How low can you go?

The news that Lidl, the German discount retailer, recently launched a range of denim clothing, with such a diverse range of items as denim-inspired knickers (£3.99) and a pair of jeans for the eye-watering price of £5.99, set me thinking.

The obvious question is how can you sell a pair of jeans for such a low price? We will try to answer that. More philosophically you might argue that there must be something “fishy” or unethical about such a price: particularly in terms of how Lidl sources such products at such low cost. We will cast our eye over that as well in the following paragraphs.

A helpful article that was published in the UK newspaper: the Guardian (13 / 3/ 2016) sheds some light on how Lidl might arrive at such a price. The author: Gethin Chamberlain asserts that it might be more accurate to consider the jeans that are on sale for £7.99 in Lidl’s “I love denim” campaign. The £5.99 jeans are more accurately described as “jeggings”.

Upon examination of the £7.99 jeans it revealed that it had four pockets plus six belt loops, three buttons and an YKK zip. It was made of 100 per cent cotton (the most expensive item of the material so far). These items, he estimates, takes he cost of one pair of such jeans to be between £2.30 to £2.50.

You can then add on the cost of thread (for stitching purposes): roughly 19p. The finished pair will also need to be washed. The estimated cost so far pans out at around £3.90.

The average Bangladeshi worker gets paid around 23p per hour. After some calculations, based on the average number of jeans produced in an eight-hour day (six days) and based on some studies undertaken by the Institute for Global Labour and Human rights, he estimates that they get paid roughly between 2p and 9p for each pair of jeans.

This takes us up to roughly £4.50 per pair. If you also factor in shipping, customs and warehouse costs, this increases to £4.80. Then they need to be taken from the port to the store. This generates a cost of £5.30. In the UK, we need to add on VAT. The author reckons that the overall cost pans out at around £6.36. This (on the pair of £7.99 jeans) would generate a profit of £1.63 per pair.

To be more realistic we also need to consider the role played by middlemen in the supply chain. They also will take a cut. It is difficult to estimate how much this might be. It could be of the order of £1.50-£2 per pair. While this ostensibly would eliminate all of the profit identified in the preceding paragraph, it does not take into account the purchasing power of Lidl. Placing such large orders provides the retailer with the opportunity to squeeze the best possible deal from the various players (manufacturers and middlemen) in the supply chain.

What are we to make of this strategy? Chamberlain argues that ultimately such a business model is based on the ability of one player (in this case Lidl) to exploit their dominant position in such relationships and take advantage of more vulnerable companies such as the Bangladeshi manufacturer to generate such as price. It can also be argued that it creates a “domino effect” in that the latter also exploit loose or non-existent labour legislation to pay people very low wages.

What do customers want? Do they know or (more fundamentally) care about the machinations used by retailers like Lidl to offer items such as the denim collection at such low prices?

Lidl argue that their buying power allows them to pass on the savings generated by bulk buying deals to its customers. This may be true at first glance. However it might be argued that it conveniently skirts around the more thorny issue of the pressure they put on suppliers in the process.

An interesting study carried out for Marketing Week (2014) revealed that only 15 per cent of shoppers stated that they were influenced by ethical concerns when making purchases. While this was based on a survey of 2,000 shoppers in the United Kingdom, and thus has to be treated with caution when trying to make generalisations across different geographic regions, it never the less provides some tentative indicators of the depth of feeling (or lack of) about this issue.

Overall 70 per cent of the respondents were classified as “cost-conscious” shoppers.

The study also shows that the ethical shopper tribe is divided evenly between men and women but with a stronger weighting towards older people. While 31 per cent of ethical shoppers fall into the 55 plus age bracket, only 12 per cent are aged 18-24.

The reality is that many shoppers in the UK either do not care about the ways in which retailers sources their products and generate such prices or selectively screen out such concerns when evaluating their purchase options.

From time to time retailers are called to account by the media in the form of exposes on sharp practices in such areas as exploitation, child labour, dangerous working conditions and so on. To be fair, many have responded by instigating practices that seek to address such problems. Codes of behaviour, the auditing of production facilities and visits to such plants are high on the list for many.

However in a quest to further reduce costs from the supply chain, I suppose it is unavoidable that some retailers will push the boundaries and take advantage of their dominance. In my view this will continue with the same certainty as “night follows day”. What do you think?

References

Bacon, Jonathan. (2014) Ethical issues a minor consideration for shoppers. Marketing Week (March 12)

Chamberlain, Gethin. (2016) How can you sell jeans for £5.99? Easy…pay people 23p per hour to make them. The Observer (March 13)

 

 

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BOGOF Forever

Having taught various retail marketing courses for over twenty-five years, a phrase that I often use to shock students (or more realistically to wake them up during a lecture) may become somewhat redundant in the United Kingdom shortly. When I get bored in a lecture, I have a tendency to shout BOGOF. This catches the attention of the students but it does have meaning within the context of the retail sector. BOGOF refers of course to that ubiquitous promotional offer used by supermarkets which stands for Buy One Get One Free.

