Consumer confidence is low and the battle for spend intense, retailers are slashing prices in a bid to attract shoppers. But is this the optimum pricing strategy, asks Rebecca Thomson.
On the one hand, Asda’s price cuts helped it generate a sales hike of 10.7% over the Christmas period, according to Nielsen data. On the other, Tesco adopted astance that employed a similar relentless focus on price, but suffered a slide of 2.3% in like-for-likes in the six weeks to January 7. It’s all slightly confusing. Just how much does price matter to consumers?
At the core of the conundrum is the increasing complexity of today’s shopper, says Waitrose commercial director Mark Williamson. The purchasing decision isbecoming less about finding the cheapest possible deal and more about spending wisely, with some purchasing decisions becoming more difficult to make. “Customers want more than just the lowest possible price,” he says. “They want good value, and are interested in quality and innovation as well.”
The big picture
While price remains crucial, shoppers’ attitudes have changed over the last couple of years and it’s no longer enough to just be cheap. But as the downturn goes on,many retailers’ knee-jerk reaction is to be just that.
Deloitte partner Jason Gordon says: “When the economy was growing very strongly it was all about organic and fair trade as opposed to a price message. The tendency is as soon as things become more difficult marketing turns back to price as the key driver.” But, he adds: “Sticking to that is not the answer.”
Instead, says Sainsbury’s commercial director Mike Coupe, retailers need to emphasise other elements of their business that make them stand out – whether this means sustainable sourcing, product range or convenient store locations. When all retailers are battling to be the cheapest, customers often no longer notice who is. Coupe says: “You can never be complacent about price but as a source of competitive advantage it’s becoming increasingly difficult to sustain. Our view would be pricing will become less important.”
The challenge for retailers will instead be to convince customers they’re getting good value, whether it’s through price, unique products, convenience or a mixture of them all. As SAS industry marketing manager Cindy Etsell says: “If someone wants an item that is on trend, they are willing to pay the price. The current challenge for retailers is convincing customers that they are receiving value regardless of the product or price.”
Asda head of pricing and insight Alex Chruszcz agrees price is only one part of a successful offer. He says the grocer’s income tracker reveals that families have less in their pockets than they did a year ago “but that doesn’t mean that they are any less demanding on quality or service – or any less wise to pricing gimmicks”, he says. “Retailers will need to keep focused on delivering the whole package to shoppers this year – price, quality and service – delivered with real transparency.”
Consumers are, in short, becoming more complex and pricing strategies need to reflect that. Many shoppers are getting smarter, mixing and matching between high-end and low-end lines and using the web to find the best deals. The ease of accessing information now means shopping around is that much easier, and customers are responding to tighter times by seeking out deals.
Going for promotion
Williamson says Waitrose is witnessing a constant rise in promotional participation and says shoppers are buying more carefully. “We’re seeing more consumers making more shopping trips, but perhaps buying less on each one. It suggests they’re shopping around more.” Coupe agrees, saying 50% of Sainsbury’s customers buy from both its higher end range Taste the Difference and its Basics range.
Part of the new level of price transparency is of course down to the web. The pressure to keep prices the same across all channels is high as consumers learn to compare prices more. “What has become more difficult, particularly with the internet, is price transparency,” says Williamson. “It’s actually quite difficult to make claims on price if you can’t back them up. Our position is that we’re never going to be the cheapest and nor do we necessarily set out to be because we’ve got so many points of difference in terms of our offer.” But that’s not to say anyone can ignore price – Williamson points out that Waitrose’s relatively new Essentials range and price-match policy on 1,000 products has played a crucial role in reassuring shoppers in the last difficult couple of years.
But while some customers are thriving in the new shopping environment, others just find the deluge of information and marketing messages on price confusing. Especially in the grocery sector, the constant stream of information and the effort it takes to compare prices can be overwhelming. “If you look at the level of promotions and promises, customers are increasingly confused,” says Coupe. This is contributing to their predilection to choose retailers based on other criteria, he says.
Follow the trends
Shoppers’ penchant for something above and beyond price is not limited to the food sector. In fashion, it’s not just the cheapest players that do well. As H&M’s most recent set of figures show, price isn’t everything – the value retailer held prices down during the cotton price hikes last year, but this failed to boost sales as much as was expected and meant the retailer suffered the effects of a margin squeeze as well.
