In the world of consumer goods, the relationship between a retailer and its suppliers is one of the most important parts of the ecosystem. This is particularly true when it comes to supermarkets, given the complexity of their supply chains and their duty to offer value to customers and retail partners alike. With this in mind, Tesco’s recent decision to to slash 39p from the cost of four pints of milk may seem slightly strange, given the friction it has caused with dairy farmers and other consumer groups. Why has Tesco resorted to this? Is it merely to lighten the load on shoppers’ wallets? Or, is it a sign of insecurities creeping in following the recent rise of discounters like Aldi and Lidl?
The decisions made by Tesco impact on a wider range of companies and individuals than any other supermarket – despite its struggles over the last couple of years, it is still out in front when it comes to turnover and market share. It’s certainly true that bringing the cost of four pints of milk down to £1 is likely to please customers, but the National Farmers’ Union has already said that “this is not good news for the [dairy] industry”. So is the price cut worth risking the condemnation of dairy groups?
Tesco seems to think so, given that the discount brings it into line with Asda, which has sold four pints of milk for £1 for a while. But one way of looking at the move is as a retaliation to the ruthless pricing tactics employed by German discounters Aldi and Lidl, which have sent shockwaves through the grocery sector in recent years. As Graham Ruddick wrote in the Telegraph last month, Aldi’s sales lifted by 37.9% for the four weeks to February 2nd, with Lidl’s up by 16.4%. Their influence, as well as the growing success of single-price retailers such as Poundland, looks to have unnerved the big supermarkets slightly; a short time after Tesco’s announcement it was revealed that Sainsbury’s and the Co-operative were also adopting the £1 price bracket. This indicates that a new pricing war has begun in response to up-and-coming firms shaking up traditional consumer habits.
Another way of seeing the recent discounting is as a response to recent attention being paid to confusing or misleading promotional tactics, exposed by organisations such as Which? since the turn of the year. Which? executive director Richard Lloyd said: “with consumers struggling to cope with rising food prices, supermarkets and manufacturers need to make it easier for people to spot the best deal.” The simplicity of the pricing structure at Aldi, Lidl and Poundland has attracted consumers seeking an easier weekly shop, something that traditional powerhouses would do well to concentrate on when thinking about how to win back market share.
The biggest supermarkets have a lot to do in order to win back both the trust of consumers and market share from new competitors. Discounting is only one part of the problem (as is apparent from the response of dairy companies to Tesco’s move), but simplifying and reinventing tactics in the area could be a good place to start. What do you think Tesco, Sainsbury’s et al need to do most in order to regain market share? Let me know at moira@thembsgroup.co.uk, and have a lovely weekend.