Cheapening the food market

The latest jousts between major grocery chains suggests we’ve slipped into a new phase in the retail food market that might spell even tougher times ahead for food suppliers.

Given the tit-for-tat announcements from Coles and Woolworths in the past 2 weeks, competitive tension is going up a few notches. Coles got the ball rolling saying it would move to uniform pricing across the country, reducing the use of regional pricing zones and establishing nationally equivalent prices on about 8,000 lines. Woolworths responded with a price reduction program, vowing to slash prices on the shelves, and then snuck in its own uniform pricing pledge, upping the ante on Coles by offering to align over 12,000 products. Go to any Woolworths or Safeway store or pick up a major newspaper this week and you won’t miss the messages.

There are a few things happening here. Uniform pricing deals with one of the areas probed in the 2008 ACCC Grocery Inquiry, which queried the ways that retail prices are set region to region. A lot of interested parties in the inquiry got upset at the time over one of the basic no-brainers of any retail situation – if your competitor is right in your face, you’ll price a product keener than when he isn’t.

This step also strives to counter Aldi, which uses national prices and is gradually spreading its network of small-scale deep-discount grocery stores. Aldi would be adding stores faster than its current rate if it could find the sites!

Another subtle agenda being driven home to the consuming public is the comparative cost of living. The current promotional adverts of both major grocery chains this week point to price comparisons with this time last year. The rate of food price increases over time was one of the catalysts for the 2008 review, and remains a political football if Tony Abbott’s performance in a Canberra store is a guide.

A drive to be seen as cheapest is hardly a new ploy, and now a feature of retail in the UK, Europe, US and Japan. It has been the main game for nearly 2 years. The large grocery players did quite well to capture a greater share of household meals when things in the economy started to get tough in the middle of 2008.

But with the economy gradually getting better in 2009 through the flow-on effects of the stimulus package, the food market simply got tougher. With the continuing focus on “value” the major grocers held onto a greater share of the food spend. Taking advantage of concern about the cost of living, the promotions pushed savings in the cost of meals – “feeding the family cheaper”.

With the stimulus party now over, the New Year is tougher for most retailers, and the fight for customers hearts and minds is fiercer. Consumers have found satisfaction with cheaper lines. The drift over the past 2 years has taken enormous value out of the food chain, and put most of the pressure back up the chain on suppliers. The hard part is seeing how we climb out of what seems to be a spiral – even when the economy is fully back on the rails.