading product inflation at the discounters has, ironically, outpaced it and the rest of the big four.

Sainsbury's graph Jan 2022

“They would say that, wouldn’t they?” some might observe of Sainsbury’s. But while there is no doubting the discounters’ competitiveness, they are less of a breed apart than they used to be and others can tell compelling stories on price, rather than give up the ground.

Just as the value positioning of respective grocers might be more complex than on first appearances, so is the wider issue for value for money – what constitutes it and how it is perceived by different consumers.

There is no one-size-fits-all. A John Lewis customer, for instance, is no doubt more insulated from real financial hardship than a Poundland shopper.

“Even the better-off are unlikely to be spendthrifts – even if they do open their purses to celebrate a relaxation of Covid restrictions and optimism grows about a return to normality”

Many people will still also be cushioned by savings made on commuting, holidays and leisure activities during the heights of the pandemic.

Marks & Spencer boss Steve Rowe said, as he updated on Christmas trading, that many of its customers are “relatively protected from the headwinds in terms of inflation”.

However, even the better-off are unlikely to be spendthrifts. They will see bills rising, too, and are likely to watch their spending that little bit more – even if they do open their purses to celebrate a relaxation of Covid restrictions and optimism grows about a return to normality.

So retailers almost across the spectrum will seek to limit higher costs and, as a result, higher prices. There are a variety of levers that can be pulled.

Some, such as Next, Currys and the Very Group, offer customer finance. Such credit facilities – offered responsibly – can help maintain and build shopper spend.

Currys boss Alex Baldock made the point during his golden quarter update, pointing out that credit customers are stickier – they spend more, make purchases more often and appreciate the service. The growth of buy now, pay later services adopted by many retailers also creates opportunities for spend to be maintained.

Retailers with big own-label businesses are also potentially in a stronger position to mitigate the effects of inflation. If they can work in genuine partnership with the suppliers who provide the vast majority of their product, they can likely make some savings without squeezing until the pips squeak.

“There is no getting away from the fact that prices are on the up in many cases. Rich or poor, the prospect is worrying consumers” 

Retailers can also adjust their margin mix, ensuring the sharpest of entry points while passing on higher costs across other areas.

Additionally, retailers enter an uncertain period having made improvements that will stand them in good stead. Many, for instance, have rowed back on constant and extensive promotions to focus instead on full-price sales and a message that value for money need not simply mean ‘cheap’. 

An increased focus on full-price sales was evident in updates from M&S and Superdry, for instance. M&S increased full-price clothing and home sales by 45% as it focused on a “trusted value trading stance” and slashed the proportion of product sold on promotion by 66%.

But there is no getting away from the fact that prices are on the up in many cases. That’s been acknowledged across the industry and across categories. Rich or poor, the prospect is worrying consumers. 

At Superdry, full-price sales – a central plank of founder Julian Dunkerton’s turnaround strategy – rose 12 percentage points. Consumers may willingly pay a higher price on some goods if they are assured of their quality.

This week’s GfK consumer confidence index data revealed a sharp decline in consumer sentiment – to a low ebb not seen since last February – that was “driven by concerns over personal finances and the general economic situation”. It concluded that “the cost-of-living squeeze that’s worrying us now… will affect us for months to come”.

This year, while value for money may not mean cheap, price credibility and integrity will be more crucial than ever as retailers strap in for another rollercoaster ride.

The widening wealth gap and polarising shifts in consumer spend were a key focus of Strategy WeekWatch on-demand as award-winning consumer psychologist Will Trump shares how retailers can tailor themselves to a wide range of incomes, and the implications for product and price positioning.