Retailers ranging from Asda and Sainsbury’s to John Lewis and Asos have all cut back prices this year in a bid to lure cash-conscious shoppers. Which retailers will fare well and which will flounder in retail’s new price war?
- Retailers across sectors and channels view price as an important differentiator in a post-pandemic landscape
- Grocers are revamping and launching loyalty schemes to capitalise on the return of ‘the big weekly shop’
- Retailers have leant from previous recessions to be ‘shopper first’ in their thinking
Speaking at John Lewis’ results last month, Dame Sharon White described Covid-19’s impact on consumers and their finances as an “economic earthquake”.
The reverberations of this earthquake have landed the UK in a recession, with forecasts from the IMF’s World Economic Outlook and the Office for Budget Responsibility both predicting that the economy is unlikely to return to pre-pandemic levels until at least mid-2022.
Against this backdrop, price is back in focus as retailers battle to woo shoppers back to stores and keep fingers busy online.
In the supermarket aisles, Tesco and Sainsbury’s have both launched pledges to price match Aldi on a range of items, while Asda is ploughing £100m into price cuts and advertising.
But it’s not just grocery retailers that are focused on price.
John Lewis has entered the fray with new own-brand line Anyday - a new range of budget goods that are 20% cheaper than its other own-brand labels. So far, its Anyday collection includes 2,400 products, spanning anything from bathtubs to bookshelves, with another 1,000 lines will be added in September.
John Lewis is far from the only ’non-essential’ retailer to be sharpening up on price. Despite thriving during the pandemic - enjoying “exceptional” sales growth of 39% in the UK in the six months to the end of February 2021 - Asos has said it is cautious about economic prospects for its core 20-something customers.
“Price remains the primary driver for consumers, ahead of quality and convenience”
Anusha Couttigane, Kantar
In response, the online fashion retailer has reduced pricing on its Asos Design line by 10% across Europe. Chief financial officer Mathew Dun says: “When we looked at the baskets of equivalent products across a number of competitors in different markets, we identified an opportunity to make our pricing more competitive.”
Retailers across different sectors and channels are viewing price as an increasingly important differentiator in a post-pandemic landscape. And, as Kantar fashion analyst Anusha Couttigane points out, data from the brand consultancy shows that “price remains the primary driver for consumers, ahead of quality and convenience.”
Against this backdrop, how are shoppers using price to lure cash-conscious shoppers?
The importance of choice and loyalty
Price wars are nothing new, of course, but UK grocery retail specialist on Kantar’s market insights team Derya Güvenç says the emphasis of where value is added for shoppers which will be different this time around.
She says choice competitiveness will be more important than price competitiveness as supermarkets endeavour to get shoppers to pick them for more than just basics.
Poundland’s recent acquisition of frozen food specialist Fulton Foods shows this is a trend that can cut both ways, with the general retailer adding another string to its bow and bolstering its value credentials beyond its traditional categories.
The value retailer aims to add a chilled and frozen food offer to 500 of its stores in the next two year in a bid to capture a bigger share of shoppers’ overall spend when they visit Poundland stores.
“I don’t think they want to be the [main] grocery destination but it does provide traffic,” says Ms Güvenç. Asda’s partnerships with complementary brands including B&Q, The Entertainer and Greggs do a similar job.
The return of the weekly shop?
The goal remains customer loyalty. During the pandemic, people stopped shopping around so much, says Güvenç.
“We slightly went back to that weekly shop. Will this remain so going forward? If we fragment our trips, retailers will try to keep them consolidated for themselves, online and in-store.” Given online retailing is bad for margins, shops want customers to come back, providing they come back to their shops, she adds.
That’s why we are seeing retailers reinvigorate their loyalty card schemes or launch them for the first time. Tesco has stepped up the discounts it offers Clubcard customers, who can save up to 50% on some brands.
Vowing to continue waging a price war when he unveiled the company’s latest annual results, recently-appointed CEO Ken Murphy said he has increased the amount of shelf space for cheaper items by more than one-third.
Even the discounters are at it, with Lidl launching a loyalty app in autumn 2020 that provides regular shoppers with personalised deals based on what they buy.
Asda is endeavouring to provide variety both in the types of products and nature of price cuts it is offering to shoppers.
The grocer’s chief merchandising officer Derek Lawlor says that as well as sticking with the chain’s focus on everyday low prices, Asda is focused on a number of other price investments to deliver value, including regular rollbacks and price lock events, reducing prices across thousands of food and non-food categories.
“We know that many of our customers are having a tough time financially due to the pandemic,” he says.
“More than half of customers that we recently surveyed said they expected their household finances to worsen during the next 12 months, so it is crucial that we do all we can to make their budgets go further. Investing in price to provide even greater value for customers when they shop remains our key strategic priority.”
