To survive the price war grocery chains need to focus on cost of doing business

The reports of a looming price war in the Australian grocery sector have absorbed many column inches in the mainstream, financial and retail trade press.

It has also manifested itself in hugely increased activity (read financial investment) in mainstream media, targeted social media, catalogue and in store activity.  All of this activity is aimed at letting the promiscuous Australian shopper know that prices are good wherever they choose to buy their groceries.

Add to this the changes with Aldi’s new fresh -focused store formats, and Woolworths’ shift to a new ‘Everyday Rewards’ program format, without Qantas in the mix, and we have a recipe for a very rich, long and interesting year ahead, one that requires a seismic shift in “how” retailers wishing to lower their shelf prices do business. Most importantly, how retailers manage their CODB – that is Cost of Doing Business.

It’s a lesson UK retailers were late to learn, rushing head long into a price war with the aim not of competing with Aldi and LIDL but of driving under one of the mainstream UK grocers. But it’s a lesson they are catching up on very fast.
Unless CODB is in your DNA you are ill-equipped to operate as a low price retailer. In the grocery world, ALDI, LIDL and Walmart have it within their DNA. From the first day they opened their first store.

I invest in JB Hi-Fi. One of the key metrics they present in their investor updates is CODB. They focus on managing their costs before they look at their product gross margin. In Australia, and the Scandinavian countries, we have the highest average labour rates in the world. In Scandinavia, grocery shoppers saw self-checkout, shopping trolleys with coins, centralised price ticketing, and electronic shelf edge labels before customers in the rest of the world.

Swedish grocers had to remove mundane tasks like chasing shopping trolleys around car parks in the snow, as it cost more to chase the trolley each month in labour costs than it did to buy the trolley! The same is true of all in stores’ mundane tasks. Walmart adopted “shelf-ready packaging” to lower the cost of labour in re-stocking shelves several times a day.

One of the ironies of a price war is that it costs more in shopper communication and store operations costs than it does in the actual price drop. On your TV and radio, in your mailbox and on Facebook, the volume of paid retailer communication has grown significantly.

In store the plethora of yellow and red price special tickets, off location cardboard dump bins and floor media has exploded in the past eight weeks. All those manual tasks increase store labour hours.

Added to this is the actual price discounting, some paid by suppliers, and some paid for by the retailers. Based upon this photograph of a trolley full of products placed outside a Woolworths store showing the price drop from $245 to $200, it is around 17%.

This is about in line with the overall discount levels from Tesco, Morrisons and the other mainstream UK retailers when they started the price war last year.

Tesco’s bet in the UK is that one mainstream grocer is ill-equipped to deal with this as their CODB, and their manual systems in store, prevent them from competing on price, buying media and implementing the in store activity AND making a profit. Once this grocer has gone, price pressure from Aldi and LIDL will be relieved for a few years.

But in Australia we only have four grocers. Woolworths/Safeway. Coles. IGA and ALDI. None will go out of business. But without structural and technology driven change, as the tide of price falls, a couple will be found to have been bathing nude. In very cold water.

Kevin A Moore is a retail expert and the chairman of Crossmark Asia Pacific Holdings and Mirador Retail Technology. He is also the founder of TheRoadToRetail.