The supermarket price wars are a “race to the bottom” that “could deter future investors”, according to a newly released white paper on retail trends.
The paper from the KPMG/Ipsos Retail Think Tank (RTT) argues that the grocery price war’s short-term beneficial impact on the price of consumers’ shopping could be outweighed by the negative effects on the supermarkets’ business models of cutting prices too deeply.
The white paper says that the current price war “could damage the sector’s prospects for attracting investment in the future”.
The RTT states: “The price war between the major grocers may offer some short term gains for consumers, but it won’t deliver the shift the average shopper actually wants in terms of service levels and convenience.
“The latest discounting also fails to give the big four grocers a competitive edge over the discounters… Indeed, it could play into their hands as consumers may not trust a spate of lower prices than offered yesterday.”
Shares in the major listed grocers have all fallen since the beginning of 2014. Shares in Sainsbury’s have fallen 12% year-to-date to 321.5p today; Morrisons is down 26.4% to 191.9p; and Tesco has fallen 12.5% to 292p.
Tim Denison, director of retail intelligence at Ipsos and a contributor to the think tank, argues: “The immediate threat to three of the big four is their potential inability to invest in the changes needed to move with the marketplace… The promise to consumers of lower prices will prove to be nothing more than a race to the bottom of the premier league.”
Discounter threat overstated?
The big four’s drive to lower prices this year is regularly blamed on the impact of the discounters, who conventional wisdom says are eating into the traditional players’ market share and margins.
However, the RTT questioned how significant the effect of the discounters has really been on the established grocery players.
The report does not see the big four’s hold on the main grocery market being “seriously challenged” due to their 75% store network market penetration.
Mark Teale, head of retail research at CBRE, commented: “Kantar Worldpanel figures do indeed show Aldi and Lidl gaining market share… [but] the market share losses of Tesco and Morrisons largely offset by gains achieved by Sainsbury’s.
“Whatever switching is occurring, it is happening at both ends of the value spectrum (quality and discount). Tesco and Morrisons are suffering because they are caught in the squeezed middle.”
The RTT concludes that the current obsession on price will not lead the grocers’ sales back into the black.
Instead, the think tank advises: “The answer to securing sales doesn’t lie on a price tag, but in strong product ranges tailored to the local market’s tastes alongside delivery options, charges and times to suit the consumer.
“If a grocer can work out how to offer free home delivery, with no substitutions, products with a long shelf life and exact delivery times, then they will pull ahead of the pack.”
It sounds a simple prescription – and one that the current strategic priorities of the listed grocers seem to reflect as they move capital spend and staffing priorities from in-store to online and click & collect.
However, the 75% of market share is a reflection of the big four’s strength, but also their weakness. These businesses have huge estates which are still heavily weighted towards superstores – and these superstores are seeing rapidly declining sales. By way of example, Sainsbury’s like-for-like first quarter sales fall was 1.1%, but its core supermarket estate saw falls of between 3-4%. And Sainsbury’s is the best performing of the quoted companies.
Efforts to become a more fleet-of-foot, digitally-savvy business are being inhibited by the sheer size of their superstore estates and the proportion of trading they still account for.
David McCorquodale, head of retail at KPMG, suggests: “Many large stores could be refitted to become click & collect or home delivery hubs… However, it’s not as simple as moving some shelves around and re-designating use. Omni-channel grocery can dilute margins if not done effectively.”
Whatever the solution, finding it is unlikely to be an easy process. As the report concludes: “The old blueprint for a UK grocer is out of date.” Drawing up an effective new blueprint, one suspects, will take some time.
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