IRI: is the price guarantee mechanic dead?

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By Martin Wood, head of strategic insight – retail at IRI UK

Since 1925 John Lewis has promised its customers it would ‘never knowingly be undersold’.

The company’s price guarantee has boosted loyalty and trust in the brand, and the strategy has been copied by the supermarkets. Yet there is growing evidence that brand price matching has fallen out of favour with retailers and shoppers.

For the supermarkets the idea of promising a shopper a refund if they can find a product cheaper elsewhere has been a popular marketing ploy for a number of years.

Asda led the field six years ago as it and its rivals struggled to find a way to improve loyalty among increasingly fickle shoppers without fuelling the price war. The message to consumers was ‘don’t bother shopping around because you’re safe with us’; while the warning to supermarket rivals was it is pointless dropping prices because every single one will be matched.

Yet price guarantees are going out of fashion for a number of reasons.

Sales for all grocers fail to grow if everyone is matching prices, while there is a mounting negative perception of these schemes among shoppers and regulators, such as the Groceries Code Adjudicator (GCA).

There is an opinion that brand price matching keeps prices higher than they need to be because there is a reduced incentive to discount.

These schemes can also be overly complex and costly. Morrisons dropped its price matching against Aldi and Lidl because shoppers found it too complicated and the grocer was accused of not comparing like with like. It also used to price match against Tesco, Asda and Sainsbury’s if you spent at least £15, but it has decided to revamp its ‘More’ scheme instead and is now offering points based on spending.

On April 26 Sainsbury’s abandoned its brand match claiming its customers preferred lower regular prices. Asda is reported to be reviewing its policy, but The Asda Price Guarantee still promises a 10% cheaper shop on a comparable grocery basket. Tesco is still matching against Morrisons, Asda and Sainsbury’s and giving shoppers immediate discounts on branded products at the till.

Of course, following the UK’s decision to leave the European Union there are fears food prices could increase as the value of the pound fluctuates. If consumer confidence does wane then price will be front of the shopper’s mind and every grocer might have to look again at whether or not to underwrite its prices.

If the Brexit vote does have an impact on consumer confidence and there is a price war then retailers must continue to have a thorough understanding of their competitors’ pricing strategies.

Pricing must be transparent to build trust, while the strength of each retailer’s brand will become even more important. Each grocer must find new ways to differentiate itself, perhaps by taking a more ethical stance or through new customer service initiatives.

There is also an opportunity for suppliers to work more closely with retailers to produce special packs that can be sold at lower prices. This is something manufacturers already deliver in the pound store sector.

We could see more claims being made by retailers about having the cheaper overall basket of goods, although stores must tread carefully when making specific boasts.

Aldi had its knuckles rapped in June and had to pull three adverts, including two TV commercials, after it claimed shoppers could make big savings. The discounter failed to make it clear it was including its own brand groceries.

The cost of running any price matching policy can be high, and shoppers will not respond to schemes they perceive as too complex.

Meanwhile, the supermarkets are watching closely what impact Amazon will have on the grocery sector and pricing. The Internet giant has already signed a deal with Morrison to start selling its fresh, chilled and frozen food.

Retailers need help to get their pricing strategy right to remain competitive and attractive to shoppers. IRI’s advanced modelling techniques analyse price points and help manufacturers understand how pricing for their products works. Every supplier needs a clear indication of its products’ price elasticity.

Manufacturers will mourn the demise of price guarantee schemes and the move away from brand matching because it could mean more promotion and shelf space for supermarkets’ own label ranges.

If there is a consumer recession suppliers may be asked to find additional funds to support deeper brand promotions.

The future of pricing is uncertain, but retailers must remain observant and, if they cannot brand match on price, they must respond quickly to what their rivals are doing and what their customers want.