Is it time to share the pain? Update by Martin Hayward

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Martin Hayward, Founder of HAYWARD Strategy and Futures, discusses the impact of an individual’s comment in a volitile stock market.

 A couple of weeks after my last post (Is it time to share the pain?), which argued that in tough economic times, customer loyalty can be more important than City loyalty, I was pleased to hear the following comment from the CEO of Tesco addressing the IGD on October 11th:

“Sometimes you need to put aside the pursuit of profit in a market in order to get in tune with the nation. We’re absolutely committed to doing what we can to help customers by cutting prices on the nation’s shopping list”

Although it’s hard to isolate any individual effects in a volatile stock market, the comments didn’t seem to generate any great comment or more importantly have any direct impact on share price as the chart of Tesco price for October shows:

Given the CEO of a major plc had effectively issued a profits warning, it doesn’t seem to have been taken as a major announcement. This suggests a number of possibilities:

  1. The City understood and agreed that being loyal to customers is important for long-term profitability even if it means a short-term profit hit.
  2. Nobody noticed.
  3. Nobody took the comments seriously.
  4. The audience wasn’t the City, It was perhaps more of a PR exercise.

I think we can discount number 1 as it will take more than this comment to convince the overpaid gamblers in the City that it’s worth taking a long-term view. As for nobody noticing, the comments did appear in a number of newspapers, and the City will pounce on anything they think is share price sensitive; which suggests that maybe nobody was taking the comments very seriously.

The problem with any business promising price cuts in today’s market is that it’s very hard to know if they’re real or not. Very few items today have a recommended price and most customers only track a few known value items (KVI’s) in their assessment of value for money (petrol being the most commonly known price in most households).  Add to this a confusing noise of endless promotions (40% of goods in Tesco were on promotion in August), 3 for 2’s, BOGOFs, BOGTFs, loyalty points and other incentives and most customers have no real way of knowing if they’re getting a good deal. Price comparison sites are beginning to help here but there are logistical challenges to their completeness and  a certain circularity to their comparison with other retailers without an absolute measure of real value.

At the same time that Tesco were talking to the IGD, the press were much more interested in analysing whether the price cuts announced by them and most other supermarkets really were real, having identified a number of instances of prices rising prior to then being cut, in addition to some loyalty point awards being halved in value.

For the customer, it’s probably likely that cynicism will rule the day. Confusion pricing does not create a clear sense of either value or loyalty, but slowly erodes a relationship until it becomes a mere transaction. If we don’t know what it should cost, how can we evaluate a price cut?

So my initial excitement that maybe we were moving towards longer term strategies to be as loyal to customers as they are loyal to us remains at present unproven. We shall have to wait for the results announcements to see what the real story is, and I shall keep looking for signs of a real commitment to customers, at short term expense to shareholders, but to the long term benefit of all parties.

Read more from Martin Hayward.

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Posted: November 10th, 2011 | Author: will.armstrong | Filed under: Customer Champions | Tags: , , , , | Leave a Comment »

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