Outside of grocery, using price as a means of driving loyalty is also a priority.
JLP’s head of buying for textiles and home accessories Camilla Rowe says the launch of Anyday aims to “bring in new customers or increase the spend of our existing customers.”
“We have lots of loyal customers but they don’t buy everything from us so we’re hoping we’re going to grab more of their spend,” she adds.
“This is a step-change for John Lewis,” says Couttigane.
“John Lewis has a perception of being a more expensive place to shop and [the Anyday range] shows it is recognising how much more competition there is with regard to prices.” The department store group, she adds, is having to reevaluate how to capture not just entry-level consumers but quite possibly its own customers as well.
Pricing up the competition
Against this backdrop, there are likely to be some familiar winners in grocery - namely the discounters.
“They benefit from economic uncertainty due to having a much leaner operating model and more runway from a price perspective,” says Paul Martin, KPMG’s UK head of retail.
“They have been successful at getting shoppers to flirt with them by enticing them in and then getting them to shop more categories once they are there,” adds Güvenç. She cautions, however, that price is no longer the only way consumers measure value - demonstrated by the fact that discounter Aldi actually lost market share consistently during the height of the pandemic in 2020.
“Shoppers will buy something that’s cheap only so many times. So many new factors, such as nutritional value, are coming into play.”
Sparking change at M&S
Shoppers like cheap stuff. But they also like to feel the stuff they are buying is good value, which isn’t always the same thing. When the two overlap, sales soar, which is what has happened at Marks & Spencer following the launch of its ‘Remarkable Value’ initiative last summer.
The idea was to cut the price on the items people buy the most: the cost of a white loaf almost halved to 65p from £1.15. Volumes on products in the range have increased by double digits, says a spokesperson, adding that the cheaper items can now be found in more than half of total food baskets. The range, which spans around 300 products, up from 240 when it first hit stores, helped the company’s latest third-quarter food sales to beat City forecasts, with same-store sales in food rising 2.6%, or 5.7% if the impact of closing in-store cafés is stripped out.
“Our customers tell us that they value our high quality and sourcing standards that lead the market and we will never compromise on those, but we have invested in price to ensure that customers can enjoy them everyday at remarkable prices,” says Sharry Cramond, M&S Food’s marketing director.
The value-led branch launch succeeded by combining M&S’s reputation for high-quality groceries with prices that new and existing customers did not expect on food cupboard staples - demonstrating the value of carefully selecting product lines for price cuts that lure shoppers to return to the store.
Martin agrees that it’s not enough just to make something cheap, and says the trick lies in knowing your consumer and their shopping mission.
“If you know your consumer is one with high ethical standards who is pursuing a green agenda and focused on local sourcing, pricing is very likely a secondary component. If you don’t know that then you are very likely giving away margin.”
Güvenç echoes this view, pointing to the fact that in the 2008-2009 recession it was not only Aldi and Lidl that gained market share but also Waitrose, which she says “had clear value proposition that was aligned to the needs of their core shoppers.” By contrast, big four grocers like Tesco and Asda lost market share by “diluting their proposition as a result of price wars”.
“Today, the lessons learned from previous recessions definitely help retailers be ‘shopper first’ in their thinking, and this means creating value not only through pricing, but also choice, be it through relevant products for all core needs, and experience such as ease of shopping, rapid delivery, assistants in-store and so on,” explains Güvenç.
Added complexity
Martin believes similar principles of customer knowledge and adding value beyond price will also separate the wheat from the chaff outside of grocery.
He says that winners of the price war for ‘non-essential’ retail will be platform businesses such as Amazon, which sell shoppers a range of goods across different sectors and price points, and “category specialists” which “can afford to command higher price points because they have the product knowledge and service proposition to outperform platform businesses”.
“The danger is if you are in the middle and if you haven’t got a real distinct proposition. That’s what happened with the department stores [during the last recession].”
To avoid this fate mid-market retailers such as Next are using partnerships to diversify their offer and get retailers extra mileage on pricing, analysts add.
“The danger is if you are in the middle and if you haven’t got a real distinct propostion”
Paul Martin, KPMG
“Next has always been in the middle market space. The brands it is acquiring under licensing agreement will help it stretch prices up and down,” says Couttigane.
Marks & Spencer has struck collaborations with labels including Ghost, Nobody’s Child and Finery London to diversify its non-food offer and draw in new customers. Even so, Ms Couttigane says M&S and Next will have to “re-evaluate” the position of some of their products if they are to continue to lure shoppers in an increasingly cost-conscious mindset.
The challenge for retailers now lies in being perceived as offering value for money in an increasingly complex retail environment, particularly given the flight to online by customers across all sectors during the pandemic. The retailers that win will be those that can communicate value to customers not only through price but also through their product quality, range breadth, online prowess and in-store experience.
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