Tesco slashes prices, further sparking supermarket war

09 January 2015 Consultancy.uk

The price war in the UK’s supermarket industry is intensifying, with Tesco announcing it will slash the price on 380 basic food items by 25% in the coming days to compete with among others German budget supermarket Aldi and Lidl. The move will however, according to OC&C Consulting, place producers’ margins under further pressure.

Supermarket price wars
The last years have seen changes to the UK’s supermarket landscape with stiff competition from budget supermarkets Aldi and Lidl offering consistently low prices, knocking the Big Four supermarkets from their past profitable perches. Morrisons has posted a sharp decline in like-for-like sales in the first half of 2014, while Tesco and Sainsbury’s reported falls of 3.7% and 1.1% respectively in like-for-like sales. Aldi in contrast has seen its market share increase from 4% in 2013 to 4.8% in 2014, while Lidl has increased its share to 3.5%. 

In response to the change in shopper behaviour, from brands to the cheapest, the Big Four supermarkets are starting to slash prices on their own budget lines in the hopes of keeping customers and upselling produces where possible. This week Asda cut the price of 2,500 “essentials” including fruit and vegetables, cereal and nappies, and Tesco announced yesterday that it would follow suite and cut the price of 380 essential items by 25%. With the move, the grocery store wants to remain more competitive and increase the “up-sell” of items available at its store and not at budget markets. "Part of their motivation for wanting to get to something simpler is that it clears out some of the clutter and makes it more feasible for the shopper to be guided toward things they ultimately might want more, and be prepared to pay for," explains Will Hayllar, co-lead of the consumer goods team at OC&C Strategy Consultants.

Tesco supermarket

The move to offer consistently low prices on basic and essential items will, according to a spokesperson at Tesco, “improve the competitiveness of the UK customer offer and to strengthen the balance sheet”. The past practice of offering discounts on staple items every so many weeks, no longer of this time. "Customers told us they wanted prices which are simple, lower and more stable," says Tesco Chief Customer Officer Jill Easterbrook.

The move to “cheaper” essential items, has a knock on effect to producers. The supermarket price wars in the early 90s and the creation of “home brand” budget essentials already wreaked havoc on producers, who are now facing some of the lowest profit margins in their existence at an average 5.2%, revealed a recent study from OC&C. With the new budget supermarket entrants and the escalating price war, the pressure on producers is only set to increase, with producers set to enter "bumpy waters for the next few years,” according to Hayllar, going on to remark that: "Having already endured commodity price inflation, and a consumer spending squeeze during the recession, food producers don’t have the profit base to fund any further discounting."

OC&C Strategy Consultants

The move to create stable low prices might however, create certain benefits for both producers and suppliers as it creates both certainty and reduces the waste of having to create marketing material for constant marketing campaigns. Tesco’s motivation is then not merely keeping market share but also to cut costs and strengthen its relationship with suppliers. "That would be the carrot to persuade them to give Tesco the absolute best price," says Duncan Swift, head of the food advisory group at accounting firm Moore Stephens.

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Lack of high street openings sees UK retail in precarious state

11 March 2019 Consultancy.uk

Changes in consumer behaviour, particularly in favour of online shopping, are starting to take their toll on shop-fronts in the UK, while stagnant wages are hitting peoples’ willingness to go out for food and drink. As a result, the rate of closures is more than four times that for the same period in 2017, although largely reflecting of a lack of new openings.

The retail market has fallen under a cloud of uncertainty in the UK; consumer confidence has dipped, while wages have continued to malinger in negative territory. Retailers are also under pressure from disruptive technology, as consumer sentiment shifts to more online shopping and at-home leisure. While retailers have been able to weather the storm for the past years, transformations, low consumer spending and technology have begun to take their toll.

New analysis from PwC explores the current market conditions in the UK for retail shops, focused on net openings and closings. The market changes in the UK have seen the net closures to date hit 1,123 in H1 2018 across the UK’s top 500 high-streets. The rate of closures was considerably above openings for the first half of 2018, at 1,569 openings and 2,692 closures. Compared to H1 2017, more than four times as many shops closed than opened.

Openings and closures for retail industry

The study considered the most prominent areas to see a reduction in openings and net closures across the retail landscape. Overall, fashion stores were the hardest hit in absolute terms, with a total of 104 closures for H1 2018, followed by public houses and inns, which saw 99 closures in the same period. Electrical goods stores saw a net -44 decline, with a total of 8 openings for the period. Meanwhile charity shops were in a state of relative flux, with 80 openings to 117 closures. The firm notes that service sector shops, including estate agent, banks, recruitment agencies and travel agents, among others, too have begun the process of moving online.

Not all areas of retail saw closures, with coffee and ice cream shops seeing a small net increase in openings over all. Book stores – predictions of their total obliteration appear to have waned – saw a net 18 openings, while supermarkets drew the highest overall growth relative to closures, at 18 opened and 6 closed.

Regional figures for the UK

Not all areas have seen the same level of closures, with the Greater London area and the South East the hardest hit by the current wave of closures, at -268 and -197 net change, respectively, compared to -23 and -25 closures for the same period in 2017. The middle of England too saw considerable closures, with the West Midlands clocking a net -89, and Yorkshire and the Humber down -117 stores overall.

Commenting on the figures, Lisa Hooker, consumer markets leader at PwC, said, “Openings simply aren’t replacing closures at a fast-enough rate. Specifically, the openings across ‘experiential’ chains, such as ice cream parlours, beauty salons and vape shops, haven’t been enough to offset closures in the more traditional categories. Looking ahead, the turmoil facing the sector is unlikely to abate. Store closures already announced in the second half of the year due to administrations and CVAs already will further intensify the situation.”

Related: Artificial Intelligence offers $340 billion opportunity to retail sector.