Tesco's move to cut prices in a bid to stop shoppers going North has started a supermarket price war, with Lidl yesterday announcing a range of reductions in response. Will Irish suppliers survive the battle?
IT WAS AN unlikely place to start a revolution, a bleak business park off the M1 surrounded by empty office units and cleared wasteland. On the face of it, there was nothing different about this shiny new Tesco Extra store near Drogheda as it reopened last Tuesday after an unexplained weekend closure.
But a closer look showed, in fact, that all had changed utterly. As usual, the miles of aisles within were piled roof-high with vast quantities of food, clothes and household goods. Everything seemed to be in its place - but not quite. All the staples were there, but the names had changed.
Tea? Lots of it - Tetley, Yorkshire, Ty-phoo, Nambarrie. Barry's Tea? Yes, there, somewhere - mind you don't hurt your back picking it out. At least Barry's was on the shelves. Other familiar names seemed to be missing altogether - Chivers jam, Robert Roberts coffee, Dolmio dried pasta. Other well known brands, such as Dubliner cheese, Brennans bread and Clonakilty sausages, seemed to be more cramped than usual. Even favourites of the Irish shopper such as Tayto crisps struggled to match foreign interlopers such as Walkers for shelf space, while Kerrygold vied for room with imported Danish butters.
The other difference was in the car park. Within a few hours of opening it was fuller than it had been since Christmas. Six months after the shop first opened for business, it had finally stopped haemorrhaging customers to the North.
The flow of customers was the direct result of Tesco Ireland's decision to knock more than 20 per cent off thousands of prices in 11 stores near the Border. The strategy was a stunning success right across the Border counties; there were queues reported in Dundalk and relief from consumers and chambers of commerce in other towns.
The strategy is likely to be rolled out across the country over the coming months.
Nothing will ever be the same in Irish retailing after this week's move by the biggest grocer in the State. The price cuts, and the manner in which they are being achieved, will trigger profound changes in the Irish retail landscape.
The expected price war started yesterday, when Lidl became the first competitor to respond to the Tesco move by announcing a range of price reductions. The German discounter, which has made huge inroads into the Irish market over the past decade, was quick to point out that this was being achieved without shifting business overseas.
"Quite to the contrary, we are constantly extending our range of Irish sourced products," their spokeswoman said, before going on to offer business to suppliers with spare capacity after Tesco's change in distribution policies.
In one extravagant move, which only a company as big as Tesco could pull off, it has done what the Government failed to do - tackle the high-price issue with effect.
But at what cost? Consumers generally welcomed the price reductions but their pleasure is unlikely to be guilt-free. Prices are being lowered on goods that are now being sourced from the UK. Irish goods and brands will drop in price only if their suppliers cut their prices - Tesco won't take the hit. So, for Irish suppliers and producers, the company's new approach spells only pain, in the form of reduced margins, job losses and possibly even closures.
"Brand icons in Irish shopping baskets are being reduced to also-rans," complains one supplier. "If you reduce shelf space for Irish products, you reduce the volumes they sell. And that means we're on the edge of a precipice."
Some see broader issues of patriotism and national identity at stake. "They've turned us into Kent or Yorkshire or Essex, a plaything, not a country with its own palate and labels."
Slashing 12,500 prices by an average of 22 per cent, and promising to roll out these reductions to the rest of its 116 stores throughout the country in the near future, Tesco had stolen a march on its competitors and pulled the rug from under the feet of cross-Border shoppers. Rivals were stunned into silence and the old rumours of Dunnes Stores being snapped up by Asda had resurfaced by the end of the week.
WHILE THE HEADLINES were about price, there is much more to Tesco's strategy than meets the eye. Change is Good might be good for Tesco, and even for consumers initially, but for farmers, supplier companies and wholesalers selling to Irish retailers, Tuesday was a black day. Losing business is never good, but losing business with the country's biggest retailer is a disaster.
"My back is to the wall," says one poultry producer. "They're constantly looking for lower prices, to the detriment of quality. There's only so low I can go."
Tesco Ireland chief executive Tony Keohane insists that the company's commitment to Irish suppliers remains as strong as ever. However, the shelves in Drogheda tell a different story, as do company documents seen by suppliers and The Irish Times. These show that, where possible, Tesco will find replacements in the UK for products currently supplied from Ireland. Only those few lines where no alternative supplier can be found across the Irish Sea will they continue to be sourced from Irish suppliers.
Even consumer advocates who have been calling for price reductions for years are uneasy. "Reducing prices is one thing and it's welcome, but sticking it in the neck of the Irish food industry is a bit much," says one figure, who may yet go public with such misgivings.
Doubts have also been expressed about the extent of the price reductions claimed by Tesco. Last year, the company claimed to have reduced 10,000 prices yet it turned out to be no cheaper than its main rivals in price surveys carried out by the National Consumer Agency. Later, it emerged that the prices of many goods had been increased before they were reduced, which rather took the good out of the claimed reductions.
Now suppliers and rivals are again crying foul. "It's remarkable that Tesco should talk about price reductions when it put up so many prices at the start of the year," says one supplier, who claimed the chain increased some prices even as it was reducing the wholesale cost of product.
