The flotation of B&M (LSE: BME) this week may surprise a great deal of investors. After all, many stock market participants may never have come across a B&M store or even heard of the company. However, it’s a name that the management teams at Wm. Morrison (LSE: MRW) and Tesco (LSE: TSCO) are very familiar with, since the Liverpool-based company that counts former Tesco chief executive Sir Terry Leahy as its Chairman has been a thorn in their side in recent years. The question is, is B&M killing the supermarkets and, perhaps more importantly, what can they do about it?
Responding To Customer Demands
Companies such as B&M are not doing anything particularly ingenious or clever in taking business away from major UK supermarkets such as Morrisons and Tesco. They are, to an extent, using the very same tactics that those companies used so successfully in recent years on their rise to the top. In other words, they are responding to the demands of customers through delivering branded goods at very low prices.
Although Morrisons and Tesco have, in recent years, announced that they will be reinvesting in their pricing (in other words they are discounting for a limited period) and continue to have various offers (such as spend £X and get £X off your next shop), B&M are keeping it very simple. Their prices are low and they have no plans to raise them — exactly what a large portion of UK shoppers are seeking. As such, they are proving to be very popular indeed.
How Should Tesco And Morrisons Respond?
Clearly, Tesco and Morrisons have tried to respond to the success of B&M and other value stores through various offers. However, they remain ‘stuck in the middle’ of discount stores such as B&M and higher-quality operations such as Waitrose through failing to define what it is they offer. For instance, Morrisons in particular has attempted to develop the quality of its own-brand goods and move away from competing with the likes of B&M. However, it is now investing in pricing (which it may or may not be able to continue in the medium to long term) and so seems to be caught in two minds. A similar situation has developed at Tesco, whereby the company is experiencing something of an identity crisis.
Indeed, a clear and well-defined offering is potentially what both companies need. They should either take a step back to their roots and compete head-to-head with B&M on price, or else attempt to go after the mid-to upper end of sales through focusing on quality. It seems as though the middle ground is too competitive, not profitable enough and, ultimately, not a sensible place to be in the long run.
Is B&M killing the big supermarkets? Absolutely — and unless they decide exactly what it is they offer, things are likely to get worse.
