As opinions on the nature of the current price cuts veer from ‘it’s a spat’ to ‘batten down the hatches’, this week I would like to examine the responses that the majors have made, or are likely to make, to the current economic situation. At Oriel we believe that the consumer downturn will take a long time to play out, and that we are going to witness conditions last seen in the early 1990s. Brand positioning is going to be crucial.
Tesco’s usual mantra is that paranoia is good, and the fact the company is rumoured to be about to launch a new range to compete with the multiples and/or reduce the price of hundreds of its standard lines suggests to us that some of the lessons of the last recession have been learned. Back then, none of the majors had a low-price alternative to the discounters’ very cheap own-label offer. Now, of course they all do (or they think they do), but what interests us about Tesco’s mooted new offering is the fact that the current value proposition is not deemed strong enough a discount brand to protect Tesco from the likes of Aldi and Lidl. This tells us a lot about Sir Terry’s concern over losing footfall to the discounters. He’s scared.
Other managements seem more relaxed. At Sainsbury’s, Justin King reports nothing out of the ordinary. Yes, the market has got more promotional, but his view is that we’ll look back on this summer and smile.
At Oriel we are less sanguine. The stock market is taking no chances: shares have fallen by a third in nine weeks. We fear for Sainsbury’s price perception as things get tougher.
We also fear for Morrisons. Sales growth has been strong but as comparatives toughen we wonder if the momentum will continue. The London-centric stock market believes Morrisons shoppers won’t defect but this misses the point: there are plenty of rungs further down the food ladder than Morrisons and the discounters will be snipping around the heels there as well. Seeing how the proposed marketing is pitched will be fascinating.
We think the Asda brand is the most protected in this sort of consumer downturn, while M&S (witness its profits warning earlier this month) and Waitrose are dangerously exposed.
In our view it is preferable to have more caution than less. It will be those companies that stretch themselves the most to deliver lower prices that will be rewarded – not only in the short term, but in terms of building long-term customer loyalty as well. Paranoia may be well placed.
Jonathan Pritchard is a partner at Oriel Securities