Wednesday, September 28, 2011

Tesco UK Declares War

On Monday, Tesco UK launched the “Big Price Drop” – a £500 million price cuts campaign that involves more than 3,000 everyday foodstuffs. This campaign represents a sharp change of strategy for Tesco, which have relied on promotions and the Clubcard loyalty scheme to lure shoppers – and signals a major re-thinking of Tesco’s price strategy. This is the EDLP (every day low price) strategy and discounters like Wal-Mart have led the EDLP wave and successfully encroached on the turf of supermarkets and other retail formats by advertising the fact that their everyday prices are “always the lowest” to be found.

The EDLP is a wonderful strategy beause it gives consumers peace of mind – they can do away with the endless price comparisons that mark shopping expeditions. This is necessary because frequent price promotions can be bewildering since they erode consumer confidence in the credibility of everyday shelf prices. With an EDLP approach, it is possible to restore price credibility. This is because EDLP is simple and consistent, it may be easier to communicate to consumers and therefore increase the chances of establishing a low price image through advertising. Furthermore, It also reduces managerial costs because it is easy to implement by simply matching or beating the most aggressive local competition. [This assumes, of course, that the retailer has an appropriate cost structure in place].

According to Hoch, Dreze & Purk (1994), “EDLP often is assumed to lower operating costs. These lower costs might be achieved in three primary ways: (a) reduced service and assortment; (b) reduced inventory and warehouse handling costs due to steady and more predictable demand; (c) lower in-store labor costs because of less frequent change-overs in special displays”. Lattin and Ortmeyer (1991) even argue that EDLP can reduce advertising expenses; e.g. Wal-Mart feature advertises in newspapers on a monthly basis, whereas many of their competitors do promotional advertising weeks a year.

Yet, not many retailers are rushing to adopt EDLP. I always believe that using pricing as the strategy is indefensible because it is just not sustainable. Consumer surveys of retail patronage repeatedly have found that location/convenience is the most important factor, followed in order of mention by low prices, assortment, courteous service, quality merchandise, and fresh meat (Arnold, Oum, and Tigert, 1983). Besides, EDLP sacrifices significant retail margins. I pose three questions. Can the sales increases be large enough to offset the reduced margins? Can sales increases maintain or even build dollar profits for the retailer? And finally, whether low price is in itself an important enough attribute to compensate for all the other attributes in order to drive customers into a particular retail location?

Tesco insist that this is not another supermarket PR stunt – they intend to focus on essential foods, with price reductions of between 10% and 30% and the deepest discounts reserved for own-brand products. According to UK’s The Guardian, Tesco had claimed that internal cost savings would help them to absorb the price cuts without hurting profitability, but analysts said 1,000 of the products, including carrots, cheddar cheese and biscuits, were own-label – which could increase the pressure on branded goods manufacturers.

Tesco UK’s chief executive Richard Brasher (left) insists that customers would be net beneficiaries and he.justifies the price offensive by saying: "We knew that we needed to take action on price. Across the country, families are telling us the same thing: their budgets are under real pressure. We're giving customers a more straightforward shop, reducing the number of promotions and putting the emphasis on clear and reliable savings that everyone can benefit from".

This may be so in today’s economic climate but retailers know only too well that they can be profitable charging low prices only when they have low costs.

I don’t believe it is going to work for Tesco because this pricing strategy is already being favored by Walmart-owned Asda – which already rely on high sales volumes coupled with ruthless efficiency.

Asda are also reportedly unmoved. "We ended all price wars with our 10% guarantee," says a spokesperson. "Whatever others do, they can't trump our cast-iron commitment to be 10% cheaper on a comparable grocery shop". Perhaps this is the better strategy?

Tesco are trying out the EDLP strategy only because they have been under constant attack by smaller competitors and it’s time to fight back. Besides they have been spending more time and giving more attention to their overseas markets than defending their home turf.

The other issue to appreciate is that the UK today are facing tough times. The price campaign underscores the weakness of consumer spending in Britain, where shoppers are economising on everything from clothes to groceries as disposable incomes are squeezed by rising inflation, subdued wage growth and austerity measures.

One last question – is this the start of an expensive price war in the UK? If it is, then Tesco will likely emerge victorious because as UK's undisputed supermarket heavyweight champion, they are best geared towards winning this war. I have no doubt that there will be casualties. What do you think?


Touching Lives said...

From my point of view much will depend on the duration of the price war. If it is prolonged the smaller competitors will be hit due to sustainability. And also the global economic conditions in America, EURO countries and the Middle East. If unemployment surges further, inflation soars, food supply continues to threaten inadequacy, then effectiveness will be questioned.

Dean Ng said...

In my opinion , price slash strategy is unsustainable today as inflation high plus food supplies are decreasing due to climate change and natural disaster. It is very important today for producers to maintain the quality of the product as before because we have seen incidents in China whereby the quality of goods such as food is terrible.

I do not think that people will mind to pay more if the quality is well maintained as people in the UK is well educated and they prefer quality lifestyles.

Overall , I think price slashing is just a short term effect on Tesco sales.