How a price war clips innovation's wings

For the United Kingdom territory, research firm IRI calculated that price wars lead to a smaller product range, fewer product launches, smaller innovation budgets and lower turnover.

Negative spiral

Great Britain has been in a huge price war for quite some time, with a lot more turmoil than we are used to in Belgium and the Netherlands. The major supermarket chains aim to fight off discounters Aldi and Lidl’s surge in popularity with their own set of price cuts. Does that help? No, it only leads to a negative spiral…

IRI investigated the British supermarkets’ product range between January 2013 and December 2015 and found that there had been a 6.3 % item drop, basically some 1,000 SKU’s. At the same time, fewer product launches appeared: 2015’s level dropped 13 % compared to 2013, while the number of private label launches even plummeted 26 %. Retailers, with Tesco leading the way, have cut down their product range to cut costs, which makes it harder for manufacturers to bring innovations to the marketplace.

Weaker support

The research firm calculated that new products (on the market for less than a year) contributed merely 2.1 % to turnover between 2011 and 2015, down from 3.4 % previously. Turnover contribution for new food items dropped from 2.9 % to 1.7 % while non-food dropped from 4.9 % to 3.2 %. However, personal care items suffered the most, from 7.7 % to 3.1 %.

This spells bad news for the food retail industry, according to the report. New items are the “oxygen of the industry”: they increase their category’s appeal and create value because of their higher price. New items’ price was 53 % higher than the average in 2015, while that was only 41 % in 2011. Innovations are apparently positioned at a higher level nowadays. 

At the same time, innovations are not as supported as well nowadays (because their budget is under pressure) and are pulled out of circulation faster if the results are not satisfactory (starting 36 weeks after its launch).

Self-harm

It is a remarkable conclusion: British supermarkets damage themselves as they try to fight off discounters. They have decided to turn one of the areas that could set them apart from discounters into a battleground, namely product innovation. 

The report also hands out several tips to manufacturers: focus your innovation budget on the best ideas. Maybe test marketing can once again become the industry’s standard approach? A new product’s high price needs to be justified and consumers need to be informed of the reasons to buy the item.

Launch offers should not cut too deep, to avoid consumers staggering when they learn the actual sales price. Sampling is still effective, but is also still expensive.