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Monday, 14 October 2013

Ernst’s Economy in discussion at BNR Newsroom, talking about the AH price war, food quality, online shopping and the brick-and-mortar stores. Will the traditional supermarket survive the online competition?

On Monday, 7 September 2013, I was again present at BNR Newsroom, the semi-live talk radio show, hosted by the distinguished anchorman Paul van Liempt.

The topic of this week was the supermarket industry: What was the Albert Heijn price war all about? What are the possible consequences of this price war? Will the brick-and-mortar supermarket survive in its current form or will it be ‘online shopping all the way’ in the near future?!

Guests were a.o.:
  • Dirk Mulder, sector specialist retail of ING Bank
  • René van Klooster, CEO of Detail Result
  • Bert Roetert, Central Bureau for Food Products trade
  • Gerard Rutte, supermarket expert 
The AH Price War

According to Dirk Mulder of ING, the supermarket industry is doing relatively well, when compared to the general retail industry. This is merely caused by the higher price level of products, not so much by higher sales.

He states that people don’t buy more food, but different food. Instead of eating outdoors – also during the working day – people started for instance to make their own sandwiches at home again.

Paul van Liempt of BNR in discussion with ING's Dirk Mulder
Picture copyright of: Ernst Labruyère
Click to enlarge
In the retail business, a paradigm shift is happening: consumers leave the service-oriented Albert Heijn in favour of Lidl. The ‘price war’ that Albert Heijn started against Lidl, however, was not the way to beat this large German food retailer. 

It was also not a real price war: after reducing the prices of about 1900 products, to a very limited effect, Albert Heijn seemed to have blacked out at once. Nothing has been happening since.

When I asked if it was not rather an attack on Jumbo, instead of Lidl, Mulder stated that this could very well be. Nevertheless, AH’s tactic was quite odd in Mulder’s view: instead of reducing a few hundred prices every week, which would be very effective in the long run, the so-called price war has been one ‘big bang’. 

After Jumbo, Lidl and the rest of the market reduced their prices too, the whole effect of the price war was gone. It was an odd and expensive way of putting AH in the picture, positioning the company as ‘cheap’.

Mulder does see the need for a clean-up in the supermarket industry, in which the small and weak supermarket chains would be annihilated. That would be good in his opinion, as it would make the main competitors more clear: also for the customers.

On the other hand, there are some strong regional supermarket chains, who are working together through the purchase organization Superunie. When these chains would better cooperate, they could merge together a number of distribution centers, which would lead to substantial savings on fixed expenses.

René van Klooster, the CEO of Detailresult (owner of the Dirk vd Broek and Dekamarkt supermarket formulas) feels the tension in the Dutch supermarket industry. This has been proven by the seemingly erratic price war of Albert Heijn.

René van Klooster, CEO of Detailresult
Picture copyright of: Ernst Labruyère
Click to enlarge
Consumers take a critical look at their ever-thinner wallets and start to make different choices. As the prices of AH are at the peak-level of the Dutch market, this company is definitely battling with its price-positioning. Dirk van de Broek, for instance, always wants to be at least 5% cheaper than AH with its A-labels.

When AH wanted to battle with Lidl, their price war strategy was definitely wrong, according to Van Klooster. Lidl has almost no A-labels [except for some Haribo and Nestle candy – EL], but flourishes from its private labels alone: to beat them, you have to offer private labels of the same, good quality at the same, low prices. AH doesn’t do that at all. And even Detailresult has not found an answer to Lidl’s private labels yet.

AH’s price war strategy seems to have become a blunt weapon. Detailresult held an extensive inquiry among 650 respondents: almost nobody had been waiting for such a price war. The interviewed people prefered consequently low-priced products. AH has historically been a service-oriented supermarket, but its customers currently prefer low prices above excellent service.

All supermarket chains in The Netherlands can handle a price war with AH for some time, in spite of AH’s sheer size and global ambitions. However, when also Aldi and Lidl get seriously involved in such a price war, it could be a different story. These chains are larger in size than AH and have therefore very deep pockets, enabling them to fight such a price war for a long time.

Effects of the price war on food quality

In the end nobody wins in such a scenario: the margins for the supermarkets and their suppliers detiorate enormously and the consumer only enjoys a temporary advantage. Besides that: people should realize that such a price war is also a matter of perception and positioning… Nobody tells them about the price-raises that also have taken place, since the price war started.

Dirk Mulder of ING even seriously doubts whether the consumer is the real winner of such a price war. Lower margins find their way into the supply chain, making the need for further efficiency and costprice reduction even more pregnant. This could lead to new food-scandals, when inferior (spoilt) meat and vegetables are used in the products, in order to save costs. 

