- To protect revenues and margins, manufacturers and retail chains must adapt their business model to operate in an inflationary environment.
- Private label has an impact on how customers perceive a given network in terms of price, and can also help to increase awareness of a given network and build loyalty.
- There is an upper limit to the private label share which is different for different product categories.
- From a customer perspective, online shopping with home delivery is a very attractive value proposition, while gamers are challenged by the very economics of the channel – breaking even is often very difficult.
- Digitization is crucial to creating a competitive advantage. Especially now, when the macroeconomic situation is becoming more and more demanding.
Inflation is accelerating
Economists predict that food prices could rise by double digits this year. In addition, there is the atmosphere of uncertainty linked to the war in Ukraine. How will this affect the wealth of Poles’ wallets and the propensity to save?
Research shows that at the end of last year consumers were fearful of rising prices, and the outbreak of war in Ukraine heightened those fears. Therefore, the mood of consumers is not the best and so far there are no factors that could change it.
Rising inflation, coupled with rising uncertainty, has already negatively affected demand for durable goods such as appliances, electronics and furniture. On the other hand, due to the influx of refugees from Ukraine, the number of consumers in Poland is increasing and the demand for basic necessities is increasing. Thus, since the beginning of the war, the large distribution chains have recorded an increase in their turnover. If Ukrainian citizens find a job in Poland and have regular income, trade will undoubtedly benefit.
What could retail chains do to avoid lower revenues and margins?
Increases in raw material and product prices generally cannot be fully passed on to customers. Therefore, in order to protect revenues and margins, producers and retail chains must adapt their business model to operate in an inflationary environment. This means they need to become more flexible, carefully control costs and constantly analyze consumer behavior. Now decisions must be made quickly and no mistakes can be made. Therefore, networks should be more agile and, to an even greater extent, use data analytics in areas such as customer behavior, competition, suppliers or commodity markets. By acting quickly and proactively, networks can, for example, modify product offering or price positioning appropriately relative to the competition.
Booming own brands
How important are private labels for distribution chains?
Private labels are playing an increasingly important role in the commercial strategy of distribution chains. They are no longer just cheaper substitutes for branded products and have become a tool to expand the product portfolio. This includes the popularity of products sold under their own brand determines the commercial success of discount chains in the Polish market.
Private label has an impact on how customers perceive a given network in terms of price, and can also help to increase awareness of a given network and build loyalty. Additionally, by strengthening private labels, retail chains can improve their bargaining position with suppliers and further diversify the supply chain.
Are we facing a situation where private label will be the main driver of channel revenue growth?
Currently, the share of chains’ private labels in the Polish basket is hovering around 20%, while the European average exceeds 30%. So there is room for growth in Poland. Already during the pandemic, new customer groups have turned to private label products because of their availability. Customers were convinced by these items, saw that their quality does not differ from the quality of branded products, and their advantage is a lower price.
Now that customers have become more price-sensitive and branded products can run out due to disrupted supply chains, chains will get an added boost for private label development. There is, however, an upper limit for the private label share, which varies between different product categories, incl. due to the presence or absence of leading national or international brand manufacturers.
The discounters are at the top
Which retail chains can benefit the most from this situation?
In a situation where customers are becoming price sensitive, discounters today seem to have a natural advantage, as they are, in the perception of customers, stores where you can save money. However, a well-conducted pricing and assortment policy, combined with marketing campaigns, can allow other formats to also benefit from the current situation.
Can convenience chains such as Żabka expect lower sales?
I don’t think so, because convenience chains largely meet the needs of customers other than, for example, discount stores or hypermarkets. The so-called impulse errands or ready meals are something different from the errands planned for the whole week. Additionally, the major convenience store chains in Poland have created formats that Poles have enjoyed and inflationary pressure alone is unlikely to reverse the growing popularity of this format.
Does the suppression of the pandemic mean that the delivery service in the food segment will cease to be so important today?
During the pandemic, food chains have intensively developed their online sales. This was expected by customers who started using this form of purchase, first out of fear of contamination, then out of convenience. Customers have become accustomed to shopping online and, under the influence of positive experiences, say they do not want to rely solely on physical stores.
From a customer perspective, online shopping with home delivery is a very attractive value proposition, while gamers are challenged by the very economics of the channel – breaking even is often very difficult. Despite this, I would not expect rapid growth of the online channel in food retail, if only because of the significant difference in the so-called online penetration in Poland compared to to other developed countries.
Digitization is a relationship with the customer
How important is digitization for distribution chains in this situation?
Digitization is crucial to creating a competitive advantage. Especially now, when the macroeconomic situation becomes more and more demanding. The use of digital tools makes it possible to better understand the customer and to establish a close relationship with him. Thanks to software and the use of data, networks can adjust their assortment faster and better, shape prices and control profitability.
Computer systems are also valuable in supporting inventory allocation and replenishment. The networks are aware of this and are increasingly using the possibilities of modern technologies to change their business model and increase their revenues. And it’s not just the e-commerce segment. One example is Carrefour, which recently announced it wants to transition from a traditional retailer to a digital retail business by 2026.