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UK RETAIL: The pricing paradox

01 August 2008 By db staff writer

Deep discounts have made wine accessible to a much wider range of consumers, but they have also helped make the UK a nation of promotion junkies. Ben Grant considers the implications for the trade

It’s the morning after Christmas and the Great British Public are feeling a tad delicate. After countless hours gorging themselves with turkey and washing it down with a lethal cocktail of sticky liqueurs, most are looking forward to that greatest of Christmas gifts: yet another day off work. The seasonal tendency towards extreme laziness and gluttony leaves many curled up under the duvet wondering whether the fourth portion of pudding was really necessary. But, in spite of the bursting belly and the aching head, vast swathes of the population are compelled to leap out of bed, brave the wind and rain, queue for hours and then dive headlong into a rugby scrum-cum-riot. Why, you may wonder, have the Boxing Day sales become such a pivotal part of the festive calendar? Well, it’s simple really. Us Brits will do almost anything for a bargain.

Historically, we’ve always been described as a Nation of Shopkeepers. In the age of the multiple retailer, however, the number of shopkeepers has shrunk rather dramatically – so we’ve redefined ourselves as a Nation of Bargain Hunters. Cruising the supermarket aisles we’re visually assaulted by a barrage of multibuys and deep discounts that appear almost too good to be true, while the internet has given us an unprecedented ability to compare prices and seek out the cheapest. It makes you wonder whether anyone ever pays full price for anything anymore.

This is, of course, great news for those consumers whose top priority is to save their pennies, but it makes life incredibly challenging for suppliers. This undoubtedly rings true for any wine producer who entertains ambitions of shifting significant volumes: the supermarkets have them, quite literally, over a barrel. In the light of this evolution of the retail landscape, a serious question mark surely hangs over the long-term sustainability of the wine trade in its current form.

In order to assess the future impact of Britain’s insatiable thirst for discounted plonk, it’s first necessary to understand why these deals are offered in the first place and how they affect consumer perception. For this, db has undertaken a crash course in economics, courtesy of Europe Economics consultant Iona McCall. Europe Economics recently produced a report as part of the WSTA 2008 Budget Submission to highlight the (limited) impact that increased taxation will have on problem drinking.

From an economist’s point of view there are a number of general principles that can be applied to the subject. The concept of “supply and demand” is, of course, central; as is the notion of the “price elasticity of demand” – the responsiveness of demand to a change of price. “Demand-side substitutability”, consumers’ willingness to substitute one product for another – is also relevant. These rules and theories may seem to suggest that there’s a high level of logic and predictability in the mindset of the average supermarket shopper – but the reality is rather different, according to Nigel Marlow. When he meets his first-year students, Marlow, a lecturer in consumer psychology at London Metropolitan University, tells them about a time when he popped into a supermarket to pick up a birthday card. He emerged half an hour later with a £70 basket of groceries – but the birthday card was long forgotten. “It’s a story we can all relate to,” he says, “it shows how non-rational our behaviour is when we enter these palaces of consumption.”

Into the deep
There are several reasons why supermarkets offer massive discounts, but the most important is as a weapon in the vicious battle for market share. “Retailers use deals to get consumers through the door, to attract them away from the competitors,” Marlow explains. This is particularly true for wine as it is a “cross-the-road category”, a product for which consumers will visit the supermarket especially, according to industry consultant Allan Cheesman. And as well as stealing share, Richard Dodd, spokesman for the British Retail Consortium (BRC) explains that price-based promotions are offered in order to encourage consumers to make a purchase now, not next month, hence helping the retailer to control stock and cash flow.

Suppliers have a range of reasons for agreeing to participate in – or fund – the deep discounts. Stealing market share is a prime objective, as is pushing through inventory when necessary. Producers also use deals as a brand-building exercise, to encourage consumers to try (or retry) the product – but the key question is: once a shopper has paid £4 for a half-price wine, are they really prepared to pay full whack for it next time?

The issue at stake, says McCall, is substitutability. “If consumers perceive individual wines to be substitutes for one another they will be more sensitive to changes in relative prices and, as a result, the impact of the reduction in the price of any one wine will be bigger than if consumers do not perceive different wines as substitutes.” Marketing managers will argue vociferously that once a consumer is exposed to their magnificent and utterly unique brand, they’ll be so enchanted that they’ll be delighted to buy again at full price. Well, sorry to shatter the dream folks, but – as the follow-on sale rates of virtually every half price deal will irrefutably demonstrate – that’s simply not the case.