In Mulder's opinion, supermarkets should better add real value to their products: focussing on quality instead of solely on price. According to René van Klooster, however, the food has never been as safe as it is currently.

Mulder reacts that he is especially referring to the large quantities of unhealthy fat, sugar, salt and other additives (soja(!)) in food. This strongly reduces the quality and healthiness of food.

On top of that, the consumer is not so much convinced that the quality has ‘never been better’. He sees that everything must be produced cheaper and more efficiently and he understands that something has got to give in the end. That something is intrinsical food quality.  

Brick-and-mortar stores versus the online channels

Detailresult is busy with extending its formula, which emerged from the Dirk van de Broek group and the Dekamarkt group of the 'De Kat' family. Talks are underway with other supermarket chains to join their Detailresult group. 

Van Klooster only wants to state that the talks will be rounded up in 2014, but does confirm nor deny it when supermarket expert Gerard Rutte states that Detailresult is having talks with Hoogvliet, the Alphen aan de Rijn-based Dutch supermarket chain. 

This in contrary to other mentioned supermarket chains (EMTÉ, Jan Linders or Deen), where Van Klooster did actually deny the occurrance of negotiations.

Van Klooster states that Detailresult will open four new supermarkets this year and six new supermarkets in 2014.

Dirk Mulder of ING talks about online food stores. He is convinced that E-commerce can be important for food. He only doubts, whether the Dutch supermarket chains are powerful enough to turn the online food-business into a profitable one eventually, as the money burn-rate is huge in the beginning. An experienced and wealthy company like Amazon would perhaps have better chances in this line of business.

A good example of the enormous money burn-rate is Zalando, the German online shoe and clothing store: this company came to €1 billion in revenues for 2012, but at the expense of €100 million in losses.

Bert Roetert, of the Dutch Central Bureau for Food Products trade CBL, thinks that the supermarket industry can yet grow, but especially in revenues and not so much in sales numbers. According to him, cheap mass products are exchanged for higher-priced, better-quality products and also different products. Products need to be safe: anomalies, like the malicious usage of horse-meat and other inferior (and even unsafe) ingredients are a disgrace to the business.

Bert Roetert of CBL - Central Bureau of Food Products
Picture copyright of: Ernst Labruyère
Click to enlarge
The sales of non-food products in supermarkets has not been successful yet in The Netherlands, according to Roetert. Abroad this has been more successful, as the shopping space is often much larger than overhere.

Gerard Rutte is convinced that non-food will be fully transfered to the online shops: why would you buy a CD at a supermarket, when you can also order it through the internet. B&M stores and online shops of the same supermarket chain will probably sell different products in the future. The focus in the B&M stores will be on food, while the online channel handles the non-food products. The purchase of by AH was a very smart move, according to Rutte.

Rutte: for Detailresult, the future is ‘fresh’. In other words: fresh products at very competitive prices, like it already happens in the Dekamarkt stores.

According to Rutte, Albert Heijn has a communication problem, more than anything else: they are extremely bad at positioning themselves. Instead of focussing at their main competitor Lidl and making cheap, not funny jokes in their commercials, AH could better focus at highlighting their own intrinsical quality: how good their formula is and how beautiful their stores are.

Gerard Rutte, Supermarket Expert
Picture copyright of: Ernst Labruyère
Click to enlarge
When I ask if the non-food products are not one of the key success factors of Lidl, Aldi and Dirk van de Broek, Rutte replies that these non-food sections hold these supermarkets down from getting really good stores. In his opinion, their non-food sections have crappy products.

In his opinion, Aldi and Lidl should sell fresh food products instead. When a specialized non-food shopping formula like Action opens a shop next to them, they are gone with their non-food. [This is something on which I absolutely not agree with Gerard Rutte. Talking about really crappy non-food products, you can find a zillion at the Action stores, unfortunately  - EL]

When it comes to online food-stores, the Dutch supermarket chains should invest in it. However, they should not expect to find the goose-with-the-golden-eggs. The online food business costs simply too much money and the success rate is yet too wobbly.

According to Van Klooster, the online food sales will never reach a fifty-fifty level with the B&M stores. It will remain a very small channel for food. Besides that, you should never underestimate the attraction of ‘fun-shopping’ at the supermarket: it is and will always remain a social event, where people can meet eachother.

Dirk Mulder does not agree upon this: his children and other teenagers don’t want to go to shops at all. They want to buy as much online as they can. 

Summarizing, the future still looks bright for the brick-and-mortar supermarkets. The impact of the online channel on food sales will never be as big as in the non-food business. Simply, because people want to see, smell, feel and taste the fresh food-products that they buy. No online store can offer this yet. 

Whether this might change in the future, under the influence of the online generation, is not clear yet. Personally, I doubt this very much.

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