In a drastically changed and hugely competitive retail landscape, the lowest-price guarantee causes a catch-22 for Belgian market leader Colruyt Group. The retailer is the prisoner of its business model, but it cannot tinker with it. Or can it?
The worst is yet to come
Colruyt Group’s half-year figures were even worse than what the gloomiest analysts had expected, this week: sales are up only due to price increases and profits have halved. Moreover, the worst is yet to come, the company admits: in January, there will be an automatic wage indexation in Belgium, a new wave of price increases is coming, and the competition is not sitting still. It is very difficult to see any bright spots left in the dark story.
” The months to come will remain very challenging, with gloomy macroeconomic forecasts that will further affect consumer spending patterns”, CEO Jef Colruyt agreed. “However, we have some valuable trump cards in our hands. Thanks to our long-standing focus on and experience in operational cost control and efficiency, and to our targeted long-term investments, we as a group have strong roots to rely and build on.”
The big taboo
This is as much as saying: there will be no change, we will keep doing what we have been doing well for forty years. However, that raises an important question: if you have been successfully keeping a sharper eye on costs than any industry peer for decades, how can you expect that this continued focus on efficiency is going to yield any big additional profits now? Small chance… As a result, the impression prevails that Jef Colruyt would rather sacrifice even more margin than adjust his company’s business model. The plummeting share price is the least of his worries.
But when you analyse where the big issues are, you inevitably end up with the retailer’s famous lowest-price guarantee. That was always considered a taboo, and understandably so: the lowest-price guarantee is part of Colruyt’s DNA. It was a brilliant strategy for the challenger Colruyt once was in the Belgian food retail market. The brand manufacturers paid for the discounter’s marketing; the competition had no answer. This allowed Colruyt to transform from the industry’s weak little brother to the seemingly unapproachable market leader in a few decades.
Nowhere in the whole world will you find a food retailer that offers a lowest-price guarantee as uncompromising as Colruyt does – and certainly not a market leader. Number one in the United States is Walmart, a chain that is very selective with its low-price guarantees. Hard discounters like Aldi and Lidl do guarantee competitive value for money, but nothing more at all. The lowest-price guarantee applied by Jumbo in the Netherlands – inspired by Colruyt – is just a watered-down version with many exceptions: it does not apply to competitors’ temporary promotions, for instance. It is rather easier that way…
On top of that, the supermarket landscape in Belgium has changed dramatically over the past fifteen years. International competitors have the tools to shred apart the low-price story. Albert Heijn, with its Dutch prices, measures up to a sharp price image with only a limited number of cleverly chosen deep promotions every week, to all of which Colruyt has to respond. The other supermarket chains learnt quickly and are now also embracing the 1+1 hype.
One against all
That makes the competition in Belgium an unequal battle of one against all. The local hero that is Colruyt has to react to every price drop at every competitor. Thanks to their sales abroad, foreign competitors like Aldi, Lidl, Carrefour and Ahold Delhaize are all bigger than the Belgian market leader. They have enormous international buying power, which they increasingly use. In that sense, Colruyt can be very grateful that multinationals have so far been successful in maintaining their territorial supply constraints….
In the current inflationary period, the disadvantage for the market leader becomes even greater: competitors have many more options to raise prices to still preserve their margins a bit. Colruyt has a much harder time doing that. Moreover, there is the increasing competition online. Like Walmart, Colruyt does not adjust prices in its physical stores to respond to online competitors: that would be completely unaffordable. But the increasing price differences between shops and Collect&Go is becoming all too obvious to shoppers.
No market share gains
As if all that were not enough, the lowest-price guarantee no longer appears to be helping Colruyt gain market share. The market leader actually saw its market share drop during the lockdowns, as many customers worked from home and opted for convenience stores. It has since rebounded somewhat, but at 30.9 %, Colruyt is still below its pre-pandemic level of 32.5 %. And market share stagnated, over the past six months.
The confrontational conclusion is, that the lowest-price guarantee in its current form is actually not sustainable, even if the cost storm would eventually subside. But just giving it up is also completely unthinkable, as it is part of the brand identity and the reason for Colruyt Lowest Prices’ existence. How do you get out of such a catch-22? At most, the retailer can tinker with the small print. The adjusting of its Red Prices policy, earlier this year, seems to indicate that the willingness to think about this does exist in Halle. It will take creativity and it will have to be done very carefully. Step by step, in other words. How much time does Colruyt still have?