Michael
Porter’s Competitive Strategy is somewhat
of a Market Analyst’s Bible. Porter advanced the notion – among many others –
that there are, broadly, three generic strategies:
- Differentiation, think Waitrose.
- Cost Leadership, think Aldi.
- Focus, think your local corner shop with its focused geographical market of a few hundred homes.
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| Michael Porter's Generic Strategies |
Those
firms stuck in the middle are less successful because they do not garner the
large market share of cost-leaders, and they do not have the profitable niche
segments of differentiated companies. Being stuck in the middle is akin to
corporate suicide, and often a slow, painful one at that: BHS is a high-profile
recent case, stuck for a long time between the cost-leadership of Primark; the
differentiation of, say, Prada (for alliteration’s sake); and the focus of,
perhaps, Marks & Spencer (“Mrs
M&S” – a
married woman in her 50s).
But I
chose my supermarket examples above for a very specific reason: because, in
microcosm, I can see this being played out in this sector in the small market
town in which I live, Newport in Shropshire, with a population of c12,000. In
Newport, we currently have three supermarkets: a Waitrose, an Aldi, and a
recently opened Budgens, which took over the previous premises of a
Co-Operative – one case among 36 in 2016[1]. There
is also a B&M, a very low-cost variety retailer that sells food and is
typically good for anything in tins and jars; and a plethora of corner shops
(Nisa being the one I go to when I wake up on a Sunday and there are no eggs).
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| Newport Supermarkets |
I had
heard people grumbling about the new Budgens, and about its prices
specifically. But I had never previously heard of Budgens, had no idea where it
sat in the market, and feared (hypothesised) that, here in Newport, it risked
getting stuck in the middle – retail aficionado Mary Portas had a similar view
a few years ago, incidentally[2].
So, in a manner similar to that in which consumer prices index (CPI) inflation
is measured, I decided to do some primary research and compare the prices of a
selection of 20 products that feature in the CPI ‘shopping basket’ at Newport’s
three supermarkets at a particular point in time[3].
The 20 items are shown in the table below, with data collected on a comparable
basis (e.g. per KG, per item, etc), and then re-calculated according to the
typical amounts that I might buy: 500g of chicken, 5 apples, 1 loaf of bread, 4
tins of baked beans, to calculate the cost of a shopping basket of goods.
The
results, overall, were as shown below, with the basket costing: £41.84 at
Waitrose, £41.54 (-0.7%) at Budgens, and £24.54 (-41%) at Aldi. Meat was very
expensive at Waitrose, and so I also calculated the total without meat products;
this time finding that Budgens was fully 15% more expensive than Waitrose.
Looking
at it item-by-item: Budgens was the most expensive on ten items, the same as
Waitrose on two items, and cheaper on eight items. But it’s the extent of the
difference that suggests that they have their pricing strategy entirely wrong:
where they were more expensive, it was by an average of 44%; but where they
were cheaper, it was by an average of just 28%. Against Aldi, incidentally,
they were an average of 86% more expensive. Carrots were the worst, with them
being more than twice as expensive as Waitrose; and they were 50-75% more
expensive on blueberries, apples and sweet potato. Budgens was cheaper on meat,
bread, eggs and tea.
So my
hypothesis – based on knowing very little about Budgens – was wrong. While,
technically, they are in the middle (30p cheaper than Waitrose, £17 more
expensive than Aldi), in fact it seems to be something else: they are trying to
out-Waitrose Waitrose! And, as it turns out, this is indeed their declared strategy;
as outlined in greater detail in this article in Retail Gazette, quoting their Brand Director.
 |
| A Facebook post from a Newport resident |
In order
to assess how they are doing on that quest, nascently in Newport, I conducted
an unscientific survey among residents, receiving 123 responses.[4]
The survey asked whether respondents preferred Budgens or Waitrose on two
measures of perceived value (quality and variety), and also on price. The
results were resoundingly in favour of Waitrose: 88% preferred them on quality,
87% on variety, and 59% on price (pie chart). Furthermore, in most cases those
who preferred them did so by quite some distance; asked to rate the extent to
which they preferred each (scale of 1-3), 53% of all respondents said “Waitrose
to a great extent” on quality, 47% on variety, and 19% on price.
