Value or Premium, Let the Customer Make a Choice

Written by John Stanley
The last few years have been tough for many retailers. Many have relied on discounting to get them through a difficult retailing period, but the discount formula was always a short term measure and the winning retailers had to find a new strategy to ensure they could grow their business.The global recession has lasted longer than many predicted and as a result retailers have had to change tactics to grow their businesses.I first observed a strategic change coming from the fast food sector and I talk about this in the October edition of Retail World Report on my members site. As countries went into the recession many fast food companies benefited as consumers downgraded from more expensive restaurants and graduated towards cheaper food offers. In the USA, for example, the fast food retailers have trained their consumers into thinking about a hamburger as a known value product and as a result they have been forced to keep the product below the five dollar price barrier to ensure they generated traffic to their stores. This policy can only last so long before increasing costs and the need to improve the bottom line means a new strategy has to be developed.The fast food retailers had a dilemma; they could not destroy the loyalty they had built with the $4.99 customer market, but at the same time they needed to attract new customers whom they wanted to spend more plus they wanted existing customers to spend more too.The answer was to keep their existing range and price structure, but create a new category in store that was more profitable and market this to their consumer base.

Value and Premium

The solution was to develop the existing product range as a Value range and to introduce a new range at a Premium level. This strategy resulted in deluxe hamburgers and ribs being introduced into the menu at a much higher price point.In the UK it has resulted in MacDonald’s developing an upmarket coffee strategy and in 2009 that meant they moved over 84 million cups of coffee. According to an article in the Daily Mail [Sept 23, 2010] the next stage is to develop espresso coffee as a premium product.The Premium and Value approach is not confined to fast food; supermarkets are also going down the same avenue. In the same newspaper it was reported the Sainsbury’s have launched a “Taste the Difference“ range which will be promoted by Jamie Oliver the celebrity chef. Sainsbury’s have launched a Premium range that contains 1,100 different S.K.U’s and one billion pounds worth of sales last year. Research carried out by Kantar Worldpanel [Daily Mail 23 Sept 2010] highlighted that the supermarkets that have seen the fastest growth in the last twelve months have developed a value and a premium strategy. One reason for the growth is that consumers are shifting from restaurants to home cooking using premium products in a tight economy.

How Does this Apply to You?

The changes taking place in the food industry in developing a value and premium range are just as important for any retailer. The market is changing and many would argue that the middle price point products are disappearing. Some buying decisions are being made on value, whilst on the same shopping trip other decisions are being made based on premium buying decisions, products positioned in the middle range are today often overlooked by consumers.This means that every retailer needs to stand back and relook at the category range they are stocking and ask themselves:

1. Do we have a value range and are we promoting it as such?
2. Is there a premium range and is this being promoted as a premium range?
3. What products do we have in the middle of the range and should they be on the shelf?

And what about the Discounting?

Discounting strategies will continue and are needed to ensure products stay fresh in the customers eyes. The most successful large retailer, Tesco, has a very successful discount policy and use it as a customer draw. The company has a policy of graduated discounting, which is something all retailers need to adopt. It is based on product life cycles and set time limits, all stock is monitored. The discount starts at 25%, then moves to 50% and then to75%. Once a product passes a certain time date in the UK it is sold for a penny as it goes through the till. According to the website "moneysavingexperts.com", they recently monitored 50 items at one time that were being managed in this way.The key is to manage the stock and to ensure stock turn is profitable...