With at least one brand or other being flogged cheap at any given time, it’s little wonder that puzzled shoppers just reach for the discount gondola irrespective of what’s on offer. For the vast majority of British drinkers the price tag is by far and away the top priority, significantly more important than what’s inside the bottle. Marlow makes a point that should send a nervous shiver down the spine of everyone in the trade: “A bottle of wine is just a bottle of wine.”

For many this viewpoint is, sadly, the reality. The trade might like to fool itself that the average man in the street wants to educate himself and enjoy discovering ever-finer wines, but in the real world this is simply not the case for the vast majority. Brits are obsessed by price, and for this the supermarkets carry a heavy burden of blame on their shoulders.

With over three decades‘ experience, Cheesman is well qualified to comment on the evolution of the trade. He was at the helm at Sainsbury’s in the 1990s when computer technology found its way onto the shop floor, providing the tools necessary to implement radical advancements in retailing practice. Sainsbury’s was a pioneer of retailing technology that played an important role in turning around a steady period of decline for the company. But listening to Cheesman discuss the way that the invention has evolved to the obvious detriment of the trade is rather like hearing Dr Frankenstein discussing his monster, or J. Robert Oppenheimer (the nuclear physicist and director of the Manhattan Project) reflect on his creation of the nuclear bomb.

The promotions that were made possible by advanced retailing software undoubtedly did a lot of good; opening up the world of wine to a dramatically expanded mass audience. But having created a seemingly unquenchable thirst for cut-price wine, does it now threaten to strangle the UK wine business by making it too commercially compromising for everyone but the biggest volume suppliers? Cheesman fears the answer to this question may be yes. “In my opinion it’s just not sustainable,” he says. “From a supplier perspective it’s only possible if you’re trying to empty your cellars … and there’s always somebody out there who’s willing to do a deal.”

LEGAL SOLUTION

The wine trade’s willingness to sell at bargain-basement prices often resembles some kind of commercial suicide, but there is the very real chance that the industry’s destiny could be taken out of its hands. As part of a concerted drive to tackle irresponsible drinking with legislation, last month the Scottish Executive put forward a number of measures, including the imposition of a minimum price structure. The politicians’ rather ham-fisted logic infers that problem drinking is exacerbated by cheap availability, so banning the discounts will solve the problem. This is – quite clearly – bunkum; a knee-jerk reaction that totally fails to address the issue in a considered and logical way. But with Sheffield University currently compiling a report for the UK government, there is a very real possibility that it could pass into law.

Europe Economics compiled a detailed study for the WSTA earlier this year examining the impact that a rise in duty will have on problem drinking. While the study addresses the issue from the opposite angle (high prices as a deterrent rather than low prices as encouragement), McCall says that the conclusions of the Europe Economics report clearly indicate that any rise in the price of wine will have a much greater impact on the vast majority of responsible drinkers than the problem minority.

Retail psychologist Marlow is in agreement. “Cheaper prices doesn’t equal higher consumption,” he explains. “In terms of individual consumption it really doesn’t make that much difference; we don’t drink more because it’s cheap, we just buy more and shop less frequently.” The British Retail Consortium also argues vociferously against the effectiveness of this ill-considered legislative proposal. “Retailers are extremely aware of their responsibility,” says Dodd, “increasing the price would harm the vast majority of responsible consumers, but it wouldn’t change the behaviour of the problem drinkers.”

The WSTA is, of course, paying close attention to the issue. Jeremy Beadles acknowledges that action is needed to combat the problem, but argues forcefully that raising the price is not an adequate solution. Rather than just jacking up the price, he says, “we should focus on the underlying reasons why people misuse alcohol”. It is this cultural aspect – not cheap availability – that needs to be addressed. But it remains to be seen whether the government will see it that way.

When it comes to the crunch
Even when they’re feeling flush, Brits stalk the aisles hunting down whatever deals they can find – so it would be safe to assume that during tough times deep discounts are an even more attractive proposition. According to the BRC, shoppers have been reining in their spending since last autumn, the slide towards recession therefore seems to be something of a self-fulfilling prophecy. “Consumer confidence has as much to do with how people feel as the actual effect on their finances,” says Dodd. And with the media terrifying us with perpetual stories about impending financial meltdown, it’s scarcely surprising that confidence is nearing rock bottom.