 |
| Extent of Preference, Chart Shows Average of All Responses, Scale -3 (Budgens to a great extent) to +3 (Waitrose to a great extent). |
Bringing
it back to the analytical models, Bowman’s Strategy Clock[5]
elaborates on Porter’s generic strategies somewhat, and we can plot the stores
thereon using the analysis done thus far. It’s clear that Waitrose and Aldi are
close to occupying opposite corners; but Budgens is in a dangerous spot: high
prices along the X axis, and low perceived value along the Y axis – they are
firmly within the uncompetitive strategies. One further observation from the
survey data is that there is a perception of price at Budgens that is not
reflected in the reality. 20% of respondents preferred Budgens on price (against
9% on quality), when the pricing data above shows that, in fact, they are no
better on price. This creates a further problem as, with people having a
perception that they are better on price than they actually are, Budgens is
stuck even further in the middle.
 |
| Bowman's Strategy Clock |
I have
heard on the grapevine – small market towns have active grapevines, an
excellent source of human intelligence – that the local Budgens is already
reviewing its pricing strategy. Looking at the strategy clock, lowering prices
only drags Budgens further into the middle, lowering margins, and to a place
that they don't want to be. Perhaps what they need to do (dotted line), as per
their national strategy, is drastically raise perceived value, and get
themselves up into that differentiation segment with a price that either
matches or slightly betters Waitrose. The challenge is about quality, branding
and promotional work, more so than it is about price.
But
there’s something else, more nuanced, about pricing too, which leads me to further
contend that they are stuck in the middle. Shoppers go to Waitrose for premium
products and so are likely to buy the more expensive variants of the products
above, making the basket more expensive still. But I did not really see these
premium equivalents in Budgens; and if they are there, then they are not a
strong enough brand, quality-wise, for me to believe that their carrots are
worth twice those of Waitrose. Further in the middle, still.
On Aldi,
incidentally, my view is that they come from a low value / low price background
but, actually, they are shifting to a low price position and, perhaps over the
long-term, a hybrid one. Firstly, people are usually, in my experience,
pleasantly surprised by the quality of their products; and, secondly, there is
further ‘perceived value’ in the brand, not in terms of quality but as a form
of goodwill, in a ‘reverse snobbery’-kind-of-way.
THE
INDUSTRY
Much of
what we see above is happening in the supermarket sector at large. In 2016, we
have seen Aldi and Lidl continue as the fastest-growing supermarkets, while
Waitrose has also achieved a record market share. Tesco, Asda, Sainsbury’s and
Morrisons, meanwhile, have all continued to lose share in the middle ground.[6]
People’s own shopping habits are polarising: they go to Waitrose for their premium,
quality items; and go to Aldi for their cheap, everyday items. But the big
four, while not immune to this and no doubt worried about the long-run trend,
at least have critical mass – Tesco has an overall share of 26% and around
3,000 UK stores. Budgens does not have anything close to this scale.
Incidentally,
it is Morrisons – as the smallest of the Big 4 – that is vulnerable: when the
Big(gest) 3 lost an average of 1.7% market share, Morrisons lost 3.8%.
PICKING
YOUR BATTLES
The
Newport spot, ostensibly, definitely fits the bill for Budgens’ expansion
plans. As shown below in a snapshot from the website, Shropshire is a target
area, and the Newport store hits most of their criteria – from a population of
5,000 within 5 minutes, to parking, to strong ABC1 demographics and new housing
developments.
But to
what extent was the competitive angle considered, and the implications of going
toe-to-toe in such close proximity with its biggest competitor? The distance
from Budgens to Waitrose in Newport is 75 metres (outside wall to outside wall,
as the crow flies), or 340 metres door-to-door by the shortest walking route,
or 0.4 miles (650 metres) by car. I haven’t looked at their proximity in the
case of every store, but rarely are they so close. With their 22 stores within
a rough 100-mile radius of me, covering the West Midlands, North- and
South-West, the average distance between a Budgens and Waitrose is 8.5 miles,
with only three being within one mile. Even in the South Eastern heartlands of
both companies, the average distance between them is 4 miles.
Of the
36 stores that Budgens adopted in the Co-Op deal, there is huge variation: from
0.2 miles in Newport to 99 miles in Cardigan; resulting in an average (median)
of 5.4 miles (or mean of 13.2 miles). In St. Neots, Christchurch and Crewkerne
they are similarly as close as they are in Newport, and in 6 of the 36 cases
they are within one mile. So these examples provide the most direct test of
Budgens’ declared strategy of competing in the premium supermarket segment,
with Waitrose. An interesting analysis, on their part, will be to monitor the
performance of their new stores by their distance from a Waitrose.
