Bye bye low prices!

Discounters are on the rise. Once again. It’s always the same old story in Germany when you look back over the last decades: in a recession, discounters gain ground and manage to keep that level until the next slump, moving up yet again, and repeat. The novelty this time is the parallel growth in private label across all channels and significant price increases, of course. 20% inflation on food and drink in Germany – this is unheard of! Notoriously low price levels of food products have always been a challenge for most exporters, for which we develop a market entry strategy here at Green Seed Germany. Will this change now?

In light of rapidly soaring cost of living and higher food prices, Germans spent their money more carefully in 2022 and purchased to an increasing degree products on promotion as well as private label value products. The discount store format profited from this in particular, as consumers traded down to premium private label such as Lidl Deluxe in the run up to Christmas. Now is the time for manufacturers to explore private label opportunities in the land of discounters! Discounters now account for 43.7% of grocery retail turnover (IRI) or 36.9% if you include e-commerce and specialist trade (GfK). While the discounters will certainly maintain their strength once again, full merchandise stores still remain relevant to consumers. Another opportunity here, for brands: get innovation on shelf. Easier said than done. Instead of retailers and suppliers working jointly to get new products on shelf, retailers are lost in price battles with suppliers and aggressive price promotions with consumers. How much innovation will this cost us?

One of our clients told me they had pushed through no less than five price increases for their branded products in the last 14 months in their domestic market. With German buyers even a single price increase usually results in a fierce battle. Retailers view themselves as guardians of prices and noble advocates of consumer protection. They accuse some suppliers of passing on higher price increases than necessary. In the last half of 2022, negotiations on price and conditions led in a few cases to the delisting of renowned brands. The example of Kellogg’s shows what kind of effect this can have on an entire category: Movement of shoppers (Käuferabwanderung) but also reinforcement of private label. In Germany, Kellogg’s generates 25.6% of turnover with Rewe (retailer No. 3). An analysis of Smhaggle, a price transparency app, shows that in a certain period in 2022 the number of shoppers in Rewe’s entire cereal category decreased by 12.1%. The Kellogg’s brand lost 19.4% in volume, while Rewe’s private labels increased by 17.2% and competitor Nestlé gained 2.2%.

This clearly shows even to grocery retailers that brands are needed, despite the steady rise of private label. However, brands need to be careful not to lose the momentum. Now is the time to review brand strategies and fine-tune propositions, and to communicate with the objective to maintain loyal consumers and convince more shoppers to buy their products. Brands need to be ahead of the game more than ever. Several recent studies show that German consumers are less willing to pay for environmentally friendly food. This is obviously a side effect of the current crisis and will surely be only a temporary phenomenon. Germany has always been advanced regarding sustainability topics and brands need to invest now, even if it hurts, in building credibility in this area while proving the general value of the brand itself remains an ongoing task. Yes, this will be reflected in a higher shelf price, but consumers will have to come to terms with price increases in general, driven by climate change, raw material, energy and labour costs.

In the end it boils down to this: German consumers (as well as some retailers) should really stop complaining. We will never return to our former low price levels, and this is a good thing.

Nicole Guenther
Managing Director, Green Seed Germany
nguenther@greenseedgroup.de