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Death throes for discounting

Scepticism, consistency, trust and profit. Four important words that are on the tips of supermarkets’ tongues as they start to develop more sustainable promotional strategies. It is these important factors that may well spell the end of the cycle of deep price discounting across the sector.

However, they are running out of time: with Kaufland ramping up construction, incumbent supermarkets have less than two years to convince shoppers to move away from “down down” discounts to “better value”.

In May this year, Anna Croft, Coles’ general manager for Grocery, told the Australian Food & Grocery Council’s Annual Summit that the supermarket still had an “over reliance” on promotions and was discounting in categories “we shouldn’t be promoting”. Similarly, Woolworths’ director of buying Peter McNamara said the supermarket was also too reliant on discounting and wanted to move to more consistent pricing.

Consumer scepticism

Half-priced energy drinks, toilet paper, razors and laundry detergent. Flick through any supermarket catalogue, page by page, category by category, and you will find “50 per cent off” discounts. While these provide short-term gain for shoppers, in the long run, shoppers begin to question how such discounts can be offered.

Dry groceries have traditionally low margins and the supermarkets are not making significantly large profits. In August, Coles announced a 9 per cent drop in full year profit, while Woolworths reported a 7.2 per cent increase. Then there are the well-publicised claims by the ACCC of “unconscionable conduct”. Coles was fined $10 million in 2014, while the Federal Court dismissed proceedings against Woolworths in 2016. With these concerns in mind, it is reasonable to understand why shoppers may seem a little sceptical about how these significant discounts are attained, and why supermarkets are keen to move toward a “better value” proposition.

Price consistency

One of the biggest gripes consumers have is a lack of price consistency. Their favourite cereal was $3.50 last week, but it is $7 this week and next week it is back on special at 30 per cent off. Such a pricing strategy makes it difficult for shoppers to budget from week to week and encourages them to switch between brands of supermarkets, chasing these discounts. Switching is naturally something supermarkets would like to negate. Accordingly, a strategic shift towards a more consistent price structure, underpinned by an Everyday Low Price (EDLP) or Everyday Better Value offer will provide a consistent price promise, while mitigating switching behaviour. 

In price we trust

Earlier this year, Woolworths vowed to move away from deep discounting and temporary specials in favour of permanent discounts. The move was designed to develop “price trust” with their shoppers, with Woolworths believing the best way to build customer loyalty is by offering consistently lower prices rather than tempting them with one-off discounts. At the time, Woolworths’ director of buying claimed it was becoming increasingly important for customers to not only feel like they’re getting a good deal, but that they can trust the price supermarkets are putting in front of them. Price trust has become a key metric of store choice and a metric supermarkets are keen to improve on.

The bottom line

The relentless price discounting has slowly eroded margins for supermarkets. To maintain margins, supermarkets have slashed operating costs, reduced product ranges and increased private label alternatives. In 2018, outgoing Coles managing director John Durkan indicated the supermarket wanted to lift private label penetration to 40 per cent by 2023. Aldi’s entry into the Australian market has been widely recognised as having legitimised private label products and encouraged incumbent players to invest heavily in improving the quality of their offerings. However, cost cutting and private label penetration can only go so far; a move away from weekly deep discounts will further stabilize and improve profits for supermarkets and also suppliers, who often fund promotions.

Drivers of a sustainable pricing strategy

While trying to re-establish price trust and healthier profits, the supermarkets are also trying to avoid another drawn-out price war with Kaufland. Kaufland are now well underway with their market entry plans, announcing three stores in Victoria, three for South Australia and three in Queensland. The German supermarket giant has also started construction on its first distribution centre in Mickleham, Victoria.

Schwartz Group-owned Kaufland will be a significant challenge for our supermarkets, with their deep pockets (they are the fourth largest retailer in the world), global buying power, extensive private label ranges and a mix of well-known brands. With Australian shoppers now well-conditioned to the German discounter model, their market penetration and growth will be much faster than Aldi’s back in 2001.   

Focusing on delivering “better everyday value” shifts the focus away from “price” and on to attributes a new competitor can’t or won’t offer. Value is a multidimensional construct, which means different things to different people. Coles’ plans to open 140 small-format stores will attract shoppers seeking convenience value. Woolworths’ expedited online shopping deliveries and smartphone “scan and go” options will tap into transactional value. Little Shop, Lion King and Discovery Garden Collectibles will please those shoppers seeking hedonic value and surprise. Woolworths’ new “Generation 3” stores and Coles’ rustic style of the neighbourhood “Local” store, with an in-store barista and chef, a food waste digester and 100 per cent Australian-grown fresh food, will leverage emotional value.  

As the cost of manufacturing and procurement continue to increase, and the effects of drought take hold, putting further pressure on profit margins, supermarkets will strategically shift to a consistent price offer. A further push towards an “everyday better value” proposition will hopefully insulate supermarkets from any drawn-out price battle with another global competitor, Kaufland.  

Gary Mortimer is a professor in marketing and international business at Queensland University of Technology. This article first appeared in Inside FMCG’s quarterly magazine. Subscribe here for the print and digital edition.

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