How can supermarkets counter the discounters in the age of inflation?

Shoppers have a challenging winter ahead. According to EY-Parthenon analysis, there is a scenario in which inflation could reach over 15% – and even if prices don’t rise this fast, inflation is already at its highest level for 40 years. Rising energy prices, continued labour disputes and staff shortages are all affecting supply chains.

Unsurprisingly, in the face of disruption and squeezed finances, consumers are taking action to preserve their lifestyles, including switching grocers: the latest Kantar data show discounters are continuing to win market share.

So, what are the discounters getting right, and how can other supermarkets respond?

The discounter formula is simple. Sell a simple range, where scale and buying power are fully exploited, at razor-thin margins. Demonstrate high quality to the consumer by investing in key quality indicators, like award-winning wines and cheeses. Use the ‘middle aisle’ to create interest and fun for the consumer. And finally, relentlessly message the value for money equation.

The formula works. According to our Retail Performance Index, shoppers give discounters a 69% score for price against an average 55% score for the major supermarkets.

However, price performance doesn’t come at the expense of other key buying criteria. The discounters are performing well on other factors including service levels, sustainability, convenience, proximity and store team.

With discounters planning to grow their store footprint by 9% over the coming year, continued expansion will bring more consumers into their catchment areas and support continued market share growth.

For consumers under pressure, a switch to a discounter for some or all their basket can seem like a rational choice.

The supermarkets have responded to the current environment with price matches and price locks, range simplification and delistings, expanded or refreshed value ranges, and an assortment of promotions and discounts. But while this strategy may limit the erosion of a supermarket’s customers, it won’t create clear blue water between them and the discounters.

To do that, major supermarkets need to focus on their relative strengths: trusted brands, online experience, and deep consumer loyalty data.

Trusted brands

It’s vital for supermarkets to sustain a clear message around supporting the consumer, like they did through the pandemic. At the height of Covid-19, EY’s Future Consumer Index asked consumers who they trusted to put society ahead of profits. The major supermarkets were the most trusted organisations in the country, scoring an average of 10%. That’s three times higher than the discounters at 3.6%. Amid a cost of living squeeze, continuing to earn and win consumer trust will be critical to keeping shoppers loyal.

Online experience

The shift to online remains a growth area for the major supermarkets – and it’s an area where the discounters have a limited presence. Winning profitably in this channel requires logistics capability and consumer volume.

However, our Future Consumer Index shows that operational issues like stock shortages, lack of control over fresh produce and expensive deliveries are frustrating shoppers and limiting adoption. Grocers that can address these frustrations will accelerate growth.

Consumer loyalty data

The major supermarkets have deep insight into our shopping habits and many are now using their data to provide shoppers with a tailored set of prices, promotions and offers to meet their personal value sensitivities. By moving from a promotional ‘one size fits all’ to a ‘segment of one’, leading retailers can start to outperform the discounters on personal price sensitivity.

The discounters have a compelling offer, but the major supermarkets have a unique opportunity to bring together their brands, online capabilities, and customer insight to recapture share.