Why prices will drop this year

Most recent reports in the business press point to strong retail sales results worldwide. Well, with the exception of Marks & Spencer in the UK who saw a modest 0.8% increase in like for like sales over the big Christmas quarter.

Marks & Spencer is turning the corner, but it has some way to go to provide shoppers with a fuller food solution, which is ironic given they started the whole “meal substitute” sector more than a decade ago (as a time saving convenience for their traditional apparel shoppers).

In the past decade, M&S lost its way for awhile, and the supermarkets in the UK all re-positioned, re-branded and improved their shopper experiences so much so that it has proven difficult for M&S to grow their food offering as quickly as they would like. This said however, M&S does retain stunning retail brand values and service.

Within the very competitive UK grocery space, Morrisons, Wal-Mart’s ASDA, Tesco, Sainsbury’s and Waitrose have all moved ahead significantly with their store formats, ranging and service.

Having built very strong brands, supported by high quality, lower priced own labels, plus sophisticated sales and shopper data systems, the latest focus is on further improving productivity in order to lower prices to shoppers.

I’ll just re-state these retailers’ objective: to lower prices for shoppers. These retailers, having created great shopping environments supported by very slick inventory systems, now want to grow the amount of money shoppers spend in their stores. There is no mention of product or gross margin improvement, as improvements in same store sales volume via big retailers transfers into improved cash margins. This in turn drives EBITDA returns as the retailer’s fixed cost base doesn’t move.

Cynical? Of course you are.

Let me take you into the airline business. Ten years ago it had atrophied, was stagnant at best, and growth was defined by the amount of business travel companies could afford to undertake, and the number of the world’s more affluent shoppers who chose to travel by air for leisure.
Neither sector was growing fast because business wasn’t becoming exponentially more profitable and salaries weren’t rising. So what happened?

The model was challenged and the price for a kilometre of air travel dropped like a stone. This opened up the ability to buy a seat on a flight to millions, no hundreds of millions of new travelers in the late 90s and early 2000s – and it hasn’t stopped yet. In fact, the GFC accelerated the proportion of low cost leisure seats sold versus higher cost first class and business class seats.

A close friend of mine was involved in the hugely successful Jetstar start up, a move without which our proud flying kangaroo may well have been in the same state as Japan’s national airline. My numbers may be out of date and a little inaccurate, but the sound bite is something like this: Jetstar has carried 21 million passengers over its brief lifetime, and nine million were first-time flyers, people who had never previously been able to afford to fly.

Take those numbers and multiply them and you have a similar picture with Kingfisher Airlines in India who are buying the world’s largest airplane, the Airbus 380, to operate, not as a long haul three class airplane, but as a huge domestic, well, “air bus” to fly new Indian travelers around the country to visit family and take holidays. There are a billion people in India.

Back to grocery. Over the coming 36 months around the world, the cost for a basket of food will drop significantly.

Prices won’t drop because lobby groups shout “foul play”, politicians “publically shame” retailers and manufacturers, because retailers “lean on” suppliers or farmers or because retailers lower their overall profit returns.

Prices will drop because clearly planned productivity improvements from farm through factory through warehouse, store and into our homes continue to lower the cost of food items. Why?

Because productivity improvements mean that less of the price of an item includes duplicated or non-value add costs. This will lead to more people being able to shop for items that were previously a luxury, and they’ll shop for these items on a daily or weekly basis. The overall market will grow in value.

I know you don’t believe me yet, but collect your till receipts, put them in a shoe box and we’ll take a look at them this time next year.

In his role as CEO of CROSSMARK, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, NZ, the US and Europe. His international career in sales and marketing has seen him responsible for business in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands. CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.