Cheap as Chips Doesn't Cut It in Brexit Britain
(Bloomberg Opinion) -- Just because it’s a bargain, doesn’t mean it’s worth it.
On Monday, Associated British Foods Plc said its Primark discount clothing chain had performed well in the U.K. in the first half of its financial year, offsetting difficult conditions in Germany. This comes days after value bakery brand Greggs Plc said full-year underlying pre-tax profit was likely to be ahead of previous expectations.
It would be tempting to think that with consumers concerned about Britain’s impending departure from the European Union, any store with cheap prices would be able to clean up. But that’s not the case. Primark and Greggs have a winning combination of offering low-cost products that customers actually want to buy – and in a decent store environment.
Take Greggs. It said the publicity surrounding the launch of its vegan-friendly sausage roll had led to an “exceptional” sales performance, up 14.1 percent for the seven weeks to Feb. 16. While that might be the company’s most headline-grabbing innovation, it has also quietly been expanding its range with a broader breakfast offering as well as salads and healthier sandwiches.
It’s a similar picture at Primark. It is continually developing its product lines, with its larger outlets almost rivaling department stores by offering everything from beauty to home furnishings. It has also been investing in its locations, updating and enlarging outlets. That sets it apart from more tired-looking high street rivals such as those in the Arcadia stable.
A combination of low prices and decent quality has also been the recipe for success at the German no-frills supermarkets, Aldi and Lidl, which have also been improving their store environments and upgrading their products – the latter now offers fresh bread.
This combination isn’t easy to pull off, and requires investment, both in the stores themselves and the products on offer. That can be a challenge, particularly if sales growth proves harder to eke out. An efficient operating model, as at the German discounters, or scale, as at Primark, helps.
This all goes to show that low prices alone are not always enough to tempt shoppers. Just look at Sports Direct Plc, which suffered dismal trading in 2016. Its pile ‘em high, sell ‘em cheap approach wasn’t enough to offset consumers’ concerns about its employment practices, especially against the backdrop of unattractive stores and secondary brands.
More recently, disappointing trading at B&M European Value Retail SA and Card Factory Plc, as well as profit warnings from clothing retailer Quiz Plc, also underline that cheap isn't always so cheerful.
Rising wages and moderating inflation looks like they are keeping British shoppers afloat. But uncertainty over Brexit is also likely to keep them cautious – and more discerning.
While that’s obviously an issue for top-end retailers, and those selling big-ticket items such as furniture, the value end is also vulnerable to picky consumers. Low-price shops need to offer more than low prices to do well in this environment.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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