Steak & Chips Shopping

If you own a cash cow you should milk it for all it is worth.

Wiki Answers tells me that the term “cheap as chips” is derived from a time when wood chips were an inexpensive form of solid fuel heating. More recently, David Dickinson, a UK TV personality who presents antiques programmes, has popularised the phrase and there is even an Australian $2 store with the same name.  Like Australia, price has become a big thing in UK retail positioning of late, particularly with household goods and food, and it is having a meaningful impact on Britain’s biggest retailers. Wm Morrison, Tesco and Marks & Spencer all reported disappointing Christmas trading with Morrison doing particularly badly. Sainsbury reported a small rise in like-for-like sales for the period.

It comes as no great surprise to me that, as most of the big supermarket brands now compete almost solely on price, although they pretend they don’t, that prices and margins are on a downward trajectory as they all fight to protect market share. In fact, nearly a year ago, I wrote about the failure of major retailers to do anything about positioning their brands on anything but price and the inevitable consequences of this lack of strategic leadership (See Here).

In spite of this rather fundamental lack of meaningful brand differentiation in this sector it used to be that Sainsbury, Tesco and M&S operated without much interference from others so this mature market was somewhat stable for them all, but then Morrison raised their national profile and, perhaps most significantly, the “hard discounters” Lidl and Aldi have now built a strong retail base in the UK. Unlike the national incumbents these two German companies are both very clear about their positioning and they are both competing to be the price leaders in this market.

When you combine the hard discounters’ invasion of our retail space with the steady growth of the internet, it is inevitable that our biggest retailers will continue to lose market share, particularly in the growing price sensitive segment of the market. Of course, all of the “big boys” are fantastic cash generating phenomena that will continue delivering a great return on capital for their shareholders for many years to come but prices, margins, and returns look likely to be lower then they are today.

The UK retail market is like a plate of steak and chips. The “cheap as chips” brigade is on the up but they still have a long way to go and the big boys are cows, well, “cash cows” to be precise. They have high market share in a low growth market space and to date at least we have all been happy for them to generate excessive profits. It must be very tempting just to hang on in there and manage the slow and inevitable decline in market share in order to maximise returns over time, but I’d still vote for a little more effort to differentiate their offerings to slow that down as much as possible; I’m not sure it can be stopped. To my mind there is less scope for direct competition with the discounters as it would somewhat undermine their higher margin brands, but who knows?

If you have a cash cow you should probably milk it too, but be clear that competition will always appear where there are excess margins to attack and, unless you have the sheer balance sheet scale and strength of the likes of our major retailers, you should probably be more concerned about taking action to protect them than they appear to be.


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