UK Supermarkets, hold your nerve
British supermarkets and their suppliers are facing increasingly tough trading conditions. Rising costs and retail prices are forcing the industry into knee jerk reactions as customers pull back on spending their hard earned cash.
Inflation is up and staying there. Sterling was devalued against the euro and dollar after the Brexit vote by 20% and hasn’t managed to climb back to pre Brexit values. The huge impact of higher cost prices (as a result of a devalued pound) is higher retail prices in the shops for the customer.
Retailer and supplier margins have been significantly squeezed to absorb cost price increases. Cash profit has been decimated on products that have had to maintain the same retail price while absorbing the higher cost price. The cash profit delivered by products where an increase has been passed on to the retail price is not enough to compensate for the overall loss.
The burden for the customer of increased retail prices is further compounded by their salary not being worth as much because of the upward move in inflation by over 3%. Stretching their budget to pay for the food shop has become onerous for many customers.
This is a very different trading climate to that of the 2008 recession. The last recession was one of haves and have nots. Those with secure jobs were able to continue spending as they always had on food while taking advantage of increased promotions in shops and low interest rates on their debt. The supermarkets were able to survive because the loss of sales from the unemployed was largely compensated by the spending of those in work.
In this current climate employment is high, but salaries are not worth as much and prices have gone up. This blizzard of inflation, sterling devaluation and Brexit uncertainty has created an equitable space for everyone; all are subjected to price hikes, stagnating wages and worry about the future, which has led to a predictable slowdown in spending.
The latest ONS figures show that retail sales growth was broadly flat at the beginning of the new year with the longer-term picture showing a continual slow down. This effectively means that volumes have declined and customers are buying less. Trading is brutal.
Now is the time to be brave. Supermarkets have to hold their nerve and get through the next few years with an intact and profitable business. But, they have to stop looking to their competition to give them the answers and stop copying what they think might be working. Instead they must look to their core customers and provide them with what they most wish for. It is the core (loyal) customers who will deliver the supermarket out from the other side of a devalued pound, high inflation, low wage and uncertain Brexit landscape.
The beliefs and values that the core customers hold dear about food, quality, price and service have not changed. The decisions they make regarding their supermarket shop have been affected by external monetary influences, but they will still want what they believe is the best that they can afford.
Now more than ever, supermarkets need to stay true to their brand values to maintain that close relationship with their core customer. If the brand values are about the family, good quality food at an affordable price, with a choice of key brands and excellent customer service then don’t weaken that formula by pushing discount, poorer quality food with limited range choice – the core customer can easily find that offer executed better with another supermarket so why encourage them to look elsewhere?
If the brand values prioritise excellent quality food, provenance, corporate social responsibility and care of the environment, then don’t replace excellence for standard quality to try and compete on lower pricing – other supermarkets are masters at this game and your core customer will migrate there. If you are a discounter, continue to offer amazing value and don’t dilute the price message with a more expensive proposition – other supermarkets have already nailed the combination of decent price with good quality and your core customer will only feel let down by the unfocused offer.
Those leading the supermarkets and those in senior positions who are desperately looking for a strategy to give them a solution to increase market share, sales turnover, drive volume, maintain cash profit and stay relevant with their customers need to leave the head office and spend time observing their customers in their supermarkets. Watch how they shop, what they buy, who they are. Those senior managers who have children, take some time off from the office and do the drop off and pick up at your children’s schools. Talk to the other parents and get a first-hand understanding of what families are facing in this economic climate. Understand a parent’s powerful desire to do their absolute best for their children, especially when it comes to food. You have to live and breathe your core customer to know exactly what they want from your supermarket and how they want to shop with you.
The primary core customer is a much smaller proportion of the overall number of customers at your supermarket, but their spend will far outstrip the secondary and tertiary customers. All customers want cheaper prices, stronger promotions and a choice of shopping channel to ease their lifestyle in this difficult economic climate and you must try and deliver this appropriately. However, do not stray far from the brand values that led to the creation of your supermarket business as it is these values that your core customer holds dear.
Don’t be tempted to change your offer to encourage more secondary and tertiary customers through the door. The size of the potential sales from this group make the effort seem like a viable option, but they are not your target customers for a reason, they are primary customers for a different offer at a different supermarket. Change your offer to chase a fickle customer and lose the good will of your primary customer at your peril.
Hold on to your primary customer and they will reward you with an increased profitable spend when the UK economy and their own finances begin to grow again.
Your core customers are still there shopping with you. They might be spending a bit less because money is tight, but don’t let them down by forcing a completely new business proposition on them as a result of the harsh trading conditions we are facing. Supermarkets, hold your nerve, everyone needs to eat.