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Facing the low-cost revolution

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Facing the low-cost revolution

It would be hard to underestimate the rise of hard-discount and lowest-price ranges as fundamental phenomenon in mature societies . Offering a reduced range or a pared-back service at an unbeatable price, hard discounts more than just a price – it is a business model. It also represents a new attitude towards consumption, and heralds a crisis for added value. It throws marketing itself into question, and thus brands too. This is why normalizations should consider themselves safe from this phenomenon.

Even in the country that invented the hypermarket, and where this form of commerce is now dominant, hard discount has succeeded in capturing nearly 12 per cent of market share (in value) over 15 years. Given that in food products, the price gap between discounters and the leading brands varies between 30 per cent and 50 per cent, it can beseem that this represents between 18 per cent and 24 per cent by volume. And of course –depending on the category – these figures maybe even higher. For example, in the repacked meats (ham) market, the hard discounters’ market share by value is of the order of 16. 5 per cent.

Hard discount is more than just a price. It is a new way of doing business, with its own specific retailers: German (Lid and Ali) or French (Ed, Leader Price). At present, the most recent European panel figures suggest that 62per cent of households shop at a hard-discount food store. The phenomenon will reach limit, however, reflecting the segmentation of the market: in food products, a threshold of 20per cent in value market share should be expected. In the DIY sector, the major retailer shave created separate hard-discount-style retail brands. The phenomenon now also extends to textiles: the classic discount stores were well known, but now new hard-discount retailers are emerging.

All these figures show that hard discount cannot simply be turned into a phenomenon that targets only lower-income groups. Hard discount is a necessity for the poorest in society, but also an opportunity for the betteroff. It offers an alternative way of living:consumers can do the daily shop close to their home, in 10 minutes, thanks to the simplification offered by a reduced range of goods, freeing buyers from the torments of too much choice.

Hard discount does not represent are turn to asceticism, but to realism. Among consumers who could afford to buy elsewhere, it attests to a desire to simplify, to uncomplicated, and to retake control. It will exert strong pressure on brands with low added value, the average brands, which do not possess a strong enough dream value. Hard discount advocates a form of intangible value:the return to a kind of simplicity for people who are not limited to it through a lack of resources. Hard discount is a search for purification of one’s life, de-pollution, and liberation from imposed constraints.

This is a genuine challenge for the major brands, as this growing form of distribution excludes them in favor of the discounters’own products. For the major brands, this further erosion of their accessibility on store shelves compounds the problem created by the amount of space already set aside for distributors’ brands in the hypermarkets and supermarkets.

Indeed, even retailers’ brands are coming under threat from this increasingly cut-price competition, which attracts clients to another store. This is why they have been strengthened, which will make them even more of a danger to the major brands as well. In fact, in 2007, the distributor’s brand is now typically 35 per cent cheaper than the national brand. As it increases in quality, however, its competitiveness also increases.

The hard-discount phenomenon is set to spread. Everyone will look for a way to increase their purchasing power in an ultimately painless way, by making shrewder purchasing decisions in respect of a portion of their consumption. This will affect telephone communications, the internet, transport, petrol, clothing and other areas. No company is immune to this phenomenon, because the competition has changed: consumers have become highly versatile, situation-driven and pragmatic. They are quite capable of shopping both at a hard-discount store and at Harrods on the same day.

Modern competition is thus expanded competition: it is no longer restricted to peers, identical brands or similar channels. Like the modern consumer, it is open and allembracing. In the process of experimenting with new channels, consumers are bound to find themselves re-evaluating brands and their added value.

What should our answer to this be? We would argue that it involves heeding the implicit message in this new form of range, while remaining true to oneself, by copying what may be copied from this competitor, while increasing one’s own strength.

The brand must retaliate with a different intangible factor and value system: product performance on the one hand, or the emotive experience of the store on the other . Hypermarkets have no choice, either. Their own brands exist only in relation to the producer brands that innovate, create and nurture markets, reveal tendencies, and also participate in the consumer society.

Remember that a brand can justify its existence only through the innovations it offers. The majority of brands are born of innovation, and innovation continues to be the brand’s oxygen: it has a stimulating, euphoric effect in promoting a sense of well being, pleasure, joie de vivre and hedonism. However, this intangible factor will have to start earning its keep.

This begins with respecting the customer: an intangible benefit that is not rooted in a tangible superior quality will be weakened, and will contribute to the brand’sex cess. There are plenty of cheap polo shirts, but only one Accosted. A Accosted shirt lasts 10years and, furthermore, adds distinction. This point has to be reinforced repeatedly. This raises the question of the visibility of brand communication, governed by the advertising dogma of the USP: how, and through which media, to promote the product. Thankfully, the internet offers many opportunities.

This new brand responsibility comprises service, citizenship, and sustainable development, which is transmitted through client service via a call Centrex or over the internet, but also through the services such as taking in worn-out electrical appliances, which indicate the brand’s high degree of social responsibility. The brand must adopt ethical principles and demonstrate that consumption is not synonym for inefficient waste, pollution and exploitation – themes to which society is becoming increasingly sensitive. Even Nike ha shad to make changes in the wake of the revelations in Naomi Klein’s book No Logo (1999). The mega-brand, with its iconic status among the young, may well have invented concept upon concept, but its social conscience left much to be desired, a fact that is particularly unacceptable in a flourishing company.

