Globally, we are seeing an all-out war develop between grocery companies. In New Zealand, we are largely sheltered from this, as we are small and only have a handful of local supermarkets. In the United States and the UK however, it is a different story. Grocery chains fight, sometimes unwillingly, in this war simply to survive and stay afloat. The casualties of course are the profitability of the supermarket and their contribution to the economy. But how do the grocery price wars occur, what effect do they have for the supplier and consumer and how might SMEs circumvent the battleground?
The origins and effects of The War
The larger grocery companies and massive retailers have become, the more accessibility to consumers they have achieved. This has put them in direct and aggressive competition with each other as they vie for the attention of their customers. The very nature of consumers is that they value deals and low cost supply and will happily research which company can meet their budgets while being accessible and convenient. This creates a vicious cycle of cost-cutting to beat the competition, driving more sales to maintain profits where margins have been cut and then having to cost-cut again to beat the competition who cut their costs to beat you.
If this was not bad enough, in June 2017 Amazon announced its $13.7 billion takeover of Whole Foods. With this transaction, they inherited a huge customer-base and increased margins over what they use for sales (5% rather than 3%). In reaction, Walmart gathered its suppliers in a room and announced the need for a 15% reduction on supplies to fulfil their lowest prices policy or, they threatened, they will manufacture their own brand of consumables and directly compete with their non-compliant suppliers.
Of course, the result of the grocery price wars on the consumer is deflated prices, which makes sundry items more affordable, perhaps raising the standard of living. However, with companies needing to reduce their costs somehow, this often comes in the form of reduced operating costs, which can mean job losses or overworking employees. So really, is this a successful approach for the economy as a whole?
How to win a price war
There are no winners in a price war, unfortunately, this much is true. The weaker competitor is eventually forced out of business and the ‘stronger’ competitor suffers long-term hardship from reduced margins and profitability. However, an MIT Sloan investigation suggests a different strategy to winning a price war, or rather, staying out of it and prospering all the same. Here are the five fundamental rules for engagement.
Identify the needs of your customers
Sometimes it is not necessary to be caught up in the hype and try and compete directly with or copy the methods of large grocery retailers. Take a step back, and calmly assess the situation and what customers actually need and then focus on meeting these needs. AH, a Dutch retailer who was thrust into a price war when Lidl and Aldi supermarket chains opened in Germany, found that there were changes in customers’ purchasing decisions. They were able to strategically meet these changes and essentially remove themselves from the competition. This is where inventory stock management software shines. They allow businesses to monitor inventory stock and customer sales and thus make it possible to generate reports and draw conclusions on customer demand and industry trends.
Pick and choose your battles
Again, it is not necessary to always match the competitor’s strategy and engage in a ‘lowest price’ battle. AH, the Dutch retailer, addressed their eminent price war by simply redefining their battle-zone. They sought to align themselves with the mid-priced market and then stand out in terms of service delivery. The results were in their favour.
Identify your target
Sometimes, competition is inevitable. However, you do not have to compete with everyone. If you choose the wrong target for example, you will never win. An example of this is that it would be far easier and more successful to engage in a battle with more local suppliers of commodities such as milk or fruit for example, than to compete with Coca-Cola for the soft drink sector.
Fly below the radar
Part of a battle is having a component that wishes to take you out. Therefore, by concentrating on your own long-standing customer base rather than poaching the opposition’s, you can stay below their radar and they are more likely to leave you alone.
Review the business and operations
One way of being more profitable is doing more with less. Reviewing the business and implementing ‘leaner’ methods of distribution and manufacture can have a significant effect on the protection of margins and the insurance of profitability in an all-out war. AH did this by identifying that ordering was being done over 600 stores and that it was more efficient to do it in one centralised office. Likewise, they looked to automate processes as much as possible especially in inventory stock ordering and inventory manufacturing. This represents an achievable and straightforward way to streamline processes and can be implemented easily with downloadable inventory management software.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.