What is this about?
Essentially, Tesco have decided to try to reduce the loss of business from their Irish border-area stores to their own and rival retailers via Irish shoppers travelling across the border to avail of lower prices in the North. In fact, it is estimated that 4% of Irish purchases, representing €550m, are currently being made in this way.
Initially, Tesco have decided to apply a 22% price reduction across 12,500 lines in 11 border-area stores.
However, by pricing against shelf prices in Northern Ireland, Tesco will have to include VAT with a 6.5% difference between rates on each side of the border, excise rate differences, UK vs. Irish case-price differences, sterling and euro exchange rate fluctuations, and compete with what can be up to 30% differences in shelf prices between North and South of the border.
Presumably, this will be achieved by a combination of UK sourcing of key brands, re-negotiation with Irish suppliers and absorbing some of the costs themselves.
Where is it heading?
It is unlikely that this pricing initiative will be confined to border area stores. Equally, the possibility of differential pricing, such as adjusting price reductions to reflect distance from the border, would probably prove unworkable. On balance, it is likely that Tesco will find the potential share gain from a countrywide application of up to 20% price reductions vs. retailers unable to match prices, irresistible….
Others will no doubt deal with issues like the political sensitivity of market dominance, causes of the high cost-to-serve, and the trade-off between ‘buy Irish’ sentiment and price-reductions in the mind of the consumer, but the key issues for retailers in the Republic have to be how to compete on an equal footing. Irish retailers will have to negotiate lower trade prices, or source in the UK, in order to avoid loss of share.
How does affect you?
On the supply side, given that cost-to-serve is so much higher in Ireland because of a combination of the greater costs of electricity, labour, transport and rent, compared with the UK, Irish suppliers will find it impossible to match trade prices of the same product sourced in the UK. This probably means absorbing some of the costs of price-matching, or losing listings.
Irish brands could find themselves facing competition showing a 20% discount on shelf prices, and losing share as consumers are forced to sacrifice national loyalty because of unprecedented economic circumstances.
A further complication for international brand owners will be the viability of their Irish production units if they decide to supply Irish retailers from their UK production.
What to do about it?
Obviously the Irish Government has to address those elements causing high cost-to-serve such as electricity prices that are the second highest in Europe, high waste disposal costs, and other production and distribution costs in order to prevent many Irish suppliers and retailers going to the wall.
Irish brand owners need to re-engineer their offering to match local appetite in a way that no imported brand is ever capable, and still cut case-prices.
In terms of the Irish market, UK suppliers have to re-examine the viability of their Irish-UK business model, and make fundamental decisions that will have an impact upon their global business.
In fact UK suppliers have to view this as an opportunity to harmonise prices and terms with Tesco and other major players, globally, and standardise the process, once and for all.
But above all, Tesco has to get it right…
As the third largest global retailer, and No.2 in profitability, and with little baggage, Tesco is in a position to unilaterally lay the foundations for practical and equitable cross-border supplier-retailer trading relationships, everywhere. There is much to be gained by greater transparency, collaboration and mutual trust. However, the standards will be set high, with no prisoners taken, and pain may be inadvertently inflicted in the process.
The stakes are high, the political risks for Tesco of getting it wrong even higher. This initial development in Ireland will provide many indicators and lessons for proactive suppliers, everywhere.
A once-in-a-lifetime opportunity to optimise brand potential, globally, in one of the most challenging economic eras ever…
