Patrick van der Zee, Senior Vice President, International Retail at IRI, discusses the impact of retailer buying alliances on FMCG pricing and what this means for brands.
Retailers across Europe and the rest of the world are joining forces. Last year news of a merger between UK grocers Sainsbury’s and Asda was announced, sending shockwaves throughout the industry. More seemingly unlikely partnerships followed, with Tesco joining forces with Europe’s largest retailer, Carrefour, to improve customer choice, increase competitiveness and optimise costs.
We also saw French supermarkets Auchan and Casino form a partnership to jointly negotiate with their main food and non-food suppliers. Then there’s online disruptors like Amazon who are investing heavily in the grocery space and forming alliances, forcing the big supermarkets to re-evaluate the way they go to market and accelerate their digital transformation plans.
For traditional grocers, staying relevant to today’s consumer is becoming harder in the face of many challenges, including the fact that shoppers are buying less but more often, and splitting their purchases between multiple retailers.
We’re also seeing the continued expansion of the discounters, forcing the realisation on the big grocers that they cannot win the price war on their terms. Add to that the market disruption from online players and it’s no wonder that competing industry retail giants are joining forces.
Increased Challenges
These new alliances show that retailers are acutely aware that growth is harder to come by and that something needs to change if current growth targets are to be met.
It also suggests that supermarkets are realising that joining forces with like-minded players, even if they are competitive, is far more attractive than struggling on their own. We can expect to see more of this type of collaboration, even evolving into more extensive buying alliances.
Buying alliances can help create cost efficiencies with suppliers of brands, as well as manufacturers of retailers’ own label products. The idea is that it will lead to greater choice and lower prices for shoppers.
But focusing on supplier pricing alone is not without its challenges. It could see smaller suppliers being squeezed out, for example. In an age when many niche and specialist brands are gaining ground against the big brands, we could see a reversal of that, with the big suppliers once again dominating supermarket shelves.
We also don’t want to see a return to the era of aggressive price promotions, used to provide a short-term boost to sales, but ultimately eroding brands and margins.
Brands should be moving to a much more strategic model of revenue management that looks at the lifetime value of the brand and makes price architecture a core part of brand management, rather than a tactical execution. This is something that national brands will appreciate, but private label suppliers will need to build upon.
Embracing The New
So how should brands respond to this new era of price disruption? There are three key areas they we believe they should focus on:
1. Stress testing product price points through marketing mix modelling should become systematic.
A marketing mix model can help manufacturers identify where they can drive incremental sales through effective pricing and promotion strategies.
For example, do manufacturers know how price elasticity, which can vary from one region to another, impacts the price point at which shoppers will switch to another brand or store? Or which product attributes are actually driving purchase? What about competitors?
By analysing and understanding the whole category, manufacturers can gain insights into what works for their brands, as well as how a competitor’s marketing activity is impacting sales performance.
2. FMCG manufacturers need to demonstrate how their brand will defend or drive category growth at a retailer.
This is where closer collaboration with retailers through shared data platforms can be extremely beneficial. Retailers are closer to consumers than suppliers and are more aware of changing trends and shopper behaviour.
Closer collaboration and the sharing of data can lead to more actionable insights that add value to both parties.
3. If there was ever a time to be more efficient in terms of sustainable FMCG production methods and packaging, it is now.
Food waste and packaging are top of mind right now for consumers, who are increasingly aware of the environmental impact their purchases and are making the connection every time they pick up a brand. According to IRI’s European Shopper survey, nearly three quarters of shoppers say they prefer to buy products with environmentally-friendly packaging, while also pointing to brand characteristics like fairness, transparency and integrity.
Maintaining a sustainable business model will be challenging for brand innovation and new product development, particularly among private label suppliers. It may also result in further expansion of retailers' own label ranges, particularly at the lucrative premium tier.
This could drive more mergers and acquisitions on the supply side too, to leverage capability, capacity and negotiating power.
Whatever format these retail alliances take, they should be thinking about developing a long-term strategic collaboration, using solutions such as IRI HRS, that involves sharing data and knowledge and combining complementary capabilities. Ultimately this will result in the best value for the customer.
For more information, visit www.iriworldwide.com.
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