As an
interesting contrast, another of the Co-Op stores that was taken over is in
Ludlow – another reasonably affluent Shropshire market town. This store is more
than twenty miles from its nearest Waitrose, in a town that alternatively only
boasts a Tesco and Aldi, neither of which is differentiated in the same way. It
will be interesting to monitor how that store compares, without the direct and
established competition in the premium segment.
RAVING
Entering
a new (geographical) market, as they have done in Newport, and displacing an
established brand is always likely to be an uphill task. One important concept
in Challenger branding is the notion of ‘raving fans’[7] –
those customers who are big and often vocal advocates of your brand. At
Challenger MI, I use a measure of ‘raving fan’ status[8],
and put this to the survey sample in order to assess the extent of the challenge
faced by Budgens in Newport. Respondents were asked as to the likelihood that
they would recommend Budgens or Waitrose to a friend; with the proportion who
gave it a low likelihood (detractors) subtracted from those who rated it highly
(advocates), in order to produce a ‘raving fan’ score on a scale of -100 (all
detractors) to +100 (all advocates).
The
difference between the two stores is stark. Waitrose scored +28, with 41.5% of
respondents scoring it 10/10; whereas Budgens scored -88, with only 5% of
respondents scoring it 10/10.[9]
This suggests two things: firstly, that coming into Waitrose’s territory with a
proposition that is similar to theirs is a questionable approach, given the
strength of positive sentiment towards Waitrose; and, secondly, that Budgens
has made a bad first impression in Newport.
 |
| Illustrative only. Dark green bars come from primary research for this article, all others are national figures from an article in The Grocer and Customer Gauge. |
The
latter point is perhaps not surprising, given that each of the stores they took
over from Co-Op was set a tight deadline of just four days to re-open as a Budgens.[10]
In branding and store aesthetic terms, that makes creating physical
differentiation difficult; the Newport store looks nothing like this concept store, and a launch like this would
have made a difference. From a huge range of flowers at the entrance, to free
teas and coffees, Waitrose in Newport exudes quality and affluence; Budgens
does not. Meanwhile, in terms of customer awareness, it leaves little time to
create any perception of the brand as a premium one in the minds of local
customers. I would venture that I am far from the only person in Newport who
had never heard of Budgens – they could have laid some groundwork before
cutting the ribbon.
For
example, nationally they have sought a unique brand position by promoting their
commitment to local communities, and locally-sourced foods. Does anyone in
Newport know this? I wasn’t told, and they did not allow themselves enough time
to get this message across. But, even so, Waitrose is already known, and
heralded, for doing this – see, for example, their ‘Small Producers’ Charter’, “Championing
regional suppliers”,
‘We’re backing British’ campaign, or the green tokens
that you’re given at the till every time to deposit by the entrance in favour
of a local cause. As seen above, Newport’s local community has a very high
opinion of them.
TURNAROUND
But
there’s something else entirely in the mix here too: a complex set of
relationships, at which this store is at the heart. Formerly a Somerfield, that
business was acquired by Co-Op in what has been, largely, a failed exercise. In
2015, Booker Group acquired the Budgens brand; and, in 2016, these 36 stores were
acquired from Co-Op and re-branded as Budgens. But they were acquired by Hilco
Capital, a
commercial restructuring firm and specialists in turning around the fortunes of
ailing retail businesses.
The
optimist would point out that Hilco Capital is a restructuring and turnaround
specialist, and that they could play a valuable part in turning around a
failing store, although Budgens Newport is not going the right way about it,
yet. The pessimist would point out that Hilco Capital has been accused of
asset-stripping in the past, and that they acquired these 36 stores knowing
that there were some duds among them (340m from Waitrose?), and will run some
of those into the ground with minimal investment, especially as it appears that
Co-Op paid a dowry to them for taking the stores on.[11],[12]
I lean
towards optimism, and notice that Hilco Capital has had some considerable
successes – HMV, notably, and also Denby and Habitat – and that the Sunday
Times has
described their boss, Paul McGowan, as a ‘Retail Doctor’, having saved a number
of businesses during the recession. Between Budgens, Booker and Hilco there is
certainly enough experience to do a much better job with this Newport store.
But they
are unlikely to tolerate poor-performing stores for very long, and the Newport
store could well be on the chopping block. When acquiring aspects of a business
(e.g. 36 stores) it is perfectly legitimate to get rid of unsuccessful parts of
it, in order to turnaround the entity in its entirety and bring it back to
profit. Among those 36 stores there could be some gems that will go on to make
good profits; and there could be some uncompetitive duds.
