How Can You Compete in the Great Grocery Price War?

Tesco, ASDA and now Co-op are pouring over half a billion into price wars this Christmas. Toys, bikes and food are all on the menu.

Co-op and Somerfield's announcement last week that they are investing £200m in price cuts for Christmas comes hot on the heels of Tesco's £250m and ASDA's £150m festive price-cut promises. And it doesn't stop there. Tesco have further upped the ante this week by mailing out an additional £67m in vouchers to club-card holders.

Some of the cuts are in core categories, like clothing and food (half-price roasting joints at Co-op, £6 turkeys at Tesco). But increasingly the giants are facing off in non-food categories: this time it's toys, games and bikes.

There's a standard pattern when the grocers push hard into new categories. Because they have a low exposure, they don't have a great deal to lose by going hard on price -- in fact, they have everything to gain from basket-size and footfall. And when more than one low-cost operator is fighting in the same marketplace, a price war is often the result.

In the late 1990s Tesco and ASDA targeted Health and Beauty, driving prices down and taking value out of the market. It took Richard Baker (ex ASDA), two profits warnings and £200m of price cuts to staunch the flow of customers streaming out of Boots.

It was the same story with clothing. Dramatically undercutting the market, the grocers quickly built large shares, whilst the value of the market for incumbents crashed around their ears. Out of the rubble emerged more differentiated players like Zara (high-speed fashion) and bargain basements like Primark and Matalan.

Thresher and the pub industry are just two of the casualties from the ongoing price wars in alcohol, and the impact of petrol price wars has halved the number of outlets in the UK over the last 15 years (18,000 in 1992 to 9,250 in 2007).

So what can you do if your business ends up in the firing line? How do you avoid becoming collateral damage in the next price war?

  • Option 1: Differentiate. Shout about your strengths, delight your customers. Whether through local, service, quality, flexibility or some combination, whatever it is, you need to find it fast, and leverage it hard. Waitrose is differentiating brilliantly, with Autumn growth double that any of the big four.
  • Option 2: Take them on (smartly). Respond on key lines where customers know prices. Source low-cost ranges to match price-fighter lines, and build a well communicated price ladder to retain value. Obscure the comparison (and reduce competitor reaction) with different brands and pack sizes, for instance. In addition, use option 1 wherever possible -- without some form of differentiation, this is not a long-term position.
  • Option 3: Be a more focused, lower cost operator. As Aldi and Lidl have shown in food categories, a focused, cost-led strategy can work against the grocers (so far, at least) but it needs to be world-class in execution. An equivalent operation in non-food might be Toys R Us -- a long-time target of Wal-Mart in the USA -- but they've struggled in the face of the world's biggest retailer.
Considering the attention the UK grocers will be giving to that category this Christmas, it will be interesting to see whether Toys R Us can make option 3 work for them over here, or whether they've already left it too late.

(Pic: tshein cc2.0)