Market Polarisation and the quest for differentiation
Despite evidence of recovery in the wider economy, there is little sign of macroeconomic growth trickling down to the grocery shopping trip. It remains the case that household budgets still feel the influence of austerity. There are three ‘squeezes’ on the household budget. Firstly, world food prices are being driven upwards driven by cereals (which obviously directly influence feed prices) thanks to growing population, changing Asian diets and biofuel demand. Overlaid on this upward trend are frequent speculative ‘spikes’ caused by rumoured harvest failures. We can say goodbye to low stable prices. Secondly, whilst food and drink have fallen from 24% of the UK household budget in the early sixties to 9% now so should be much more affordable, other calls on household spend have rocketed – notably energy, transport and housing costs. Thirdly there is the squeeze taking place in the grocery retail market itself.
The German-owned discounters have been enjoying double-digit growth for several years with regular all-time record shares being achieved. For example, the latest analysis for week ending December 08 2013 shows that over half the GB population shopped in either Aldi or Lidl. This should seem the logical response to tough economic headwinds. However, at the same time Waitrose has been growing at between two and three times the market average with consistent share increases. There is clear evidence of ‘two nations’ with both ends of the price / quality spectrum racing ahead and placing pressure on the middle ground. This squeeze can be summarised by stating that Waitrose, Aldi and Lidl have together siphoned an additional three share points out of the market over the last three years. With each share point being worth over one billion pounds, then the situation for mainstream retailers is increasingly serious. Tesco, Asda, Morrisons, Sainsbury’s and The Co-operative are all now losing market share. This is where the ‘quest for differentiation’ comes in.
Simply shouting about low prices and amazing promotions is losing its impact. This is a result of the recent phenomenon which I call Dynamically Reactive Pricing whereby both Tesco and Sainsbury’s will analyse your shopping at the point of payment and generate an instant refund if that shopping would have been cheaper elsewhere. Sainsbury’s match on branded products, whereas Tesco more controversially match on own-labels as well. And there is the well-established Asda Price Guarantee which aims to beat competitors pricing for the overall shopping basket. Thus, whilst a reputation for keen prices remains important, these mechanisms reduce the desire to change one’s store. So retailers have to look elsewhere for ways of differentiating themselves.
An obvious area for differentiation is the in-store environment – simply is it a nice place to shop? All retailers are investing in their store estates but notable developments are: Morrisons Market-Fresh refits with the famous misted veg displays, Tesco’s flagship Watford store with the inclusion of Harris + Hoole coffee shop, Giraffe Restaurant and Euphorium Bakery and a completely new Morrisons concept store in Preston with gravity-feed freezer displays and 360 degree high-speed scanning tills.
Own-Label has a major role to play. A 500g pack of Kellogg’s Corn Flakes is widely available so cannot be a differentiator whereas a quality own-label offering can be. In this regard, Tesco Finest (which is effectively a major national brand in all but name) is hugely important – if you are loyal to Tesco Finest products you can only get them in Tesco. The range has just been relaunched and went into the 2013 Christmas period with double-digit growth. The successful Taste the Difference performs the same function for Sainsbury’s.
For Marks and Spencer, its own-label is fundamental to its appeal but it is also differentiated by the chilled prepared foods range. It completely dominates the ‘For Tonight’ shopping mission (just observe commuters shopping in a Simply Food outlet at a London rail terminus) bolstered by the regular ‘Dine in for £10’ promotions. As a result, M+S food is consistently exceeding the overall market growth despite the squeeze from the discounters.
Sainsbury’s is keen to differentiate itself on ethical and provenance grounds which forms the crux of their current dispute with Tesco, where Sainsbury’s claim that matching own-labels in the Tesco Price Promise does not reflect the Sainsbury’s perceived quality advantage. Sainsbury’s Basics Ham is guaranteed British-sourced. The Tesco equivalent is not. All Sainsbury’s bananas are fair-trade, Tesco bananas are not and so on. This dispute will run well into 2014 with legal challenges to the ASA which has twice ruled in Tesco’s favour.
Obviously provenance, food quality and service levels are absolutely central to the Waitrose positioning. For example, its share of the Organic market is nearly five times higher than its overall grocery market share. Nearly all fresh food items feature clearly declared provenance and together with Sainsbury’s and Morrisons managed to avoid direct involvement in the horsemeat scandal.
No commentary on the grocery market is complete without highlighting the growth of the internet and related topics of mobile commerce and click-and-collect. On-line ordering now accounts for 5% of the GB grocery market and is growing at 20% a year. This growth is bound to continue given 3G and 4G networks, smartphones and tablet devices. Also there is a demographic effect in that young households account for an online share of 10% and this will act as an engine of growth if their shopping habits are retained into older demographics. Along with the rapid growth, internet shopping brings the advantage of a level playing field for frozen foods (unlike the spartan in-store experience which takes place at the end of the trip) and larger transaction sizes – people buy more on the internet.
Finally, returning to the discounters Aldi and Lidl. They have successfully changed their image from ‘shops selling cheap stuff’ to ‘shops selling quality food cheaply’ thereby removing much of the bargain store stigma and encouraging larger shopping trips. Christmas lines including lobster, goose, award winning wines and Serrano ham together with TV advertising are driving this process. The limited product selection (1,300 lines on average compared with 40,000 in a large superstore) tends to limit their ability to take over ‘the big shop’. They are restricted to a repertoire role with relatively small shopping trips and low loyalty. In a 4-week period a Tesco shopper spends 48% of their money in Tesco and the other 52% in competing outlets. The Aldi or Lidl shopper spends only 16% in their outlet with 84% going to competing outlets. Nevertheless, Aldi and Lidl are here to stay even in a post-recession world.