BrandLoop #1, October 1996

Food Wars- The Tesco / Sainsbury's Battle

The UK retailing environment has always been hotly contested. This BrandLoop considers how marketing budgets are now being flexed for retail pole position. Two players have emerged dominant in the UK grocery market and are showing signs that they may leverage their retail expertise into other market sectors.

Retailers have learnt, particularly in the UK, that their own brand identity has become more important than the products they sell and greater wealth can now be created by the communication of an overall retail brand identity. This will become even more important in the future.

Tesco has become increasingly aggressive in the last few years. During the late 1980s and early 1990s, the company increased its market share steadily but it remained a constant distance behind Sainsbury's. However, Tesco's share overtook that of Sainsbury's during 1995 and, by the middle of 1996, it had opened up a 2% lead. This shows that Tesco is looking to build on its leadership by constantly working to ensure that it is maintained. Sainsbury's, on the other hand, could be said to have been complacent, especially as it was continuing to gain share. However, Tesco's recent aggression has been matched by a poor performance from Sainsbury's.

Source:           Institute of Grocery Distribution

Early in 1996, the City was criticising Sainsbury's for allowing Tesco to get so far ahead of the game in terms of customer service, loyalty and perceived price competitiveness. Sainsbury's was also accused of not promoting itself sufficiently and while running many similar customer initiatives as Tesco, it has failed to take the lead or develop unique products or services. Further to this, it has showed itself to be "unresponsive" in a fast moving market. This was clear in the debacle over Sainsbury's Reward card launch. Tesco has also shown itself to be faster moving in the development of targeted store types, intended to reach different consumers at different times.

One of Tesco's key weapons in the battle for retail supremacy has been its Clubcard loyalty scheme and the subsequent launch of the Clubcard Plus debit card. These have shown Tesco taking a clear initiative and then building rapidly on its advantage. Sainsbury's was not only slow to launch its Reward card nationally, but its strategy appeared unclear with conflicting statements about its intentions. Once it had been launched, the initial advertising helped create a short term rise in market share. Subsequently, it has failed to have any major impact and has been beset with technical problems. One footnote to this is that loyalty cards should be seen as a longer term marketing tool since they enable retailers to learn more about their customers' shopping habits and respond accordingly with tailored offers. The key to the success of the loyalty scheme is not launching it but how it is used within the total marketing mix.

For periods of time, retailers have sold on a price promise and in Autumn 1996 Sainsbury's launched a price campaign, Autumn Value, involving special offers on 700 products. Tesco followed this with its Unbeatable Value range, potentially precipitating a price war. The impact of these promotions will boost short term volume, rather than build brand empathy, with most pressure on those retailers that historically have always sold on price. Kwik Save, in particular, has been badly hit by this. However, what do these price promotions mean for Sainsbury's and Tesco? A mix of retail positionings could lead to a confused offer and, possibly, a cynical consumer.

In the grocery market it would appear that you can compete on price or service but the two may be mutually exclusive. In a price war, the only way to win is by reducing the overall cost base, not the profit margins. This is shown by Sainsbury's poor profits performance, and consequently falling share price, since moving closer to a low price platform. The other downside is that consumers may become cynical or even smart. Once a price has been reduced it is less easy to return prices to their previous level without alienating customers. Furthermore, it will encourage consumers to become promiscuous, shopping at whichever store has the price promotion. This does not engender loyalty to the store.

So what does the brand future for retailers hold? A price positioning does not appear to solve any of Sainsbury's problems but seems to add to them. The market is one where many innovations can be easily copied. A sustainable competitive advantage is much more difficult to achieve but this is what the major players need to aim for, and that on a regular basis to create and maintain leadership. Growth through building new stores is no longer viable now that superstore saturation appears to have been reached. Growth must now come through attraction and retention of customers, increasing share of a customer's total expenditure or through moving into related, but relevant, products and services. However, there is a clear danger that price-cutting will be used for short-term share gain, even though its long-term effects would appear to be less positive. Sainsbury's now has to regain the trust of its customers and the confidence of the City. Sainsbury's has arguably a stronger brand than Tesco but brand leadership has to be continually reinvented and this is what Sainsbury's has failed to achieve. On the other hand, Tesco has embraced this concept allowing it to accelerate in the market share table.