Is Price Still the Main Hook for Grocery Shoppers?

Posted by Aimia on Oct 1, 2018 3:55:26 PM

Grocery Price Wars-1

An Australian Perspective

With Coles retiring its long running “Down Down” advertisement campaign for the new campaign slogan “Good things are happening at Coles” – two years after Woolworths parted with their “Cheap Cheap” tagline – industry speculators are predicting the end of the supermarket price wars. But is it so?

Let us consider what consumers are doing today. Australian in-store supermarket sales have been steadily growing. Food (the second highest category of spending for the average Australian household) accounts for 17% of household budget today of which groceries account for 67 cents of every dollar spent.

The average Australian also considers where they shop. Value for money, convenience and better quality products are the top 3 reasons why local consumers switch where they shop. Furthermore, younger Australians are the least loyal customers and may switch where they shop based on their preference for organic and ethically or sustainably produced goods.

 

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Household spending on food is also highly volatile. As household incomes rise, consumers will tend to switch to buying higher quality foods, which are often pricier. Conversely, when consumers are squeezed, food spending is also immediately impacted and consumers will switch to more affordable options regardless of quality. Essentially, the key variable in food spend is therefore not the quantity but the quality and price point.

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Source: Deloitte Access Economics

 

The Rise of Private Labels

Although the grocery industry revenue is projected to have grown by an annualised 4.2% in the five years reaching $105.3 billion and consumers are overall spending more on their groceries, industry-wide profit margins have fallen over the past five years as the major players have cut prices and margins to stay competitive. Major supermarkets have chosen to focus more on market share than profit margins, entering a zero-sum race to the bottom with many casualties along the way, including supermarket chain FoodWorks, which continues to struggle to compete in the cross fire between the two supermarket giants, and Aussie Farmers Direct which has since ceased operations.

Coles, Woolworths, Aldi and IGA account for over 80% of total industry revenue, with Coles and Woolworths alone accounting for more than 60%. The rise of Aldi has forced Woolworths and Coles to cut prices and expand their private label product range. Private labels now account for around a quarter of all super market sales and have developed into a sophisticated brand strategy with products now being offered across all product segments. When you enter a Coles supermarket today, you will find options by value tiers and product segments ranging from Coles and Coles Smart Buy to Coles Finest, and from Coles Organic and Coles Simply Less all the way to Coles Green Choice. Woolworths has similarly engaged in a similar product strategy where you will find ranges from Woolworths Homebrand to Woolworths Select, and Woolworths Fresh to Macro Wholefoods Market. These are just the few options apparent to the consumer, and not including the supermarkets’ phantom brands.

 

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Private labels exist to compete on both the value and quality front where consumers are provided with goods on various rungs on the price ladder. Supermarkets have also been particularly efficient at gathering and synthesising data about consumer preferences and in what situations people are willing to buy private label goods and where consumers will prefer to splurge on branded goods to fine tune their product strategy.

 

What does this mean for customers?

Coles’ shift away from their “Down Down” campaign and pure price play signifies its entering a new life stage where it is crafting out a more mature relationship with its customers. The multi-pronged, yet consolidated approach that tackles value-based pricing, brand image, and complexity of its customer segments speaks to current demands of its modern, responsible and individualistic customers. The focus to grow their private labels also ensures the maintenance of healthy product margins where cost of goods are better matched to their price ladder, as opposed to a pure price-discount based strategy that thins the margins.

Customers now have more choice than ever to find a private or branded label to fit their needs and price points for every product category. Combined with recent initiatives such as Coles’ Australia’s First Sourcing Policy, their $50M contributions towards Coles Nurture Fund initiatives, Sports for School campaigns, and their community partnership with SecondBite and Redkite; Coles is taking a multi-pronged approach at fulfilling modern customer needs of value for money, community and responsible business.

 

A New Era of Grocery Retail

While the price discount wars between Coles and Woolworths may be over, consumers are still seeking value and convenience. With Cole’s 2018 half-yearly earnings dropping by 14.1 percent from $920M to $790M, they will need to continue to innovate their approach to customer experience and value proposition. Although the quality promise would certainly give shoppers another reason to head down to Coles, competitors with different approaches to grocery continue to threaten the traditional brick-and-mortar grocery business model in Australia.

While Aldi’s share of Australia’s $90Bn supermarket budget continues to grow in SA and WA, market entry in the next 5 years by German retail giant Schwarz Gruppe who owns Kaufland and Lidl will bring a new era of aggressive price-discounting strategies that will likely win the wallet share of the more price sensitive customers. 

Online options are also expected to rise and with ‘dark stores’ (i.e. fulfilment houses) becoming a more important competing ground for operators serving customers who are time-poor and prioritise convenience. The arrival of AmazonFresh service is expected to affect the industry’s major players significantly and increase price competition. While online stores are still relatively niche in the Australia market and incumbent brick-and-mortar stores are physically well placed to reach the majority of shoppers, the arrival and increased sophistication of online competitors like AmazonFresh will likely up the ante with competitive pricing, quick delivery, large product range, synergies with their other retail and subscription brands, and online 24/7 service with options to pick-up or delivery.

With online grocery spend and transactions growth of 14% and 15%, respectively, and new customer base gains of 10% between 2015 and 2016, eCommerce will be the new battleground for consumers and retailers alike. To maintain their ability to compete, Coles Online will need innovation on par with their product strategy. The price war is certainly not over for supermarkets in Australia, however, the frontlines have been permanently redrawn. 

