Supermarket price promotions are used in various ways to build brands, but, as Sainsbury’s has found to its cost, return on investment can take a long time
For the past ten years, two philosophies of branding have been battling for supremacy in UK grocery retailing. One looked to a magical and elusive, but extremely powerful, elixir called branding to deliver higher margins. If people love the brand, it argued, they’ll be happy to pay a higher price for it. So the secret of business success lay in building a strong brand.
The other philosophy also saw a strong brand as very important. But it didn’t see the brand as a reason – or an excuse – to charge customers more. In reality, it argued, a strong brand is a by-product of doing lots of things right, and one of these is to offer outstanding value for money. The economic rewards of a strong brand don’t lie in being able to charge higher prices, but in becoming the shopper’s trusted first port of call.
If shoppers come to you first – perhaps driving past a rival to do so – they’ll spend more with you. This improves the economics of the business in a different way to margin fattening. As sales volumes rise, the ratio of income to costs improves and profits fall to the bottom line. In fact, if you do it well enough, you can both reduce prices and increase profits at the same time.
Sainsbury’s was a proponent of Theory A – that strong brands equal fatter margins. And Tesco was a proponent of Theory B. We all know what happened. Sainsbury’s rebound over the past couple of years – after introducing Tesco-style value lines and Asda-style price rollbacks – has put an end to the argument. In mass market grocery retailing at least, the theory that brands are about premium pricing is a load of tosh. It shouldn’t need saying, but customers prefer brands that deliver value to them, not those which seek to extract value from them.
But how could a company so clever, insightful and path-breaking as Sainsbury’s make such a fundamental mistake?
The answer, according to Justin King, the chief executive now leading the turnaround at Sainsbury’s, lies in time, measures and perceptions – how the price mechanism actually works in an industry like this.
Retailing is a fast-moving business. Weekly, even daily, sales levels are a subject of keen managerial concern, and retail managers are an action-oriented bunch. Their time horizons are very short.
Shoppers take time to notice changes
But while most shoppers will be able to quote you a few KVIs (highly publicised Known Value Items), very few can recite the prices of every item in their shopping basket, or how these individual prices compare to those in other outlets down the road. So if you let your prices drift up relative to the competition, shoppers don’t immediately notice. So sales volumes don’t suffer, and cash flows straight through to the bottom line. All your measures tell you you are being very successful. Obvious conclusion: “let’s do more of that”.
Trouble is, while shoppers don’t notice item-by-item price drift on a week-by-week basis, after a while they do begin to notice price drift on their total shopping basket. Starting with the most price-sensitive customers, they begin to drift away, and market share starts to fall.
Managers now face a choice. Do they reduce prices to win back these defecting customers? Or do they protect their profits by easing up their margins just a little bit more?
Again, given the signals that managers actually receive on a day-to-day basis, the answer is not as obvious as it might seem. Just as shoppers don’t immediately notice when the price of their basket drifts up, they also don’t immediately notice when it starts coming down either. So, if you shave your margins, you get punished twice over. Your profits fall. And so does your turnover because, far from lauding you to the skies, customers don’t seem to notice anything at all.
If you cut one price dramatically – via, say, a buy-one-get-one-free promotion – you are instantly rewarded with a massive spike in sales. But if you ease down the price of the basket as a whole, nobody cares.
That was Justin King’s painful experience in his formative years as a manager at Asda. “When we made our very first price investment in produce, it took around two years to get back to where we started in terms of turnover,” King says in a forthcoming interview for the ECR Journal. “That figure – two years – was imprinted on our brains. That’s how long price elasticity can take to show through.”
And during this long and painful period, all the hard, factual evidence seemed to suggest that adopting Theory A brings palpable, big rewards, while pursuing Theory B just brings you punishment. So, given this evidence, which strategy would you follow?
“It’s the parable of the boiled frog,” says King. “It creeps up on the business slowly, over time. It became a strongly held belief [at Sainsbury’s] that there was something inherent in the brand, so we were able to rationalise why we had a slightly different pricing structure. But in the end customers are pretty rational – very rational, in fact. If you think people are prepared to pay more for Coca-Cola just because it says Sainsbury’s over the door, then think again.”
When Sainsbury’s reigned supreme, King continues, Sainsbury’s slogan was “good food costs less”. And it did. “I can show you graphs of our relative prices over a 16-year time frame that demonstrates this.”
More to life than price cuts
Of course, in real life, success in grocery retailing is far more complicated than simply cutting prices. Sainsbury’s turnaround also depends on sorting out a botched revamp of its supply chain, on invigorating staff with can-do attitudes, Jamie Oliver, and a lot more. Asda hit the doldrums even with low prices because it got other things wrong, such as convenience formats.
Also, as King is quick to point out, price is not the same as value. Many people are very happy to pay higher prices for better quality. And, given the dramatic effects of promotions, there are many different ways to compete on price.
So what conclusions can we draw? Here are some thoughts. First, a caveat. When an entire market coalesces around a commonly accepted model of “what works”, it’s usually time for a disruptive new entrant to come in and prove the exact opposite. So watch out.
Second, beware the up-and-coming “fashionable” idea – evidence-based decision making – because the evidence you look at and find particularly significant may simply be the by-product of a flawed theory.
Third, brands work differently in different contexts. Be wary of neat all-encompassing theories about good branding. On this front, we still have an awful lot to learn.â¢
Alan Mitchell, firstname.lastname@example.org