Chief executive Karl-Johan Persson defended the tactic, blaming the 3% fall in sales in the fourth quarter on difficult economic conditions and saying the policy will help it gain market share in the longer term. But the figures nonetheless served as a reminder that price isn’t everything – if consumers want something, they’re prepared to spend and cheapness is not enough of a spur on its own.
But that’s not to say H&M’s price policy was the wrong one – it’s more likely that other aspects of the business need tweaking. Primark is another value retailer to pursue a similar policy, but with more success. The fashion giant’s sales surged 16% over Christmas, and its insistence on keeping prices low was acknowledged as being a key part of its strong performance. Gordon says retailers should be wary of immediately dropping prices when the cost of raw materials falls, because there’s no guarantee they’ll stay low.
He says: “Cotton prices are coming down as lots more was planted at the peak. It will relieve some of the margin pressure. But if you start bringing prices down with cotton prices, the new challenge is where it leaves you should that turn around. Returning to lower prices may not really be sustainable.”
Williamson agrees, saying fluctuation in commodity prices means they can’t dictate retail prices too much. “If you want to lower prices you’ve got to be absolutely sure that the commodity prices are staying down. There’s a lot of fluctuation and some would suggest that longer-term commodity prices are going to rise.” But that’s not to say, he adds, that savings made as a result of cotton or wheat price falls can’t be given back to shoppers in the form of promotions.
Some other retailers – Supergroup chief executive Julian Dunkerton among them – have predicted price falls for consumers this year as cotton prices ease. The right option for each retailer will depend not just on its overall offer, but the strategy it’s followed so far – those who hiked prices last year as commodity prices soared may be wise to reduce them a little as margins increase again.
But commodity price volatility isn’t going away, and Vol Pigrukh, chief executive at price monitoring company Profitero, says retailers will focus ever harder on own-brand lines in an attempt to protect themselves against these changes. “What we see changing is the number of private-label products because retailers have better control over those margins,” he says.
A new understanding
The overall trend, Gordon says, is that pricing strategies must become more sophisticated to enable retailers to cope with a new shopping environment, which means retailers will have to work harder than ever at pricing things correctly. “The key here is having a more sophisticated understanding at a local level who your customer is,” maintains Gordon. “You need to know who’s in your store so you can influence their behaviour. I’m expecting to see money being spent on technology to support that, whether it’s pricing software or analytics.” Electronic shelf edge labelling could help some deal with the fast-paced changes in price but what’s crucial, he says, is that operational robustness underpins new technology.
Not only must retailers navigate the wider trends at work, but they need to realise how those trends impact consumers at a very specific level. Things can change according to product category, income bracket and even geography, and introducing a level of differentiation in prices for different consumers could work for some retailers.
Chethan Sharma, partner at pricing and marketing consultancy Simon-Kucher & Partners, says: “Retailers should focus on understanding changes to consumer purchasing behaviour at a segment-category level. For instance, chocolate consumption defied the recession as customers saw chocolate as an affordable treat they deserved.”
As the economic downturn continues to bite and as shoppers get fussier, getting the price right is more important than ever but with new shopping habits forming, it’s also getting harder.
But spend is clearly still there for the taking – retailers capable of predicting what shoppers are happy to pay will thrive despite the difficulties.
What makes a successful price strategy?
Perception is everything. Customers need to believe you are the cheapest, or a price message won’t work.
It might not matter whether every single product in a basket is cheaper than competitors. If customers don’t associate you with low prices or believe your price message, cheapness alone won’t drive sales. Keeping the message clear and consistent is crucial.
Clear positioning of a retailer in its market is also important. Shoppers are often happy to pay more if an item is on-trend, good quality or if your range is better than others. Chethan Sharma, partner at consultancy Simon-Kucher & Partners, points out that Waitrose’s positioning is clear enough that customers know they may not always get the cheapest deals there, but that low prices are noticed when they’re introduced. Getting this positioning wrong means price cuts might not be effective
Prices this year will continue to be shaped by the volatility in consumer markets, rising commodity prices and the effects of austerity taking hold in the UK economy, Sharma says. Retailers should focus on understanding changes to consumer purchasing behaviour and on attaining a clear idea of their position in the market
Watch commodity prices closely, and use predictions of what will happen to inform supply chain planning and sourcing in advance. This will help retailers make decisions on how much cost increases should be passed onto consumers. A differentiated approach can work – for instance increasing the price of premium bread, but not everyday loaves.
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