 

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Source: Roy Morgan Single Source (Australia), January-December 2016, n=11,940. Base: Australian grocery buyers 14+
 

A U.S. Perspective 

 
This past year has unquestionably been a year filled with big announcements within the grocery market. With the acquisition of Whole Foods by Amazon, the bankruptcy of Tops and Southeastern, increased competition from German retailers, and the slow adoption of online grocery shopping, one must wonder: What does this mean for the grocery price war in the US? Does the price war even still exist? What must retailers do in the future to remain relevant in such a competitive landscape?

 

Consumers Still Care About Price the Most

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87% of shoppers listed price as one of the top 10 attributes while shopping and there is no sign that this will change in the future. With price still being what consumers care about the most, it’s not surprising that the price war still exists. Following price, consumers care about the overall value that the retailer provides. Grocery retailers will have to continuously demonstrate their value to win business and market share. 

Additional competition in the market triggers lower pricing strategies. As German grocery stores Aldi and Lidl gain US market share, stores like Kroger and Walmart are pressured to offer lower prices. If competition continues to enter the US market, grocery retailers will continue to battle to provide the lowest prices and offer “price match” strategies, which benefits consumers but forces retailers to struggle to maintain margins. Grocery is already a low margin business with stores receiving on average one to three cents of profit from every dollar spent.

Some retailers cannot keep up with this pricing trend and are being forced to shut their doors. Recently stores across the nation took a major hit and are filing bankruptcy because they can no longer compete with the low prices of retail giants such as Walmart and Aldi, and regional giants such as Publix and Wegmans. Tops and Southeastern, two major grocery chains, recently announced they will file for bankruptcy.  Winn-Dixie, who is owned by Southeastern, will shut down 94 stores across states like Alabama, Florida, Georgia, North Carolina, and South Carolina.

Online Grocery Sales Have Yet to Take Off in the US

In the US, online grocery shopping continues to take off and we can assume that as this industry grows, it will have an impact on the pricing war, as well. Customers will have to see a clear benefit to leave their couch and go in-store, so grocery retailers will likely turn to more in-store deals or experiences to increase foot traffic.

With its recent partnership with Instacart, Aldi is moving into the grocery delivery space. Not only does this partnership elevate Aldi’s customer experience, it demonstrates the brand’s ability to capitalize on innovation and reach a broader market, while still investing in remodeling its brick and mortar locations.

 

Cutting Prices as a Quick Fix

In fall of 2017, Amazon purchased Whole Foods for roughly $14 billion. The first strategy that the online retailer implemented was cutting prices on key items such as bananas and avocados. Consumers were elated when the news broke, and in-store traffic shot up before quickly dropping back to pre-acquisition rates.

Cutting prices seems to be a short-term benefit to get customers in the door. However, what happens once members become accustomed to the lower price? Do you simply keep dropping prices until your profit margins are 0%? Or do you invest in innovation strategies to provide a valuable in-store experience?

 

Retailers Need to Balance Consumer-led Strategies Across the “Battleground” Areas of Price, Convenience and Customer Experience

With the rise of discounters, there are now retailers whose proposition is solely focused on offering the best price, with no added frills. If a retailer is not able to truly deliver the lowest price on offer, then fighting the customer attraction war using this weapon alone is unlikely to be a successful strategy. Each retailer must decide how aggressively they want to pursue price within the matrix of price vs. convenience vs. customer experience. If price competition is just too intense, then the answer lies in offering a differentiated and valued shopper experience which is strategically focused on building sales at full price, rather than subsidizing them through cutting price.

If we take a look at two retailers – Walmart and Target – we know Walmart promises the lowest price, guaranteed, while not promising any sort of customer experience. Target, on the other hand, may have slightly higher prices, but its loyal customers have become habituated to the store experience – with designer clothing partnerships and cult favorite beauty items, and its competitive pricing. However, Target is not immune to the price war. Its sometimes aggressive offers show pricing still plays a large part in its grocery strategy and encouraging customers to increase basket size with additional purchases. And Walmart isn’t completely ignoring the customer experience, either. Its solution could be to not ask customers to come into the store at all, with click and pickup purchasing and investment in ecommerce through its recently acquisition of Flipkart

Trader Joe’s is another example of a specialty grocer balancing pricing strategy and customer experience. Its cult following is willing to pay more because of the unique products and renowned customer service – TJ’s regularly posts top consumer satisfaction ratings – but the brand understands its customer’s price sensitivity as still the number one driving factor of purchase and keeps prices for Cookie Butter reasonable.

 

Fundamental Best Price Practices

Even if cutting prices is not a part of a retailer’s strategy, they should still define key benchmarks and what their price position is relative to the benchmarks. By doing so, retailers can start to analyze their “Known Value Items” (KVIs) and map out where they lie compared to their top competitors. KVIs should be the most important items for their price sensitive customers and are the areas where the most pricing investments should be made.

The grocery pricing war is still alive in the US with no signs of it letting up anytime soon. Once prices hit a floor, eroding profit margins, retailers will have to find new ways to provide value to their consumer base. Whether through innovation tactics or developing an engaging loyalty program that drives personalization, retailers will have to ensure they are providing an overall valuable experience to customers if they want to survive.  

 

 Additional Sources

Topics: Retail, Customer Experience, Customer Engagement, Loyalty Strategy, Loyalty Trends