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'Flight to value' will soar after recession and reshape mid-market
Archived article dated Friday October 30th 2009
The recession has brought about a new way of shopping and these changes will be permanent, bringing about a step change in the way consumers perceive 'value' and spend money, according to PwC.
PwC’s latest research found that over 70% of consumers who have traded down to lower-priced items for some or all of their groceries and 60% of those who have traded down for clothing say they will continue to do so once the recession is over. Indeed, 78% of those trading down for grocery shopping think they receive the same or better value from lower-cost items.
PwC also finds that the flight to value will intensify because the share of total household spending absorbed by groceries and clothing has been falling over the past 25 years, as spending on more non-discretionary items like leisure, housing, fuel and communications such as mobile and broadband are demanding a larger share of wallet.
At a product level, behaviour is more likely to be permanent in brand-led FMCG categories such as toilet paper, washing powder, and soap, whilst consumers suggest they are more likely to trade back up to higher-priced products in categories such as meat, fruit and vegetables. Interestingly, people are most likely to trade back up in chocolate – clearly indulgence comes at a premium.
The research suggests that ‘scrimping and splurging’ will become even more pronounced, by which we mean the same consumer is often willing to spend more on products and services that they perceive to have genuine value, while focusing ruthlessly on finding the lowest prices for more commoditised goods. 17% of respondents who shop at premium supermarkets regularly buy clothes at discount stores; while 11% of those who opt for mid-market or value grocers also shop for clothes at designer outlets. Additionally consumers are getting more individual and cannot be segmented as easily as they used to be, meaning that some of the old mass marketing principles no longer apply.
Mark Hudson, retail and consumer sector leader at PwC, said: “The last recession sparked the birth of the value sector, which now makes up around 25% of the total retail market. This recession is fortifying the concept of value and firmly establishing it in the consumer’s psyche.
“Competitors in the premium and mid-market are banking on consumers trading back up when times improve, but the value sector will continue to thrive, because customers have sampled what it has to offer, and they like what they have seen. Cheap no longer means nasty.”
All CEOs we interviewed are reducing overheads, maximising procurement savings and eliminating redundant product and service features. Yet, for mid market operators, competing on price is not a viable option, because the operational changes required for mid-market retailers are simply too sizeable and the two operating models diverge dramatically. PwC’s research suggests that the lowest cost operators will still have a cost advantage of 10 to 15% of sales versus more traditional players in grocery, clothing and leisure.
PwC thinks that over time, customers get used to many of the benefits that have been added and ascribe no value to them, effectively taking them for granted. To grow profits sustainably, mid-market operators need to encourage customers to pay more for their products. This means having a better understanding of what they don’t take for granted and what they are prepared to pay for (or not).
A continued polarisation between value and premium players will force companies to remodel their business to satisfy the post-recession consumer, and identify what this value 'zeitgeist' now means for them. Mid-market operators will need to assess which of the existing product or service benefits customers don’t value and upgrade the ones they do and charge for them.
But their next challenge is to gives customers a choice and clearly signpost why customers could pay a premium over the lowest cost option. There are 4 options to do so – the first 3 being more well-trodden:
Product range - gives quality choice e.g. good/better best in grocery or designer/diffusion ranges in clothing
Channel - gives location choice e.g. convenience/superstore or online/home delivery
Yield management – timing choice e.g. paying more for popular time slots for delivery of items ordered online.
Unbundling – giving an attribute choice – stripping down product or service and allowing customers to reassemble it to pick bits they want i.e. the elements they value. Airlines and travel operators have used unbundling for some time and it is only now that retail and consumer companies are starting to explore the opportunities presented by this strategy e.g. self service check out tills, choice of home delivery/click and collect.
Andy Garbutt, retail and leisure director at PwC, concluded: “Consumers are still prepared to splash out if they can see clear benefits from doing so – they’re just getting a lot more astute about what those benefits are, and how much, exactly, they’re willing to pay for them. The challenge for all companies is understand how this dynamic is working in their own sector, so that they can start competing with the low cost operators on value, not price.”
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