Trade Promotions RIP - is the current trend towards EDLP the end for promotional systems?

31 March 2016

David Williams

David Williams

Head of Consumer Products

Congratulations, you’ve just invested in a trade investment system, such as SAP TPM, and you’re now on the journey towards getting control of your spend with your customers and moving towards improving your returns on investment. Now the trade press is full of headlines stating that all of your customers are heading towards an Everyday Low Price (EDLP) strategy – have you made a very expensive mistake?

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Recent announcements from Sainsbury's and Tesco to phase out multibuy promotions and a recommitment from Asda to invest a further £500m into price reductions suggest that the days of High-Low promotional strategy are numbered. These moves have undoubtedly been precipitated by the continued success of Aldi and Lidl and their commitment to an Everyday Low Price (EDLP) strategy. However, before pulling the plug on your system implementation, we should reflect on the wisdom and likely duration of the big grocers' pricing strategy changes.

Why are UK Supermarkets moving to EDLP?

This is an interesting question. The obvious answer is they are reacting to a strong and growing competitive threat from the German discounters Aldi and Lidl and the Walmart influence on Asda. However, there are two other huge benefits to switching:

1.    EDLP smooths the demand profile and makes forecasting product sales a lot easier. With an ever-changing and complex supply chain (online deliveries, click and collect, multiple store formats, etc), removing the additional cost and complexity of managing promotions is an attractive proposition.

2.    Environmental, political and social pressures are high in the grocery industry – offering multibuy deals can be seen to be encouraging higher waste, obesity and confusing shoppers into spending more than they should. EDLP addresses these pressures.

Does EDLP work?

There are a number of large grocers who have had great success following an Everyday Low Price strategy. Walmart is probably the highest profile advocate of the EDLP approach so let’s have a look at what has made them successful.

1.    Shoppers trust that Walmart offers the best prices. Trust is hard to earn and even harder to keep. The price message is constantly reinforced by Walmart through advertising and price comparisons. Equally in 2014, Aldi and Lidl spent over £100m in advertising their price messages (about 25% of grocery advertising spend).

2.    EDLP is a long-term strategy that works based on high volume sales on wafer-thin margins. To consistently be the cheapest, cost must be taken out of the business at every opportunity and reinvested in the price of goods to shoppers. Deviating from this strategy can lead to confusion and loss of trust. A study from Stanford Business showed that in the late 2000s, when Walmart tried to replicate the success of the Asda rollback concept in the US, shoppers started to wonder whether Walmart really was the cheapest supermarket as it could afford to offer further discount from stated best price. Walmart lost market share and had to rebuild its shoppers trust.

3.    Due to the constant need to save cost to support lower prices, EDLP tends to promote innovation in the supply chain. Walmart has heavily influenced grocery supply chain models around the world with initiatives such as distribution centres and Collaborative Planning, Forecasting and Replenishment (CPFR).

4.    In a highly competitive marketplace or in tough economic conditions, EDLP becomes a ‘race to the bottom’. Every supermarket wants to be the cheapest and must heavily advertise the fact to steal shoppers. The larger players with the best negotiating power over their suppliers will tend to be the winners in these times. When Walmart enters a market, typically other EDLP supermarkets lose $1.7m in annual revenues as it cannot compete. Clearly, a marketplace where all supermarkets compete on EDLP is not the best strategy and this is borne out in the results from the Stanford Business study which showed that supermarkets using a promotional strategy were more resilient to Walmart’s entry (only losing $690k per year).

5.    A lot of the investment in price (and indeed supply chain innovations) for supermarkets comes from their suppliers. An EDLP strategy can create problems for the supplier. The constant demands for lower cost that enable an effective EDLP strategy can cause a squeeze on the supplier’s margin and stifle the amount of investment available for innovation. Successful suppliers to an EDLP customer must embrace the culture of EDLP and create a similar virtuous circle of supply chain cost reduction to enable lower costs to their customers.

So will this rhetoric from the UK Supermarkets come to reality?

One size does not fit all in a Grocery marketplace. Walmart, while very successful, is not the only player in the US – Safeway and Kroger are both very successful running on a High-Low promotional strategy. Indeed, the Stanford Business study showed that you are less likely to succeed against strong established EDLP supermarkets if you try playing them at their own game. Coming from their High-Low promotional strategy, Tesco and Sainsbury's would need to invest heavily and consistently in EDLP messaging to gain trust from their shoppers that they are truly offering value. I don’t believe that either are interested in competing in a value-destructive price war in the long term.

In the UK, as in all markets, price is a very important factor in shoppers’ minds but it is not their only consideration. Tesco UK & ROI CEO, Matt Davies, recently outlined his priorities for the coming year and price was not amongst them. However, both listening to customers and personalised service were. Are these comments in line with a hard EDLP strategy? Does it look like we are heading towards a no frills, cost-cutting, price-dominated grocery industry? I don’t think so. This current rhetoric is a response to the political and social environment that the supermarkets find themselves in. They need to simplify their promotional offerings and become more transparent in their promotional strategy but they won’t take the leap to EDLP. 

So back to the question; does EDLP represent the death of Trade Promotions? I believe that the current statements from the supermarkets are just positioning and do not reflect a wholesale move to EDLP. I think the decision to invest in promotional management systems is still the right thing to do and will reap the rewards in improved ROI. It is then your choice if you want to reinvest that return with your customers!

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