It would be a mistake to believe that hard discount will become the norm. In France, Crystalline spring water, sold at a price three times cheaper than Evian, does not control 100per cent of the market, and Evian is still the leader by value. However, it will grow, until it reaches its threshold – and in so doing it may lead to a re-evaluation of attitudes endeavor. As is always the case in our modern societies, contradictory tendencies appear, coexist and learn to live together – but what they cannot do any longer is ignore each other.

An examination of the specific strategies of companies and brands to combat hard discount reveals the following themes, all of which capitalize on the enduring weakness of hard-discount.

What link is there between Ryanair, Virgin Express, and Asda or Aldi? They are all socalledlow-cost companies. How have the traditional competitors responded? Through the introduction of a new, lowest-price product offer to its existing range. The brand must create a stepped price range, with accessible products that make it possible to experiment with and to discover the brand. Furthermore, this contradicts the discounters’arguments, since they wish to stereotype all manufacturer brands as ‘expensive’.

In air travel, for example, Air France has shown that the famous bait-and-switch prices of the low-cost companies (s20 flights from Paris to London) applied only to a few seats and time slots. Conversely, Air France’s promotion of its lowest prices, and of reduced prices in the case of reservation long in advance, has also demonstrated that its price range is much wider than the low-cost companies had claimed. The SNCF (French national rail)created e-TGV to reduce prices. Thanks to yield management and process optimization, Air France and British Airways can also offer quota of seats at very low prices. These may be obtained by booking far in advance, reserving over the internet, and so on. In this way, the SNCF’s e-TGV puts Marseilles only as20journey away from Paris.

The superstores have offered products even cheaper than the hard discounters, but under specific brands (the No. 1 brand at Careful, for example). This reduces the temptation to look elsewhere by capitalizing on the hypermarket’traditional strength, ‘one-stop shopping’. The difference in terminology is revealing: ‘low-cost’ is a business model; ‘even cheaper product’ was the result of an emergency action.

For 50 years Ali and Lid have been designing an efficient business model in order to provide a quality product at the lowest price, based on the elimination of all unnecessary costs, and on a new vision: long-term agreements with suppliers, dedicated factories with a common design, not to mention a store concept without flourishes, with a greatly reduced range of goods. If Ali’s fruit juice is still the market leader in Germany, it is because it is good: its quality/price ratio is unbeatable.

At the communications level, it is necessary to constantly recreate the perceived risk, by revealing the invisible and the unspoken aspects of ‘low cost’. Perceived risk is a key lever of brand sensitivity (Caperers and Laurent, 1995). The book written by two nutritionists was therefore a timely arrival in 2005. It showed that drastic price-cutting on food products was bound to negatively affect the intrinsic quality of the products. Thus, low-cost gingerbread contained not a single gram of honey. Low-cost ham contained high levels of chemicals. Locos is raised in the worst condition sand barely has time to grow up (40 days), and soon. In the air travel sector, a degree of doubt will inevitably remain regarding the maintenance, the quality of the equipment, and the heavy usage of the airplanes.

The brand must react to attacks on price by playing its trump cards: innovation and creating desire. In order to see off the challenge of the cheapest possible industrial chicken, the brand must offer hal al chicken, organic chicken, regional chicken, and so on.

To oppose the cheapest possible yogurt, it must offer one that does you good: Actively, Dana, Boat. To oppose as5 cafeteria Careful, imported from China, it must offer Espresso, or Sense by Philips, or Krups. To oppose the cheapest MP3 player, it must offer the Pod and its continual innovation(images, nan, mini, access to Tunes, Phone, and the like).

Value innovations are low volume, at least initially. Without volume there can be no strong brand, since it is volume that creates the financial resources for R&D, marketing, communication and so on. It is therefore first of all necessary to innovate on pillar products, those products that achieve the volume and the margin, and are essential to the distributor. In short, faced with supermarket shelves where space is at a premium due to the introduction of low-cost products, and in order to retain clients who might be tempted by the vista of hard-discount stores, it is important to remember that an essential reference remains essential only when supported through innovation and communication.

It is also vital to track the costs that do not carry added value, even imitating the best practices of the low-cost competitors. Thus Air France is constantly reducing the time clients must wait before they can board, via machines that deliver boarding cards: this also helps storerooms on personnel. The same is true for the growing use of the internet to book and to pay. For low-cost companies, as is well known, everything is done at a distance.

Finally, the brand must react through specific business model. Air France adopted the hub-style business model: it allows any traveler from the French regions to travel to Paris on an Air France flight and to make use of very convenient international connections (with short waiting times), not to mention the immediate transfer of baggage, and moving within as ingle terminal. All these added values discourage the internal traveler from flying to Paris with a low-cost company, then being forced to change airports or terminals, without guaranteed immediate connections to international flights – not to mention the air miles.