In the spotlight - Couponing becomes "necessary evil" for UK retailers

By Michelle Russell | 15 June 2012

Sainsburys Brand Match is one of a number of promotional tools used by UK retailers

Sainsbury's Brand Match is one of a number of promotional tools used by UK retailers

As retailer Morrisons announces it is to trial a voucher scheme in a handful of stores in the north-east of England and during a week in which Tesco CEO Philip Clarke said the high level of vouchering was "unhelpful", Michelle Russell takes a closer look at the growing trend of couponing and whether this is likely to continue.

As economic confidence among consumers remains relatively low in the UK, retailers are increasingly using vouchers and couponing as a way of capturing a greater share in the competitive retail market. 

In 2011, UK retailer coupon redemption grew by 40% to 230m, with retailers now accounting for two thirds of those redeemed, according to figures from coupon and voucher services provider Valassis today (15 June). Five years ago this was just over half.

And with the number of consumers looking to use coupons up by 22% on a year ago, it's no wonder retailers are reluctant to shy away from what has become what one analyst has described as "a necessary evil". Despite the squeeze vouchers are having on margins, they appear to have become a necessary part of the mix.

"[Tesco CEO] Philip Clarke said on Monday that vouchering is not a solution to the retailers' competitive issues and not something they want to do in the long term, but at the moment its a necessary requirement," Shore Capital analyst Clive Black told just-food.

"The promotional drug for suppliers is a necessary evil or its a less worse option, so to speak, to supporting volumes. The promotional tail is now wagging the dog and promotions have gone from 25% to 40%, which means an awful lot of promotions do not work.

"But promotions are better than having to cut case prices and support volumes through pricing activity. Vouchers are the same, it's a way of trying to support volumes and minimise margin damage. That's a dilemma in a market where volumes are declining and if volumes were positive we wouldn't have so many promotions and we wouldn't have vouchers."

Which would go some way to explaining why Tesco has increased its usage of such schemes over the last year and along with Asda and Sainsbury's, have been at the forefront of the increase in couponing.

Last October, Sainsbury launched its Brand Match promotion, which offers consumers a coupon for the difference from a shop if the basket of products is cheaper at its rivals. Tesco, earlier this year, offered a GBP5 (US$7.60) voucher on any spend over GBP40, which Asda claimed was identical to its own offering.

Tesco, however, which has had its fair share of challenges in UK in recent months, has admitted it was slow out of the block.

In a bid to attract the UK's cautious - but promiscuous - consumers, Tesco has increasingly used money-off coupons more often.

However, earlier this week, the retailer's CEO Philip Clarke slammed the high level of coupon promotions in the market, calling it "unhelpful" but conceded that it must continue to play its part or risk falling behind.

This played out at the end of last year when Tesco attributed some of its poor performance to its retreat from coupon activity while its rivals, Sainsbury's and Asda ramped it up.

"There was a lot of promotional coupoing going on around Christmas and that's probably, with hindsight, where we should have gone a bit harder," he said at the time.

Last month, when rival Sainsbury's published its annual financial results, it said it had offered 375m coupons during the year. The retailer said some 125 suppliers had also participated in that activity.

This week, the retailer also extended its contract with Valassis, and CEO Justin King, speaking after Sainsbury's published its first-quarter sales, was keen to point out the "unique" coupons the UK retailer can offer consumers after rival Morrisons launched its own voucher initiative this week.

"Not all couponing is created equal. Our coupons are predominantly targeted using our data either at the till or in mailings to customers' homes. They are coupons they value and they use," King said.

While for Morrisons its previous voucher schemes have only been in the run-up to Christmas, the retailer has now turned to using coupons during 'normal' trading, albeit initially as a trial, it insists.

On Tuesday, a spokesperson for Morrisons confirmed its trial of a voucher scheme in a handful of stores in the north-east of England.

The voucher scheme falls into two categories. One will be a money-off discount on a full grocery shop, while the other will offer money off a particular product.

Morrisons' late arrival to the scheme now means all of the big four retailers in the UK are using vouchers. However, Morrisons still lacks the technological capability of its three rivals if it wants to produce a like-for-like offering.

"Morrisons is not in a great position," Black told just-food. "They don't have a loyalty card like Sainsbury's and Tesco have, therefore they don't have bespoke data on individuals to issue vouchers. And unlike Asda, Morrisons doesn't have the web capability. Asda issues vouchers to customers who click online to their Price Guarantee, so these are two important areas there where Morrisons vouchering is very basic.

"In essence, it is either going to issue supplier funded product vouchers or basic basket vouchers, which is just much more hit and miss," he said.

Conlumino analyst Simon Chinn believes Morrisons may have felt "under pressure" to respond to what its competitors have already established.

"If you look at the retail market, Tesco is already established with its Clubcard and it is well received by its customers, especially in these tightened times. So for Morrisons it's kind of a response mechanism. They feel they have to offer [vouchers] otherwise they are at risk of losing business to their rivals," he told just-food.

Black echoes Chinn's sentiment in that the retailer may not be participating voluntarily. "I think they'd rather not do it. The fact is, they are not able to stand back and therefore they are having to not only look at vouchering but looking at other things like profiling their value credentials more aggressively so they don't lose their custom to Aldi and Asda."

Whether the industry is likely to see a retreat on the use of vouchering by retailers, however, is questionable. As consumers increasingly see vouchers and coupons as part of their weekly shop in times of such austerity and retailers fear stepping back from usage for risk of losing market share, it feels inevitable they will form part of the value offering from retailers for the foreseeable future.

Chinn believes couponing works too well for retailers to consider dropping it at the present time.

"At the moment, couponing seems to be working well. The digital price drop for Tesco didn't work out too well. So while price promotions and discounting activity will still be strong, especially in the current climate, the couponing is a much better initiative to target core and loyal customers."

Black, believes the industry is only like to see a reversal of the trend when volumes start to rise.

"When volumes rise and [retailers] sell more units, productivity improves. We're in a situation which is historic. We've gone through 18 months where 16 out of those have had negative food volumes. We've never had that before. The size of this compression should not be underestimated. In 2011, living standards in Britain fell at the fastest rate in living memory. That's why the number of individual food units have fallen and that has continued.

"By the end of this year, volumes may well be neutral to positive and that will be the signal that promotions will ease and vouchers will ease."

Sectors: Multichannel, Retail

Companies: Tesco, Morrisons, Asda, Sainsbury’s, Aldi

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