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Considering the marketing strategies of budget supermarkets, critically evaluate these against the marketing strategies of Tesco.
This report aims to set out and explore the current marketing strategies used by budget supermarkets and use academic materials to critically evaluate how they differ against the marketing strategies of UK leader Tesco’s.
Traditionally the UK food retail scene has been dominated by the ‘big four’ supermarkets who control 73% of the UK grocery market (Mintel, 2017). This market dominance has existed since the 1950’s with supermarket companies Tesco’s controlling 27% of the UK market share (Jahshan, 2017). However, since the global recession of 2008, shoppers spending habits have changed due to their spending confidence being at an all time low. Now key factors like price differentiation and own-brand labels has allowed a rise in competition to offer a unique proposition to consumers. As a result, marketing strategies for supermarkets have changed with competitors like budget-brand Lidl resorting to ‘price wars’ in a targeted effort to attract price sensitive customers (Eley, 2018). Budget supermarkets are in a position where they are willing to sacrifice their profit margins to remain competitive, which in turn are forcing the big supermarkets like Tesco’s to adopt the same pricing marketing strategies. As a result, this report aims to evaluate both forms of strategies and investigate whether they are sustainable in the long-term.
Tesco’s operates as one of the ‘big four’ supermarkets in the UK within a sector worth over £179bn in 2017 (Mintel, 2017). With further growth expected to reach over £200bn by 2020 (Mintel, 2017). However, despite the grocery sector growing, the ‘big four’ are facing continuous yearly financial losses (Elder, 2017). Tesco’s lead with the highest amount of financial losses within the ‘big four’ with 5.1% fall in 2017 (Elder, 2017). This in contrast with the growth of budget supermarkets like Lidl and Aldi growing by 13% and 11% respectively (Butler, 2017).
Tesco’s marketing strategy operates on a traditional set of principles originating from the American company Walmart and their marketing innovations of the 1980’s (Ellickson, 2015). While their marketing campaigns regularly change, they operate on the principles of getting the product to the consumer as cheaply and efficiently as possible (Zhao, 2014). Originally this strategy was limited to the supermarkets themselves, however with the growth of internet, supermarkets are now extending their marketing strategies to their own-brand websites (Chadwick, Doherty & Anastaskis, 2007). Tesco traditionally operates on a price-based marketing strategy which focuses on promoting multi-buy offers and promotional pricing of brands to attract customers to the brand (Haddock-Millar & Rigby, 2015). Tesco utilises campaigns that incorporate television, radio and print advertising which promotes ‘valued-based’ pricing. This marketing strategy focuses on using the brand to offer their customers quality products at affordable pricing.
This form of marketing strategy forms one of the key traditional strategies for the UK grocery sector (MacGoldrick, 1990: 44, Kotler & Lane, 2015: 384, Verhoef, 2003). Pricing has evolved from the traditional strategy of a products initial manufacturing cost, plus profit, which traditionally set the overall price for the retailer (MacGoldrick, 1990: 40). Within modern marketing, price has now evolved as a potential differentiator strategy for supermarket brands (Kotler & Lane, 2015: 200). However, Jones, Comfort and Hillier (2007) argue that by using a pricing-strategy can lead to a ‘price-war’ where retailers race to the bottom for the lowest-cost to customers. Academics argue that a pricing war is not sustainable in the long terms and leads to confusing the customer segment due to changing prices from one week to another (Verhoef, 2003; Ellickson, 2015).
An example of this is occurring between budget supermarkets and brands like Tesco’s. Since the 1990’s, European budget supermarkets have existed in UK markets. However, it wasn’t until the global recession where these brands have gained rapid growth. Both discount supermarket brands Lidl and Aldi grew their sales by 16% in 2017 and claimed 9.8% of the UK market, a title which led them to be the fastest growing retailer in 2017 (Cox, 2018). Aldi, one of the leading budget supermarkets, employs the marketing strategy of ‘penetration pricing’ which aims to encourage customers to change to a new brand due to the benefit of lower prices (Chatterjee, 2017).
