Downgrading for Success

Food retail is a fierce battleground at the best of times, but a combination of inflation, steady interest rate hikes and an all-consuming credit crunch presents a formidable challenge. Against that backdrop, the discounted price approach is proving to have real resonance with hard-pressed families, and it’s already paying dividends for some retailers. In a bid to gain market share, Shoprite cut its margins on basic foodstuffs for the six months to December. That lower price positioning has been instrumental in the retailer’s customer transaction increase of 10,3% announced at the end of June. Pick n Pay, always ready to fight the good fight, is subsidizing basic food items like bread and potatoes, while even upper-end retailer, Woolworths, has acknowledged the need for certain price adjustments. In its trading update for the 53 weeks to June, the retailer recognized its customers’ “spending pinch” and announced a reduction on entry level prices.

Consumers have already entered into a defensive style of shopping, a style that is particularly evident in FMCG retail. Besides price manipulation, one of the obvious counter actions is to adjust retailer offerings to the consumer buy-down. Circumstances have rendered a well planned and executed own label strategy a vital tool of the times. This is already evident abroad. According to market research organisation Gfk NOP, 42% of UK shoppers are opting to purchase supermarket label items rather than branded items. In the US, the number of shoppers who say they are buying more store-brand items has also been steadily rising - now up to some 60%.

But, according to Nielsen South Africa market research published in June, local retailers have not taken adequate advantage of the market opportunity. With the exception of Woolworths, whose private label operates more as a premium brand offering than a cost-saving initiative, retailers have fallen especially short on improving the visual appeal of their own name brands, reinforcing the traditionally poor perceptions of their quality. Even within the basic food categories like maize meal, consumers are seen to stick to the perceived quality assurance of national brand names.

At the same time, going down-market carries a risk - that of damaging brand perception and suffering the losses when the economic tide turns. Its profitable use calls for the skillful balancing of extent, cost and timing.