Aside from the necessities, says McCall, “as income falls, consumers’ sensitivity to price becomes greater”. And evidence from the BRC certainly backs up this economic truism, as Dodd explains, “price is a very important part of the decision-making process, and it is increasingly important” in the current climate. The result, says Marlow, is inevitable: “If the recession really bites, there will be more goods sold on promotion.” A safe assumption – but does it necessarily mean that consumers will buy more goods on promotion?

With belts being tightened consumers are forced to consider what purchases can be left out of the weekly shopping basket – and herein lies the critical question for the trade: is wine a luxury or a necessity?

“The impact of a reduction in income depends upon your preferences,” says McCall. For some people wine is a necessity, for others it is not. According to economic theory, most wine (except that at the very bottom or very top of the price spectrum) is considered to be a “normal” good, that is, when the price falls demand rises and vice versa. It thus seems likely that it will behave similarly to other normal consumer goods and be impacted by the credit crunch, though not devastated.

The next question to consider, according to Marlow, is how consumers will invest their slightly-reduced wine budget. “They’ll cut back a little, but it’s a question of personal judgement where they will make the saving,” he points out – this could mean buying slightly less of the same quality wine, or the same volume but compromising on quality. Or, of course, they’ll shop even more obsessively for deep discounts, which appear to offer the same quality at a reduced price.

There are clearly tough times ahead, but Dodd stresses that it’s not all doom and gloom. Even when times are hard, he says, “people will still occasionally treat themselves … it’s not a complete rejection of premium products, consumers just want to see that the products deliver value”. He also points to figures that suggest the food and drink sector continues to be in growth (though rising food prices are clearly playing a part in this). Off-trade wine sales could also be buoyed as consumers cut back on eating and drinking
out, opting to treat themselves at home instead.

Deep discounting has become the number one grievance for many wine producers in recent years – but the bad news is that it looks like the deals are here to stay. Promotional junkie consumers are so utterly addicted that it seems inevitable that a small number of increasingly homogenous brands will steal an ever-greater share of total sales. And seeing as the promos can only be afforded by the leanest, meanest and largest of companies, continued consolidation of the supply base must surely be on the cards. Half-price promotions have inspired more Brits than ever to add wine to their drinking repertoire; it seems somewhat ironic that these same deals may ultimately result in there being less variety than ever on the shelves.

CHEAP AND CHEERFUL

The leading multiples use deep discounts as a powerful weapon as they spar with themselves for market share. But they are increasingly forced to contend with competitors for whom discounting is not merely a tactic, but the very essence of their business model. The profit warning issued by M&S last month was an ominous sign for retailers who proudly push their premium credentials, but for those at the opposite end of the scale business has never been better.

Aldi, Lidl and Netto have long been a successful feature of the continental retail landscape – but it has taken many UK consumers some time to warm to their rather cold, utilitarian features. Notions of preference appear to be giving way to necessity, however, and the credit crunch is persuading evermore Brits that discount retailers are a viable option. The reason, according to Aldi managing director Paul Foley, is simple: “You save about £30 on a £100 weekly shop.” The Lidl message, meanwhile, is “Where quality is cheaper”. It is, says marketing manager Marco Ivone, “the logical supermarket of choice”. For those who have recently started to watch the pennies, both stores are putting forward a pretty compelling argument.

According to TNS Worldpanel, Aldi and Lidl are eclipsing all of the more upmarket multiples in the current environment, registering year on year growth of 20.7% and 12.8% respectively during the 12 weeks to June 15. New openings are certainly a feature of this impressive performance: Aldi currently operates 430 stores, but is opening a new door every week and Foley has expressed his aim to build the portfolio above 1,000. Lidl, meanwhile, has 450 at the moment and its expansion plans are almost as ambitious.

But it’s not just the new outlets that are driving up sales, it’s also the new customers. Aldi claims that footfall is up 25% during the last 12 months, with those from the ABC1 demographic up 17%. According to Martin Whittingham, research director at TNS, the discounters “are becoming an acceptable part of many people’s repertoire of shops”. He explains that British consumers like to frequent a number of different shops – so they will still continue to patronise a range of other stores, but the credit crunch has been the inspiration that has got them through the door of the discounters for the first time. Now that they’ve experienced the no-frills approach, it’ll be interesting to see whether these new consumers are still attracted to the bargain basement stores when the good times return.