In an earlier post, Elizabeth looked at oligopolistic competition between supermarkets. Although supermarkets have been accused of tacit price collusion on many occasions in the past, price competition has been growing. And recent developments show that it is likely to get a lot fiercer as the ‘big four’ try to take on the ‘deep discounters’, Aldi and Lidl.
Part of the reason for the growth in price competition has been a change in shopping behaviour. Rather than doing one big shop per week in Tesco, Sainsbury’s, Asda or Morrisons, many consumers are doing smaller shops as they seek to get more for their money. A pattern is emerging for many consumers who are getting their essentials in Aldi or Lidl, their ‘special’ items in more upmarket shops, such as Waitrose, Marks & Spencer or small high street shops (such as bakers and ethnic food shops) and getting much fewer products from the big four. Other consumers, on limited incomes, who have seen their real incomes fall as prices have risen faster than wages, are doing virtually all their shopping in the deep discounters. As the Guardian article below states:
A steely focus on price and simplicity, against a backdrop of falling living standards that has sharpened customers’ eye for a bargain, has seen the discounter grab market share from competitors and transform what we expect from our weekly shop.
The result is that the big four are seeing their market share falling, as the chart shows. (Click here for a PowerPoint of the chart.) In the past year, Tesco’s market share has fallen from 29.9% to 28.1%, Asda’s from 17.8% to 16.3%, Sainsbury’s from 16.9% to 16.2% and Morrisons’ from 11.7% to 11.0%. By contrast, Aldi’s has risen from 3.9% to 5.4% and Lidl’s from 3.1% to 4.0%, while Waitrose’s has also risen, from 4.7% to 4.9%. And it’s not just market share that has been falling for the big four. Profits have also fallen, as have share prices. Sales revenues in the four weeks to 13 September are down 1.6% on the same period a year ago; sales volumes are down 1.9%.
But can the big four take on the discounters at their own game? Morrison’s has just announced a form of price match scheme called ‘Match & More’. If a shopper finds that a comparable grocery shop is cheaper in not only Tesco, Sainsbury’s or Asda, but also in Aldi or Lidl, then ‘Match & More users will automatically get the difference back in points on their card. Shoppers also will be able to collect extra points on hundreds of featured products and fuel’. When the difference has risen to a total £5 (5000 points), the shopper will get a £5 voucher at the till. The idea is to encourage customers to stay loyal to Morrisons.
But what if Tesco, Asda and Sainsbury’s do the same? What will be the impact on their prices and profits. Will there be a race to the bottom in prices, or will they be able to keep prices higher than the deep discounters, hoping that many customers will not cash in their vouchers?
But if effectively the big four felt forced to cut their prices to match Aldi and Lidl, could they afford to do so? This depends on their comparative average costs. At first sight, it might be thought that the big four could succeed in profitably matching the discounters, thereby clawing back market share. After all, they are much bigger and it might be thought that they would benefit from greater economies of scale and hence lower costs.
But it is not as simple as this. The discounters have lower costs than the big four. Their shops are typically in areas where rents or land prices are lower; their shops are smaller; they carry many fewer lines and thus gain economies of scale on each line; they have a much higher proportion of own-brand products; products are displayed in the boxes they come in, thus saving on the staff costs of unpacking them and placing them on shelves; they buy what is cheapest and thus do not always display the same brands.
So is Morrison’s a wise strategy? Will other supermarkets be forced to follow? Is there a prisoners’ dilemma here and, if so, is there any form of collusion in which the big four can engage which is not illegal? Can the big four differentiate themselves from the discounters and the up-market supermarkets in ways that will attract back customers?
It is worrying times for the big four.
- Heavy Discounters Up Pressure On The UK’s Big Four Supermarkets
- Tesco loses more market share as supermarket sector slows to record low
- Record low for grocery market growth as inflation disappears
- How Aldi’s price plan shook up Tesco, Morrison’s, Asda and Sainsbury’s
- Sainsbury’s shares drop 7% on falling sales report
- Sainsbury results: the reaction
- Morrisons Becomes First Of Big Four Grocers To Price Match Aldi, Lidl
- UK: Morrisons Takes On Discounters With Price Match Card
- Morrisons to match the prices of Aldi and Lidl
- Three reasons why Morrisons price-matching Aldi and Lidl is not a ‘gamechanger’
Alliance News, Rowena Harris-Doughty (3/6/14)
CITY A.M., Catherine Neilan (23/9/14)
Kantar World Panel, Fraser McKevitt (23/9/14)
The Guardian, Sarah Butler (29/9/14)
BBC News (1/10/14)
Food Manufacture, Mike Stones (3/10/14)
Alliance News, Rowena Harris-Doughty (2/10/14)
The Telegraph, Graham Ruddick (2/10/14)
The Telegraph, Graham Ruddick (2/10/14)
- Would it be possible for the big four to price match the deep discounters?
- What is meant by the prisoners’ dilemma? In what ways are the big four in a prisoners’ dilemma situation?
- Assume that you had to advise Tesco on it strategy? What advise would you give it and why?
- Assume that two firms, M and A, are playing the following ‘game’: firm M pledges to match firm A’s prices; and firm A pledges to sell at 2% below M’s price. What will be the outcome of this game?
- Is Morrisons wise to adopt its ‘Match & More’ strategy?
- Why is it difficult for Morrisons to make a like-for-like comparison with Aldi and Lidl in its ‘Match & More’ strategy?
- Why may Aldi and Lidl benefit from Morrisons’ strategy?