In February 2016, it was rumoured that the Competition and Markets Authority (CMA) had plans to announce a tightening up of the regulations on misleading advertising and promotions that are currently offered in abundance by the large supermarket groups. More accurately referred to as multi-buy deals, they reflect offers such as BOGOF and reduced price promotional offers for a limited period of time.

It is estimated that over 55% of all goods sold in UK supermarkets are based on such promotions. This contrasts with over 29% for Europe. For instance in France and Spain roughly 20% are sold using these methods and in Italy it pans out at approximately 33%.

Why is this government agency becoming so angst-ridden over BOGOFS?

A study by the consumer group; Which, indicated that shoppers on average overspend by as much as £11.14 per week as a result of being tempted by such deals and offers in the supermarkets. This equates to almost £1,300 annually.

Such deals it appears, can be difficult to assess and compare. Only 2% of respondents to a survey carried out by the Money Advice Service organisation were able to select the optimum deal from four sets of multi-buy offers.

Hey, why don’t I test you on one of these offers?

Of the following options for milk, which represents the best deal?

a). Six pints of milk for £1.80p

b). Four pints of milk for £1.40p

c). Two six-pint cartons of milk on offer for £3.50p

d). Two four-pint cartons of milk on offer for £2.

The answer is given at the end of this blog. Please wait!!!

This survey by the Money Advise Service also indicated that around 76% of the respondents regularly overspent on their weekly shop.

The other negative aspect associated with such multi-buy deals is that they encourage people to buy more than they need. This results in a lot of waste in the form of items not being consumed and fired out in the bins at the end of the week or month.

This discussion and proposed changes to the legislation appears to be having some effect. Sainsburys; one of the big four supermarket groups in the UK announced in February 2016 that it was planning to phase out all of its multi-buy promotions by the autumn. It based its decision on the fact that it is more transparent and effective to offer shoppers in their stores lower prices at quantities that are more relevant and appropriate for them.

The impact of the discount retailers such as Aldi and Lidl should not be under-estimated either. Increasingly shoppers are making use of their stores to save money. People that never went there before but have discovered them since the deep recession in recent years, have been surprised by the low prices but also by the perceived quality and value of their business proposition. In short, lower prices may act as a stronger incentive to shop in such outlets.

It should be acknowledged that the CMA has denied that it will explicitly prohibit the use of multi-buy deals in the future: instead it claims to be seeking greater transparency over the way in which products are priced in retail outlets.

Will shoppers miss such promotions if they disappear from the supermarket shelves and gondolas? It is debatable. We have become conditioned over the years to expect a raft of promotional offers when we make our way around the aisles. As mentioned earlier, shoppers are more likely to seek better value that can be identified through lower prices than complicated special offers. Arguably some shoppers are becoming more conscious of environmental issues that spin off into the area of reducing waste: a clear problem with the tendency to “overbuy” as a consequence of these offers.

In an era where supermarkets have undergone major criticism over many aspects of their behaviour: unethical sourcing, misleading shoppers and so on, any activity that attempts to make them more credible and transparent to their target markets is more likely than not, a positive development. Every-day-low pricing (EDLP) such as that advocated by Asda / Walmart certainly addresses the issue of greater transparency.

However we are unlikely to see the total eclipse of BOGOFS; unless of course they are banned, and this appears unlikely. Multi-buy offers allow retailers to widen their range of options when competing in a market-place that is driven by ever greater focus on lower prices and lower costs. We are likely to see less usage of such tactics however. As we know from our basic understanding of competitive analysis and strategy-making, retailers are challenged with the task of constantly trying to come up with the “latest wheeze” which might turn out to be a game-changer and lead to that all important competitive advantage.

Various tactics such as loyalty cards and multi-buys go in and out of vogue. We may see a period where retailers will focus more fully on lower prices and more targeted offers to its customers. This is likely to be driven by the ever-increasing amounts of “big data” which they hold on their customer base. In theory this should present numerous opportunities to come up with more creative ways in which to develop promotional offers that reflect the shopper’s personal preferences and shopping habits. It can be argued that this ultimately, will lead to shoppers capturing better and more customised value from their visits to their retail outlet.

In summary the use of multi-buy tactics such as BOGOFS is more likely to stall and decline, rather than disappear of the supermarket shelves. Simpler and clearer pricing should lead to a reduction in the level of confusion which appears to exist in the minds of many shoppers.

Maybe I can still shout BOGOF at my students into the future!

By the way the answer to my question posed earlier in the blog is???

D (it works out at 25p per pint).