Price cuts fall short for many German brands

22 July 2010

NUREMBURG: Intense price competition between grocery retailers in Germany is only "partly justified", a new report from GfK and SAP has claimed.

The research firm and the data analytics company assessed the buying habits of 30,000 households in 275 sectors in the fast moving consumer goods industry.

Overall, there were 40 segments in which customers inevitably reacted to any increase in the expense of one brand by switching to a cheaper alternative.

Each of these categories, which included coffee, chocolate, butter, yoghurt and fruit juice, generated regular repeat purchases, and collectively they were responsible for 50% of FMCG sales in Germany.

The "price war" that has ranged discounters like Aldi and Lidl against established rivals like Metro and Edeka has thus been "particularly fierce" in these areas.

More positively, brand attributes have a greater role in the other 230 featured sectors – covering everything from cleaning products to sweeteners – where purchases are occasional.

This has allowed supermarkets and hypermarkets to leverage the wider selection available on their shelves when compared with chains primarily stocking own-label offerings.

Older shoppers and people on higher incomes tended to display the most willingness to make choices based on factors like quality and product positioning.

Regional differences also played a role, with the west of Germany proving considerably more price conscious than major cities and tourist hotspots.

The study concluded that the wave of promotions following on from the onset of the recession had exerted a profoundly negative impact on the growth prospects of grocery manufacturers and retailers.

To redress this situation, it will be necessary to abandon approaches that protect market share by tapping in to consumers' "willingness to pay".

"The pricing policy in food retailing is facing a paradigm shift," the GfK/SAP report said.

"Instead of asking how low prices can be used to obtain new customers, we must explore what price can be charged without losing customers."

Data sourced from GfK; additional content by Warc staff