How Low Can You Go…
by John Ruddy, Irish retail analyst and Editor of Checkout Publications (www.checkout.ie),
which produces Checkout Magazine and the Retail Intelligence news service

It may be unfair to lay all the blame for the troublesome ‘new’ consumer at the door of the global downturn, but the 2008/09 recession certainly has a lot to answer for.

Reduced incomes have made Irish consumers more promiscuous (in terms of store choice), less brand loyal (vs PL) and, in every retail format, more price and promotion conscious.

To react to this, retailers operating in Ireland have had to respond in a number of different ways.

Swathes of PL have been shoehorned into virtually every category – bringing total PL penetration (including discounters) up to around 20%.  Promotions have gone from being a bonus (for shoppers) to a must (for retailers), with most multiples now selling circa 30% ‘on deal’.  And price communication – once secondary to niceties like provenance, locality and shopper experience – is now the foremost message for retailers of all sizes and formats.

With this experience being mirrored in countless other retail markets, there is nothing particularly new to report here.  The real question, however, is how sustainable the current promotional levels are, and whether retailers who built their brands based on more than just a price message can revert to this brand image when things improve in a few years time.

Take the example of Superquinn.  In the past 12 months, promotional spend has gone up by around eight percentage points.  While this includes ‘long term’ promotions with no specified end-date, it brings promotional spend at what was considered a more elite retailer to over the 25% mark.

Superquinn is not acting this way because it wants to – no retailer wants to throw away margin unless it is really necessary.  However, while shopper numbers are up (around 13% year-on-year), average spend is down, which indicates that while its promotions are certainly eye-catching, it is struggling to make shoppers stick around and do the rest of their shopping there.

Superquinn is by no means alone in this respect.  From a retail standpoint, the bastard child of the Celtic Tiger has few virtues, with promiscuity one of its more distasteful habits.  Today’s shopper is more likely to visit a discounter (94% of Irish consumers have now shopped in Aldi or Lidl), and while spend is being spread across more retail groups, it is also reduced across the board – down €200 per household for the full year to August 2009.

These new circumstances are leading to varying reactions across the Irish FMCG sector.

Despite the best efforts of suppliers, retailers of all sizes are increasingly tapping into the grey market to buy product for once-off promotions – with indigenous suppliers then effectively blackmailed into offering free stock to counter the ‘amazing’ deal that the retailer has just been offered.  This has led to an increasing understanding and awareness of net-net pricing at a supplier level.

Meanwhile, suppliers are also fighting back against what they feel is the scapegoating (by retailers) of the Irish supply base for ‘rip-off’ pricing, with many brands now actively advertising price-cuts and urging consumers to check with their local retailer to see if they have been implemented.  Like price-flashing, supplier-led price advertising may not always sit well with the retailers, but with giants like Premier Foods, Unilever and Glanbia all publicly announcing price-cuts, it’s clear that many of the big players are feeling the need to force the hands of their biggest retail customers.

With suppliers now pushing back against the retailers, the stage is set for the next big bombshell to hit the Irish FMCG sector – namely the upcoming introduction of some sort of Grocery Code of Practice.

After a consultation process which critics said was anything but consultative, the creation of a Code (probably policed by some kind of Supermarket Ombudsman) would seem to be a fait accompli; although with the big retailers now spinning the line that more regulations equate to higher prices, the Government may now be having second thoughts.

Either way, with sterling now sticking at around 90p against the euro, the volume of grey stock flowing from the UK into Ireland is likely to continue into 2010 – a phenomenon that will fund the current promotion obsession.  The question, for both suppliers and retailers alike, is just how low can you go.

Date article published: November 2009