CHALLANGER
(Conclusions)
Budgens
is a Challenger in the overall supermarket sector (miniscule market share,
0.4%), and one of very few Challengers, to Waitrose (5.3% market share), in the
premium segment of the supermarket sector. I
am, therefore, firmly in their corner and on their side! I love Challenger
brands. But I have no idea what they are trying to do here. On the streets
of Newport we are seeing played out, in microcosm, the risks of strategic
uncertainty and getting stuck in the middle. In our microcosm, Budgens is in
deep trouble, because neither its products nor its message are sufficiently
differentiated, despite its high prices.
That’s
taking it at face value, where we see two premium supermarkets going toe-to-toe
within a few hundred metres of each other. There may, of course, be other
reasons for this – including a lack of investment in the branding – and it may
be the case that this store doesn’t last, and someone ends up building houses
on the site within a few years.
But
let’s take it at face value. Their strategy of going after Waitrose is a bold one,
and they have talked a good game about competing with Waitrose. When I say they
talk a good game, I am referring to statements like this from their Brand
Director, when talking about another store opening (emphasis added)[13]:
“The customers of Crouch End have
a very different set of needs and expectations to the customers in Broadstone
and Byfleet, so we wanted to bring it into a high street like Crouch End where there is competition because we think we
have got something different. It was very interesting to see the store
managers of our local competition walking around here and leaving looking a
little bit afraid. For me, convenience isn’t just the location of the store,
it’s the proposition and the offer. If we are to be convenient, we need to really understand the local
community’s needs and that’s where we are different. Yes we are seeing increased competition, as the entire
market has on a local level, but it’s how
you react to that and how you respond to customers’ needs on a local level.
Our unique business model in Budgens allows us to do that.”[14]
There’s
huge emphasis on the differences in local communities. But, where I live, and
where they are directly competing with their main competitor, they are not
playing a good game. I have pointed out here some problems with strategy 101
(generic: either be cheaper, or better), and would give them the following
advice:
- I hear you’re reviewing pricing, but don’t just look at price. Consider your position on Bowman’s Strategy Clock and evaluate whether, in fact, you need to invest further in order to move upmarket, rather than slash prices and move downmarket, or further towards the middle.
- But, keep an eye on price, through regular and comprehensive pricing analysis. How have you got yourselves in a position where your carrots are twice the price of those at Waitrose, and a single sweet potato is 59% more expensive?
- Determine your strategy, at a national and local level, (which you seem to have done) and stick to it, and invest in it, relentlessly. It is currently confused and confusing in Newport, as far as I can tell.
- Be the Challenger to Waitrose in the premium supermarket segment, by all means, but give more consideration to some of the concepts behind Challenger Branding, as you’re not really nailing any of these yet. These are the 8 credos of Challenger Brands, according to Adam Morgan and Eating the Big Fish. You appear to have gone about the Newport opening ‘half-arsed’ and that is completely anathema to Challengers.
- And, perhaps, you need to mount that challenge from further than 340m away. Race Waitrose north, and west, by all means; but perhaps pick locations where Waitrose is not already established. Trying to out-Waitrose Waitrose in a town where they already have a strong and established presence, really? Newport could be the epitome of losing the battle, but you can still win the war.
I will
continue to passively monitor this fascinating situation as it plays out in
Newport, probably mostly through the shopping behaviour of my own family: we
currently go to Waitrose and Aldi, so let’s see if Budgens can attract our
attention in the coming months. They need to, if they stand any chance here.
Meanwhile, if you’d like to talk to me about anything herein, or to look at
pricing analysis and marketing strategy in your business, then contact me here.
[7]
Original work of Ken Blanchard and Sheldon Bowles, applied to Challengers by
John Gumas here: http://marketingsmart.gumas.com/marketing-mistake-63-being-satisfied-with-customer-satisfaction/
[9] The
results are likely to be skewed by presenting both brands head-to-head. If
asked independently of one another, I would expect Budgens to score higher than
this. But, again, it’s illustrative.
[11]
There is a dated article about whether Hilco is a “hero or villain”, here: https://www.retail-week.com/topics/hilco-hero-or-villain/5004923.article
[13]
Incidentally, they no longer own this Crouch End store as it was bought
by…Co-Op!
[14] http://www.retailgazette.co.uk/blog/2015/08/budgens-changes-its-strategy-to-target-the-waitrose-consumer
and http:/www.thedrum.com/news/2015/08/18/budgens-brand-director-bullish-early-results-revamped-strategy-target-waitrose
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