LONDON, June 30 (Reuters) – Faced with the toughest economic conditions in decades, UK supermarkets are trimming down their product ranges, seeking cost savings and patrolling each other’s stores to check prices and products while trying to stay one step ahead.
Like retailers around the world, UK grocers including market leader Tesco (TSCO.L) and No. 2 Sainsbury’s (SBRY.L) are struggling with rising delivery costs, shortages of key products and labor and cash-strapped consumers.
But they are entering the downturn after an already long period of cutting costs due to stiff competition, forcing them to look for new ways to make savings while increasingly using data to predict customer reactions to change.
Sign up now for FREE unlimited access to Reuters.com
“I spend a lot of time in our competitors’ shops, so does the whole team, we’re constantly looking at what they’re doing,” Sainsbury’s CEO Simon Roberts told Reuters. Continue reading
While some price increases are passed on to customers and profit margins themselves suffer, supermarkets are struggling to contain consumer pain in their most important areas such as fresh fruit and vegetables, meat, fish and poultry.
“They’re all going to look at their relative performance and their relative price position like never before, because that’s what matters in the end, their relative position to everyone else on price,” said a food industry veteran on condition of anonymity.
Tesco and Sainsbury’s are pricing key items in line with German-owned discounter Aldi, which is seen as the low-price benchmark.
Prices are rising after the war in Ukraine restricted supplies of sunflower oil and pushed up wheat and animal feed prices – pushing up the cost of meat, dairy and baked goods. Rising energy and fuel prices, as well as increased labor and transportation costs, have contributed to this.
According to market researcher Kantar, UK grocery inflation hit 8.3% in June, a 13-year high, forcing shoppers to scale back and buy cheaper ranges. US bank Citi said UK food price inflation could hit 20% early next year. Continue reading
A focus for supermarkets is reducing product offerings, as the ability to sell multiple types of things like olive oil, beans or toilet paper is no longer seen as a priority for customers.
While supermarkets previously sought simplification, the pursuit of new savings means they attack them with renewed vigour, as by concentrating their purchasing power they can obtain better terms.
Last year, Tesco reduced the number of milk alternative product lines sold, such as oat and almond milk, by 47%, resulting in a 4% improvement in availability in the retained product lines.
Similarly, a 19% reduction in yogurt lines resulted in an 11% improvement in availability.
Privately-owned Asda said it reduced its grocery range by 12.5% last year, mostly by removing duplicate products. However, the introduction of more budget products has meant that the range has increased by 2.5% this year.
The approach fits in with moves by French food giant Danone (DANO.PA), the world’s largest yogurt maker, which is reducing the variety of products it sells, including the number of flavors and pack size options. Continue reading
“If you cut your range in half in one area, the remaining half immediately sells twice as fast on average, assuming you haven’t lost a customer to what you hired,” said the food industry veteran.
“And if you switch from two suppliers to one supplier, your terms with that supplier can improve dramatically.”
Supermarkets can reduce assortments more effectively than in the past by using shopper data and analytics to predict whether or not shoppers will accept an alternative brand.
“The role that algorithms now play in understanding the commercial model is extremely important,” said Sainsbury’s Roberts.
“We have more innovations, but we have also cut certain categories,” he said.
With UK supermarkets operating on margins of just around 3%, they also need to make savings across the business.
“If we’re investing £500m to cut prices, or £100m this year, £200m over two years to invest in colleagues, then we need to find efficiencies,” said Roberts.
Market leader Tesco has used heavily publicized price match offers and a popular loyalty program ‘Clubcard Prices’ to agree good terms with suppliers and ensure that where it needs to raise prices it tries to ‘make sure it’s a little bit less and a little later than the rest of the market,” it says.
But tensions with some suppliers are increasing. On Wednesday, US grocery giant Kraft Heinz (KHC.O) halted shipments of some products to Tesco after the grocer fought back against higher prices. Continue reading
While Tesco, like Sainsbury’s, has warned of a fall in profits this year, industry data shows it has consistently outperformed its peers on a sales value basis, along with discounters Aldi and Lidl. Continue reading
“Our goal is to outperform the market, we cannot control the environment which of course remains incredibly challenging and frankly looks like it’s getting more and more challenging,” said CEO Ken Murphy.
Sign up now for FREE unlimited access to Reuters.com
Reporting by James Davey Edited by Mark Potter
Our standards: The Thomson Reuters Trust Principles.