Both strategies demonstrate the use of pricing as a core to their marketing strategy, however both target a different customer segment. However, academics argue that UK consumers are tired of traditional price-based strategies, and instead are embracing the simplicity of the budget supermarket strategy of ‘simple pricing’ (Chatterjee, 2017; Looney, 2015). This is demonstrated by the fact that in 2017, Aldi accounted for 20% of an averages shopper spend, up by 6.8% a year earlier (Cox, 2018). All of which is closing the gap on Tesco which accounts for 45% of the average UK shoppers spend (Mintel, 2017). Budget supermarkets use simple pricing as a market strategy successfully according to several academics (Chatterjee, 2017; Ellickson, 2015). By using advertising messages such as ‘low price guaranteed’, brands like Aldi have successfully tapped into a price sensitive customer base (Chatterjee, 2017). By using low prices, Aldi deploy a ‘right price, first time’ marketing strategy which doesn’t rely on the promotion of special offers, instead offering the correct competitive price the first time (Chatterjee, 2017).
The use of ‘penetration pricing’ as a marketing strategy to attract customer is available to budget supermarkets like Aldi and Lidl due to the smaller operating model they run. Finne and Sivonen (2008: 30) state that a retailer’s size and format offer a key advantage in how they offer pricing. Due to budget supermarkets having lower operating costs and a more limited range of products, they can quickly adapt their strategy to meet the markets needs (Finne & Sivonen, 2008: 32). Authors like Haddock-Millar and Rigby, (2015) argue that larger organisations (i.e. Tesco’s) operate on a much larger scale and as a result are unable to change strategy quickly to meet market demand. Instead, Tesco focuses on marketing strategies which retain customers through loyalty (Clubcard, unique offers, reward vouchers). Which, Turner and Wilson (2006) argue in the long-term is a marketing strategy which is more sustainable. Academics argue that while brands like Aldi are using low-cost pricing strategies to attract a new segment of customer, these customers lack long-term loyalty and are only focuses on saving the most money (Seaton & Waterson, 2012). As a result, several authors state that a long-term marketing strategy like Tesco’s is more sustainable (Turner & Wilson, 2006).
A current example of a marketing strategy which is paying off for Tesco is their investment in the online grocery sector. In 2017, 29% of grocery shopping was done via online supermarket websites (Mintel, 2017). Within this segment, the key market was the 25-34-year-old customer segment who shopped at least once a month online for their groceries (Mintel, 2017). Out of this segment, 66% cited that convenience was the main reason to shop online, despite whether promotions were available or not (Mintel, 2017). For their online strategy, Tesco’s used a market penetration strategy which focuses on retaining existing customers, which is cheaper than attracting new ones (Verhoef, 2003). This is carried out by using brand loyalty to take traditional instore customers and use services like their Tesco Clubcard to promote their online strategy (Elder, 2017). By rewarding loyal customers with unique promotions and offers online, they use the ‘valued-based’ pricing to drive existing customers to their website. A strategy which works as Tesco dominates the online grocery category with 39% of the market share (Mintel, 2017). In 2016, Aldi launched their online grocery website to compete with the ‘big four’ (Butler, 2017). However, realising they couldn’t operate on the scale of brands like Tesco’s, Aldi have launched a website which focuses on wine sales. Due to many UK customers visiting Aldi for their wines, Aldi have copied Tesco’s marketing strategy of using existing customers to promote their new online wine website. A strategy which has worked, as in 2017 the website increased sales by 90% with over two million bottles of wine sold (Butler, 2017).
In conclusion, both styles of supermarkets operate with different forms of marketing strategy in the UK. While both overall compete using a pricing strategy, each brand uses it to target a different segment of customer. This report argues however that due to the weakened economy, UK customers are becoming more value focused and less receptive to traditional price-based marketing strategies. The focus on the message of ‘simple pricing’ has a powerful impact on consumers, with customers looking to find best value for money easily. As a result, brands like Tesco’s have employed marketing strategies that focus on retaining loyal customers through strategies like reward loyalty. The use of the Tesco Clubcard has allowed the brand to target loyal customers and push them to other services like their website. All of which Tesco’s aims to combat disloyal price-sensitive customers who only seek the cheapest price, a strategy current employed by budget supermarkets, which is argued to be not a sustainable strategy for long term growth.
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