Channels / Discount
In & Out of the Box

Beware the Race to the Bottom

The world is full of examples of cutting costs to try to maintain a competitive edge that do not work long-term. Which brings me to the world of fighting discounters. Twice this week I have read articles about so-called mainstream retailers lowering their pricing to match the ever-increasing threat of the discounters. Whether in Australia where ALDI is growing fast and creating major shock waves by becoming truly coast to coast. Whether in Europe where ALDI and Lidl continue to battle for larger share. Whether in Canada where discount banners continue to erode larger-format margins and force price-gap reduction. Whether in the United States where ALDI continues its march, announcing it will be truly coast to coast by 2018, growing store count by nearly 50 percent in 5 years.

An interesting report just published by European private label consulting firm IPLC shows mainstream retailers are fighting off the discounters with lower entry-level price points than the discounters’ comparable national brand products. What they also revealed is that, in many cases, those entry-level or budget products did not match up to the quality of the discounters.

I see this all over the world. It is an unassailable fact that discounters operate with a different cost and margin model. They can afford to match “national brand” quality and still be aggressively below mainstream retailer pricing for their “NBE” items. To compete, these larger operators have to look to entry-level or budget items to try and be competitive, but maintain margins within their own parameters. The only way to follow this strategy is with lower quality. Or lower margins. The latter will not work for many, who are firmly locked in yesterday’s paradigm.

Understanding our demographics and the degree of market share erosion is crucial. Understanding we need to change the cost model is crucial. And completely overhauling our supply chain and sourcing practices is also crucial.

Time to think about how strongly we are wed to yesterday’s model. We can’t keep throwing money at promoting “value” while lowering quality to maintain margins and competitive pricing. Customers know when the paper towel is thin and nonabsorbent. They know when the meat is pumped full of salt and water. They know when the ballpoint pen leaks into their shirt pocket. And they know when the wheels fall off the suitcase on the second trip.

The race to the bottom is a dangerous one. Beware the victory dance that becomes a fall on the ice.

 Till next time. 

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