Store wars: The supermarket strikes back

The key challenge the big grocers face from the discounters is right there, in the name. The discounters’ raison d’etre is low prices, and they have a distinctive and efficient operating model that delivers that promise. A smaller range, a lower proportion of chilled and fresh lines that are expensive to manage and afocus on everyday low prices, rather than complex promotions that can be confusing for consumers. It’s simple, and it works. The question is, how can the supermarkets compete?

Some are electing to take the battle to the discounters, and try to beat them at their own game. Tesco’s ‘Project Reset’, for example, is removing up to 20,000 SKUs in the interest of a more streamlined lower-cost operation and a simpler shopping experience. Even world-leading brands like Carlsberg have not been exempt. The impact of discounters is also extending to the way many of the traditional grocers are approaching pricing and promotions.

It’s too early to tell how consumers will respond, but the consequences for consumer goods suppliers are already being felt. Many are facing significant drops in revenue, especially if their products aren’t number one or two in their segment. In most cases, the only way to plug the shortfall will be to find new outlets, or develop new products, pack sizes or price points. But there will be winners too, especially the more agile and innovative operators, and those which are focused on one particular category or niche. Many of these are already seeing stronger growth than their bigger competitors, who are struggling to manage large portfolios spread across multiple ranges.

The irony in all this is that some of the discounters are going in the opposite direction, not only increasing their fresh and chilled ranges, but starting up some online services, where they’ve never chosen to compete before. The reason, in large part, was the cost: the big supermarkets have made online an integral part of their offer, but it’s hard to make the margin needed to cover the operating costs. The difference now is that we’ve reached the tipping point with online: shoppers now expect stores to offer it, so the discounters have to find a way to do it. And all the more so with the advent of Amazon Fresh, which could be a complete game-changer if it does indeed manage to apply the company’s world-leading logistics capabilities to the challenges of food retailing.

All of this proves that price isn’t the only combat zone in the store wars. Channel is clearly another, and that includes not only online, but also convenience. The big supermarkets have had smaller convenience stores for a long time, but new players like My Local are changing the rules, not least by changing the layout and the product range. Some of the same trends are coming through in the supermarkets too, with more emphasis on convenience products like ready meals, and new layouts that group products according to how people use them, rather than by category (for example, pasta alongside tinned tomatoes).

And last but not least, differentiation. Some of the big food retailers have elected to fight a different battle altogether, by offering something the discounters don’t. Waitrose, M&S, and to some extent Sainsbury’s, are pinning their colours to quality, variety, and consumer trends like healthy eating. M&S, for example, is keeping shopper interest with a constant stream of new lines, backed up by a sophisticated approach to TV advertising that owes more to fashion than food. And that, too, seems to be working.

So what are consumer goods companies doing to win in this environment? Firstly, they are aligning their products to consumer trends by making them healthier and convenient to eat on-the-go. Secondly they are reassessing their channel strategy – thinking about ways to enter the discounters and convenience stores profitably. Finally, they are continuing to build their brands or scale their private label offer to position themselves as the winning number one and two in their segments.

To learn more about some of the key deals that took place in Q3 2015, read our new publication, 'the Consumer' here.

How do you see the rest of 2015 playing out? Share your thoughts below or schedule a meeting to discuss your situation in confidence.

Inge Cajot |  Director, Strategy
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Claire Davies |  Senior Manager, Strategy
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