In similar vein, one of Tesco's main competitors claims that price reductions on meat and milk were actually "adjustments" based on price reductions of the raw material.
None of the suppliers contacted by The Irish Timeswas willing to put names to any of these comments. Even now, with disaster staring them in the face, they are too reliant on Tesco to make a public stand.
"I'm scared. I have a partner and kids and a house that the bank owns. I have a career that pays my wages, so far at least. I need to keep it that way," says one contact. For an organisation with such a bland and smooth exterior, Tesco inspires great fear among those suppliers who depend on it for their livelihood. "Burn your notes, wipe your PC and for God's sake don't mention my name," one tells me.
RGdata, which represents small, independent retailers, says its members are adopting a "wait and see" approach to Tesco's announcement. "Many of our people have gone up to Drogheda for a look and, while they don't feel the offer is as has been presented, they'll be watching to see how consumers respond," says RGdata director general Tara Buckley.
"Some of them would have tried before to introduce unknown brands but found that customers didn't want them, even if they were cheaper." Buckley says there is huge concern about a "race to the bottom" in which price is the only deciding factor. "The independent trade has always fought to retain its share of the grocery market and it will continue to do so. It's still very important for customers to have local shops they can walk to."
She called on the Government to ensure that a level playing field is provided that allows smaller shops to survive. If Dunnes was to follow Tesco's example and cut out local suppliers this would have huge ramifications for smaller stores, for example, were the existing distribution channels to close.
SIZE IS ONE reason so many are in awe of the company. Globally, Tesco the company rings up sales of more than €1.1 billion a week and made a profit of €3.3 billion last year. It is the third largest retailer in the world in sales terms and the second in terms of profit. Last year it opened 16 new stores around Ireland.
The company says it spends more than €2 billion a year on Irish products and services, including €700 million worth of Irish products that are bought and exported through its international stores. Tesco buys more Irish food than France, Germany, Italy or the US. Two million Irish people shop in Tesco every week.
"Tesco is a monster that is going to eat us all," the head of a rival supermarket chain once told me with surprising frankness. "And there is nothing we can do to stop it." Some companies buckle in a recession; others spot an opportunity. Tesco belongs to the latter group; here at last is a chance to grind down its rivals, increase market share and keep the profits piling up. Quite how much profit isn't clear, as Tesco Ireland doesn't reveal its figures.
By adding a mere cent to a staple item bought every week by Irish families, Tesco can raise millions for its "war chest" to fight marketing battles. It already has a huge distribution centre in Donabate, Co Dublin, that outperforms anything Dunnes can offer, and now it is plugging directly into the parent company's operations in the UK.
If the discount stores were fazed by this week's development, they weren't showing it - yet. Aldi said that its prices were not short-term offers or promotions and were continuously reviewed to ensure they are competitive.
With Tesco increasing its UK brands, it's likely that other stores will choose to emphasise their Irish links. Superquinn, SuperValu and Dunnes are Irish-owned, but even Aldi, which is German, was highlighting the fact that 40 per cent of grocery sales were sourced from Irish suppliers and manufacturers, including Bewley's, Irish Yogurts, Odlums and AIBP.
A FORTHCOMING REPORT from the Competition Authority on retail distribution channels should help to settle some of the arguments between retailers and suppliers over where the blame lies for high prices and profiteering. Minister for Enterprise, Trade and Employment Mary Coughlan received a draft of the report in recent weeks but has yet to say whether or when she will publish it. As a native of Co Donegal, Coughlan is fully aware of the damaging effect of the cross-Border exodus. As a former minister for agriculture, she is also aware of the pressures exerted on farmers by the big retailers. Officials in her department may also be poring over the undertakings in relation to the Irish supply chain that Tesco gave when it entered the Irish market in 1997.
It isn't all plain sailing for Tesco. Its ventures in the US are performing badly and its first foray into Ireland in the 1980s ended in tears. Change for Good is to some extent making a virtue out of necessity. Tesco's Irish sales, like those of its rivals, and its market share, are declining, because of the recession, the cross-Border exodus and the inroads made by discounters such as Aldi and Lidl. Quietly, it has been trimming its own sails, by cutting opening hours in some stores and shedding headquarters staff. Internal documents show the company was extremely concerned about the effect of cross-Border shopping on its brand. Consumer resistance to its cheaper own-brand products remains strong.
Slashing prices tackles the cross-Border issue head-on, while also putting pressure on competitors less well equipped to cope with declining income. The price gap between North and South, which previously stood at 40 per cent, has now shrunk to 10 per cent, according to Keohane. The inevitable outcome will be the further decline of smaller independent stores, but industry observers think bigger casualties are likely. And if that happens, consumers will be worse off than they were before.
Market share 2008
Tesco 26 per cent
Dunnes Stores 24 per cent
Supervalu 20 per cent
Superquinn 7.5 per cent
Lidl and Aldi 7 per cent
Up to 4 per cent of shoppers have gone out of the Republic to shop.
Source: TNS mrbi