Sunday, 9 March 2014

Race to The Bottom That Benefits No One

Woohoo! Cheap milk! Kind of! Farmers moaning, so something must be happening in the world of retail. But, unlike previous incursions in the cold price war that's been going on for well over ten years now, this won feels like we're entering a Dr Strangelove phase, mutually assured destruction and all.

When you consider the catalyst for this latest round, you'd be forgiven for scratching your head. Across the top 4 multiples, there is clearly some loss of market share to the discounters and Waitrose happening, but they are still profitable and stable businesses. In a normal universe, they'd be keeping calm and holding their nerve through these tough times. Yet, instead, we seem to have some insecure CEOs acting like jumpy teenagers. And I would have loved to been a fly on the wall when Andy Clarke heard that the one SKU that probably saved him millions in Asda Price Guarantee vouchers had finally been price-matched!

With the notable exception of Sainsburys, who have so far kept to their sensible policy of doing simple things really well, the other three seem so obsessed with the rise of Aldi and Lidl that they are prepared to go hell for leather into a race to the bottom. And not once, are they seeming to stop and think about their shoppers! They'd need to look no further than Asda to see that suicidal pricing is not working in this new world and, from a growth view, even Co-op seem to have realised that Like for like growth is a much more sensible grail to chase. We have to accept that this weird version of city-driven capitalism demands growth in sales and profits at all costs, but surely only a fool would fail to realize that achieving this solely by adding new space is not a sustainable way to achieve this? 

I'm hearing some worrying things come from our retailers at the moment - talk of focusing on the core and driving value may keep city analysts happy with some buzzwords, but the danger is that the incredible choice of products that have been made more accessible to more people over the last 20 years will be removed as everyone tries to replicate the look and SKU density of the discounters. The affluent supporters of anti-"Tesco" will obviously cheer as it will mean the oiks will only be able to get focaccia and balsamic vinegar for bijou artisan stores in nice, twee High Streets, but of course those. It lucky enough to have access to that will be left with endless £1 deals of foods that hit lowest common denominator criteria.

The knock-on effects of a nasty round of price slashing and range rationalisation could be huge. Mainstream retailers depend on extended ranges to manage their margin mix, so proftibility will be hit - this could be a reduced number of store staff. Of course, reduced ranges will have huge implications on manufacturers. Large manufacturers will be able to survive without lower selling products, albeit with some potential lay-offs in their distribution networks and factories, but will really hit smaller companies who may suddenly stop being so vocal in their support of "localism"

Scaremongering? Exaggeration? Maybe, but if you look at what's happening in the last 5 years and then the clear lack of judgement and long term thinking amongst the two Clarkes then I wouldn't rule out movement some way down this path.

I've said it many times before - these are interesting times. Up until now, I've said that I'm glad that I'm no longer on the retail side of things. Now I'm also not so sure manufacturing is such a safe distance either.

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