Drastic price cuts may seem an obvious way to keep supermarket tills ringing but it is a dangerous tactic when big name brands are involved.
As one grocery retailer is finding to its cost, big-label suppliers do not take kindly to the practice of “loss-leading” – selling products not to make a profit but to draw more shoppers into stores where they will probably buy other goods.
Co-operative Retail Services claims some suppliers are refusing to deal with its Leo’s, Pioneer and Lo-Cost supermarkets in protest at its two month-old Low Price Zone promotion on 150 lines. The promotion also includes a “Super Six” – six items reduced even further for two or four-weeks. More than 200 stores have been hit by the boycott.
It highlights the often tense relationship between retailers and their suppliers when it comes to the thorny issue of control of the brand.
For CRS, the nationally-advertised promotion gives the impression of price aggression. However, in an uncharitable light it could be seen as a desperate measure to reverse long-term decline. The promotion combines products bought regularly, (known value items) with big, popular brands.
CRS says suppliers are either refusing to deal with it, or are increasing prices on reorders to bring a halt to the reductions. Coca-Cola, Birds Eye Wall’s and Anchor Foods are all unwilling to supply CRS with the orders it wants, according to the supermarket group.
David Messom, CRS food division’s buying controller, says there is a conflict between the marketing strategies of the manufacturers, trying to maintain the power of their brands, and CRS’s desire to market itself as a supermarket chain with an aggressive pricing policy.
Messom says the company is determined to continue its Low Price Zone in the face of growing hostility and is prepared to import big brands from the Continent to replace those involved in the boycott.
“The suppliers are making it very difficult for us to sell products that meet our marketing needs. We will be forced to move more into own-label, or we will have to import European brands which we can sell at a low price, like the discounters.
“The brand share of the whole Co-operative Movement has been in decline for the past 20 years. But we are determined to invest and grow. We believe the best way of doing this is to have an aggressive price policy. We are not going to lay down and die. We have just had a three-day store conference and we have made it clear this campaign is going to continue.”
But there are those in the trade who say CRS’ tactics smack of a desperate need to hike consumer volumes in its stores. And they believe the promotion will not last the course.
Messom accepts the promotion will become more difficult to sustain, if suppliers become nervous and start blocking large orders. More fresh produce might be put on promotion, where mark-ups are high and it is easier to give the appearance of price slashing. Or items such as canned fish could appear more often, where suppliers have to buy with currency up front and need to shift volumes.
For suppliers, unforecast promotions by individual retailers are a headache because they inevitably provoke the wrath of every other buyer in the land.When CRS sells an eight-pack of Coca-Cola at the loss-making price of 99p, for example, how can Morrisons or Somerfield, Sainsbury’s or Tesco compete unless they have similar competitive deals?
Buyers will be on the phone to the supplier threatening fearful retribution unless they are given what they want. Coca-Cola, for example, may plead ignorance of CRS’s two-week price cut. It will reassure its other customers it will not supply CRS with further stock for the promotion, although if the retailer has stockpiled for a temporary price blitz reorders are sometimes unnecessary.
Other buyers will then seize the opportunity to turn the screws on manufacturers – perhaps threatening to axe jointly-agreed price promotions or to cut the amount of facing space given to different lines.
One trade source says: “It could cost Coke a fortune. Everyone will assume the supplier has given CRS a better deal. Even if it is known they haven’t, no one will admit this.”
Loss-leading provokes not only harmful effects on prices across the board, but seriously demeans a brand in the eyes of the consumer. Shoppers believe they get what they pay for. If a brand is positioned as an expensive but high-quality item, it goes against its commercial logic to be sold at the same price as a “tertiary” or price-fighting brand.
Kevin White, commercial director of Coca-Cola Schweppes Beverages, says: “Clearly we spend millions of pounds building up a brand with very strong equity. We are not in favour of this type of activity [selling below cost]. We don’t need this type of exposure.” He denies the consumer loses out if these promotions are discouraged.
Cereal giant Kellogg refuses to supply any brand to any customer who sells below or at cost price and where the sale is made for the purpose of loss leading.
The company delisted discount chain Shoprite three years ago because its cornflakes were being sold at a loss-leading price. When Shoprite complained, an Office of Fair Trading investigation said Kellogg was justified.
Loss leading is not illegal but, according to the Resale Prices Act of 1976, it is the one situation where a supplier may legally withold supplies from a retailer. It is not loss leading if the goods are sold as part of a “genuine seasonal or clearance sale”, or with the manufacturer’s consent.
Richard Block, regional planning director of ad agency J Walter Thompson, which handles the Kellogg account, says: “The manufacturer wants to keep control of its brand’s positioning and its pricing policy. “They are very happy to co-operate with promotions but on their terms. They don’t like retailers to erode their power.”
Baked beans is a recent example of loss leading which has made the headlines. In Tesco and Kwik Save, cost-fighting ranges of beans have fallen to 3p a can – probably lower than the cost of the tin itself.
Some observers say Tesco’s macho stance on price could backfire, cheapening the chain’s own brand image which it has worked so hard to build.
But crucially this is a price war over own-label items, indirectly hitting brand owners. For the big supermarket players, a price war over branded goods is the last thing they want.
According to CRS’ Messom, big name suppliers turn a blind eye to drastic price cuts at European discounters such as Netto.
“There is a double standard operating,” says Messom. “They (manufacturers) get less aggro from Sainsbury’s and Tesco if prices are very low at Netto, not the Co-op. Sainsbury’s and Tesco are trying to put pressure on our promotion. We are supposed to behave ourselves and have high prices, but instead we have rattled a few cages.”
CRS may win support from some suppliers by offering to expose its brands to fresh markets and shifting large volumes. But it risks a breakdown in relations with long-term suppliers. Its price slashing may drive more traffic through the stores temporarily, but it will not build business long term. As the old retail truism goes: “Selling groceries cheap is easy. It’s making a profit that’s hard.”