So what are the big supermarket brands order winners – if not price and quality?

Lovely (?) article in The Guardian by Joanna Blythman, author of Shopped, who basically says I told you so…  Her book, published ten years ago, was a major indictment of the large supermarket chains.  In her view they had “closed down small shops, operated a feudal system with their suppliers, bullied their way into communities, encouraged consumption of rubbish food, generated unprecedented levels of food and packaging waste and clocked up environmentally ruinous food miles”.  But despite this, British consumers continued to use these outlets – until the last twelve months or so.  Now, according to Blythman, Tesco, Morrisons, Sainsburys and Waitrose are in “meltdown”.  So what’s going on?

Blythman argues that the traditional supermarkets competed on the basis of “value for money”, and now that discounters like Aldi and Lidl have come along, this “myth” has been dispelled.  The concept of value for money, in operations terms, is a combination of two order winners (see chapter 2) – cost and quality.  This view is supported by the typical advertising you see on television and elsewhere. But was this really how they sought competitive advantage?

Actually, what they have been competing on was speed.   Let me explain.  When all the brands were very similar (as they were), offering an almost identical range of products at similar prices, customers did two things.  First they chose to go to the most conveniently located store; and second, they did their shopping for the week all in one go.   Competing in this required the operators to find the right sites for their outlets, build large stores to ensure they stocked everything a customer might want, and ensure the shelves were full, so that customers could find everything they wanted in their one visit to the store.  Large stores also had the advantage of economies of scale, which helped to keep prices down – but they depend on high volume of shoppers.  And it was a highly successful business model – until now.

Two things have changed.  First the discounters have become as ubiquitous as the established brands.  So it is just as convenient for customers to go to them.  Second, consumers have become very much more price conscious due to the state of the economy.  Hence they have changed their behaviour, in order to save money.  Instead of shopping once a week, they go to the discounters to buy the basics, and then other stores for the items that the discounters do not stock.  One effect of this behaviour is that the difference in prices between the two types of supermarket are highlighted, reinforcing the behaviour.

Now the business model that made the traditional supermarkets successful is working against them – they have diseconomies of scale.  Not enough customers, large store overheads, overstocked shelves, and price offers that consumers know are not competitive.  And one further problem is ownership.  The discounters are privately owned, and hence not worried about the stock market.  The UK brands are in public ownership with investors who expect a return on their investment.  Such investors put their money where the best return is.  If supermarkets fail to deliver, their stock price will fall and severely limit their ability to operate.

 

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