Cost pressures mount on grocery supply chains

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Anyone who has seen one of Asda’s television advertisements comparing its prices to Tesco’s can hardly fail to realise there is a price war going on in the grocery market.

In fact, the Walmart-owned retailer is currently promising that if it is not ten per cent cheaper on comparable grocery shopping it will refund the difference. This applies to four competitors – Tesco, Sainsbury’s, Morrisons and Waitrose.

At the same time discount retailer Aldi has been running a series of TV advertisements highlighting the difference between its prices and those of branded goods.

Not surprisingly, the impact of all this price cutting is starting to be felt in the supply chain. Last month, Morrisons, which has been hit particularly hard by the discounters, came out fighting. CEO Dalton Philips highlighted the fact that Morrisons had been losing ground to the discounters despite the fact that it was holding its own against the big three.

And he pointed out that consumer behaviour was changing – the discounters are increasingly being used instead of traditional supermarkets rather than as an additional source of cheap products.

As a result, Morrisons has refocused is strategy on lowering more prices permanently. And that will involve reducing inventory through improved visibility, range reduction, and reduced stock in depots. The total SKU count is set to fall by 20 per cent over the next three years. And there will be greater centralisation from regional to central distribution centres.

It’s worth noting the contrast with Sainsbury’s which also just reported a significant fall in like for like sales. However, Sainsbury’s did particularly well last year when others were struggling with the horsemeat scandal. It can also point to strong performances in its convenience stores and online – two areas where Morrisons is still trying to catch up.

As a result, the responses of the two have been significantly different. Nevertheless, the impact of the Morrisons move should not be discounted. Morrisons expects to invest £1bn in improving its offer to win back business from the discounters.

It’s a move that will not only respond to the growth of the discounters – it will increase the price pressure on Tesco, Sainsbury’s and Asda. And that, in turn, will increase the pressure for supply chain savings right across the grocery market.

Malory Davies FCILT,

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