News & people

Price war not a long-term path to success for retailers and manufacturers

Analysis by global insight leader, IRI, of the FMCG price war in France has highlighted key lessons for both retailers and manufacturers in other European countries, including the UK, Spain and Italy, where they are currently experiencing deflation or stagnation in grocery products and the early stages of a price war.

According to IRI’s Point of View ‘FMCG Price War in France – An Overview and Lessons for other European Countries’, the findings suggest that lowering prices may not bring the increased volume sales and improved performance that retailers and manufacturers expect.

Since the beginning of the price war, deflation has reached around 2.6% in hypermarkets and supermarkets, but has had no impact on volume consumption overall in France. Neither has the performance of retailers been affected by their level of involvement in the price war. The likely reason for this is that price is not the strongest sales lever – IRI’s findings indicate that an expanded offering has the greatest impact on performance, followed by promotion, then finally price.

So far, the price war in France has re-energised certain sectors and brands, however. All sectors have had to drop their prices, with a particularly sharp deflation in cleaning products and hygiene/beauty. These sectors were both on a declining path, but deflation – in combination with promotion – has successfully boosted sales.

Lower prices have also encouraged consumers to reconsider and adopt national brands. Price deflation has only affected national brands in France, reducing the competitiveness of private labels. This has driven the trend to upgrade, as consumers invest what they save back into their everyday purchasing. While deflation reached 1.3% in 2014, the price of a shopping basket increased 0.3%.

While shoppers have been the short-term winner in France’s price war, they could end up the loser in the long-term. The price war may impact assortment size – reducing choice for consumers, levels of innovation and leading to lower quality products as manufacturers strive to maintain their margins. IRI noticed that in the Netherlands the price war, which took place 10 years ago, has impacted the level of assortment and of innovation.

A significant change brought about by the price war in France is that retailers’ purchasing organisations have formed partnerships, which means that manufacturers now have to negotiate with four purchasing groups, representing 90% of the French distribution, instead of seven. It is too early to measure the impact.

Paul Hinds, senior vice President of international retail solutions at IRI commented: “There’s no escaping a price war – but there are opportunities for growth. In France a price drop of 1.3% over 2014 returned about €1 billion to the pockets of French shoppers, representing less than €3 per month per household. The consumer may be the short-term winner in the price war but could be the loser in the long-term if range optimisation reduces choice, price pressure stimulates cost reduction and new product innovation and quality is compromised.

“In the UK the latest figures show that price deflation is down by -1.1% (for Q1 2015), the lowest for more than three years. It’s saved shoppers £1bn more than it did for the same quarter five years ago. Retailers and manufacturers take a shared approach to reviewing ranges, price positioning of products and innovation if they want to optimise the impact of price deflation.”

Leave a Reply