Discount Warfare is Destroying Innovation

by | Mar 23, 2017

The half yearly results have thrown a spotlight onto the escalating Australian supermarket war. Woolworths’ CEO Brad Banducci received widespread praise from investors for his turn-around of the supermarket business in only 12 months and surprised many by beating Coles’ sales growth in the last quarter.

Banducci has rallied the troops, consultants and turn-around specialists and fought hard to bring the ailing business back from the brink. So with Woolworths back on top, fears of an all-out price war continue to simmer. However, an extended price-reduction strategy will have long-term negative impacts on innovation in the supermarket and retail sector.

Looking into the future, there are a number of opportunities for supermarket retailers to focus on innovation rather than the bottom line in order to drive sustainable growth.

Delight over discounts

Discount warfare has been the frontline battle for Australian supermarkets in recent years. The Australian retail market’s obsessive focus on price wars leaves them vulnerable to more innovative international chains like Amazon, Tesco and Lidl who address more than just price concerns. This will heat up competition on Australian shores in the next 5 years.

The threat of increased international competition is at the same time a key opportunity for Australian supermarkets to invest in designing in-store experiences that can’t be found at low-cost or online competitors. Look around. Globally, companies leading the pack are those who have won the customer relationship delivering experiences that customers enjoy more than those offered by their competitors (think about Apple, Uber, Air BnB).

We all make emotional decisions about where we spend our time and money. This is a long- established behavioural science understanding. So, if the supermarket giants are not really inside the hearts and minds of their customers and creating experiences intentionally designed to make customers feel excited about the shopping experience, they’re not on a winning trajectory.

Redefining customer problems

From a store experience perspective, supermarket retailers have recently focused on mitigating the biggest pain point in the shopping experience: queuing at the checkout.

However, in trying to solve this problem, the focus is placed on operational efficiency rather than service experience. For example, reducing the number of items at the self-service checkout to make the queuing time quicker isn’t a delightful experience, it’s just an incremental improvement on the current process. It also adds additional pain points, such as stressed staff explaining the new process to confused customers.

Supermarkets need to stop solving the problem and start flipping it on its head. It isn’t a problem to be solved – but an opportunity to delight. For example, the “no checkout” concept store AmazonGo redefines the customer checkout experience making it seamless and stress free.

Amazon has an obsessive customer focus and designs their services with the customer firmly at the centre. By placing greater focus on understanding how to innovate the experience rather than how to incrementally improve it, Australian supermarkets will be better placed to service customer needs now and into the future.

Collaboration and innovation are inextricably linked

Continuing to focus on price above all else is also creating tensions between supermarkets and suppliers. Scandal surrounding supplier relations has been rife in the supermarket industry. A number of “bad behaviours” have been brought to light through the Australian Consumer and Competition Commission (ACCC) which have caused the relations between Australian suppliers and supermarket chains to sour. This doesn’t go un-noticed by consumers. There hasn’t been a shortage of news stories about squeezed farmers and other producers getting unfairly low prices from supermarkets.

Add to this reduced product choice due to suppliers being out-priced by low cost supermarket own-brands, and it’s clear something needs to be done to improve supermarket and supplier relations. Coles, Metcash and Woolworths have all reported plans to cut their product ranges. Supplier pressures have increased and many have no choice but to acquiesce to the terms and conditions of the national chains that hold 75% of consumer supermarket spend.

However, by squeezing the supplier relationship, supermarkets have been undermining long-term opportunities for collaboration and innovation just to ensure short term growth. By establishing a strong collaborative relationship with suppliers, supermarkets are in a position to jointly work on offering customers the experience they want. Empathy is central to this process and the principles of design thinking help draw out important elements to focus on.

Supermarkets getting ahead in innovation

Forward-looking Australian supermarkets are redefining the customer experience using cutting edge business strategies and methodologies adapted from the design and startup worlds.

Harris Farm Markets developed popular unique in-store experiences which keep customers coming back and give an edge against competitors. They used design strategy, an approach adapted from the product design world which applies an empathic lens to problem solving and stakeholder engagement.

Empathic interviewing and observation techniques create a more open and collaborative environment for problem solving. They picked up on customer’s desire for sensory experience and concern for suppliers by creating self-serve single origin milk in store, with information about the farmers and cows that produced it.

The design strategy approach creates a treble win situation for supermarkets, suppliers and consumers

This kind of customer-led approach is paying dividends for supermarkets willing to look beyond traditional drivers such as price.

  1. Supermarkets win because they create a popular product which drives high profits and attracts more customers to the store
  2. Suppliers get a better price, sell more of their products and gain positive exposure for their products
  3. Consumers get a great sensory experience that addresses their concerns and makes them feel good.

For supermarkets, redefining the B2B relationship can be the start of a valuable journey to collaboratively improving the overall B2C relationship. This can result in a win-win-win strategy whereby suppliers win, supermarkets win but most importantly, the consumer wins.

About Michelle Tabart

Senior Associate, The Strategy Group

Michelle is passionate about using digital technologies to improve business processes and engender collaboration in the workplace.

Through her experience on technology programs, Michelle has become an advocate for resolving complex business problems by using innovation techniques and strategies. Michelle previously worked at a global technology consulting firm in management consulting and project management, primarily working on large scale technology implementation programs for Australian tier one and two banking, insurance and superannuation organisations.

Michelle hosts a podcast about startups in which she interviews Australian entrepreneurs, and runs a candle-making business. Michelle holds a Bachelor of Commerce Liberal Studies from the University of Sydney.

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Senior Associate, The Strategy Group

Michelle is passionate about using digital technologies to improve business processes and engender collaboration in the workplace.

Through her experience on technology programs, Michelle has become an advocate for resolving complex business problems by using innovation techniques and strategies. Michelle previously worked at a global technology consulting firm in management consulting and project management, primarily working on large scale technology implementation programs for Australian tier one and two banking, insurance and superannuation organisations.

Michelle hosts a podcast about startups in which she interviews Australian entrepreneurs, and runs a candle-making business. Michelle holds a Bachelor of Commerce Liberal Studies from the University of Sydney.

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