SO IS YOUR CIRCLE VIRTUOUS OR VICIOUS? The virtuous circle is where you cut your prices and get more customers. On the back of the extra business you’re doing you screw your suppliers to reduce their prices, you reduce your prices and get even more customers and then go back to your suppliers again etc etc. The vicious circle is when your costs go up so you raise your prices. Because you’ve raised your prices you get fewer customers so you have to raise your prices again in order to cover your costs, so you get even fewer customers… Now, according to all the experts, if you’re a retailer and your circle isn’t virtuous you’re a dead duck, but are they right?
THE FIRST THING TO BE SAID is that there is no doubt that the likes of Asda and Tesco have built their business on the back of the virtuous circle. A quick survey of their prices now compared with those of 10 years ago soon shows how successful they have been in driving their suppliers’ prices south and you don’t need me to tell you how they have taken an ever-increasing share of the UK’s total retail spend. But what can we, as independent retailers, do?
AS A STANDALONE INDEPENDENT with one outlet it would be easy to answer: “Bugger all!” Whoever you get your supplies from, they are hardly going to be quaking in their boots if you demand they cut an extra 10% off their prices. But that doesn’t mean you have to do nothing. While it is very easy to plod along with existing suppliers, sometimes the effort taken to find alternative sources does reap the rewards of an extra few per cent. After all, there is usually someone out there who is on a ‘growth kick’ and who is prepared to supply new business on terms that only give them a marginal return, just so they can boost their own turnover. There is also the possibility of joining a symbol group and enjoying the rewards of their increased buying power, although in my experience symbol groups’ prices aren’t necessarily that competitive. The value of having a Spar or Costcutter fascia seems to be more to do with gaining access to a wider range of goods, especially fresh, and altering your customers’ perception of your shop and rather less to do with getting cheap cigarette prices!
SO BASICALLY THAT MEANS we’re dead in the water then, does it? Well I don’t think that’s necessarily so. For a start there is a limit to how far the hypers can screw prices. A pair of jeans at £4 is very cheap, but that only leaves £3.40 excluding the VAT to cover the costs of manufacture and distribution and profit margin for both the retailer and the manufacturer. Would it be worth it for either of them at £2? Then there’s a limit to how many customers there are in your area. It was interesting to note the recent suggestion that Asda’s slowing down of sales (albeit to levels that we would die for!) was due to them saturating their existing trading area and finding that there was a limit on how far customers will travel to save money. There is also the inherent danger of only trading on price. If your retail strategy is based on aiming to match the cheapest in town that’s fine if you’re the most efficient player and can buy the cheapest. But what happens if there’s a competitor who beats you on either or both of these fronts (perhaps you should send your answers to those clever people at Shell!). I have also repeatedly pointed out that while price is important it’s not the only factor that determines the shopping decision – if it was, Asda would be number one and not Tesco.
OUR SURVIVAL DEPENDS ON analysing why we think our existing customers visit us at the moment, and why the rest of the shoppers in our area don’t! What niche in the market do we wish to fill? Are we going to base our strategy purely on the fact of our location and opening hours or are we going to offer our customers a more rounded experience. Most importantly, do we actually have a strategy? Now there’s something to think about after your Christmas lunch!