Value is never a race to the bottom

Anyone analysing the highly competitive, UK supermarket sector over the last year or two will have noticed several headlines* like this one in the FT  –

“Tesco must play long game in race to bottom – Chief executive Dave Lewis must decide strategy amid full out price war.” 

The story quotes ex-Sainsbury CEO, Justin King, referring to price wars as MAD (mutually assured destruction).  Yet it is “creative destruction”, a phrase coined by eminent economist  Joseph Schumpeter**, that lies at the very heart of any socially legitimate form of capitalism.

There is plenty of madness in capitalism today.  It is best exemplified by what has been going on in the boardrooms of very large corporations, like Sainsbury and Tesco, over the last couple of decades; but is not exclusive to retail markets.  Corporations think customers go for price, when in fact they always go for value.  They compound this error by pretending to their shareholders that profits mean value (tell that to Tesco shareholders). Tesco is not satisfying either of its main constituent groups currently and never will unless it starts re-focusing its strategy on value rather than price. Price breeds abuse of market dominance and the bullying of suppliers and Dave Lewis now has to repair the years of damage created by its bad behaviour (cf. banking, financial services, pharma, oil et al).

One of the companies that is very creatively destroying its competitors’ business models, in the interests of society, is Aldi. Visit the Aldi corporate site and you will see why. They have a simple, crystal clear purpose of social responsibility –

“We promise our customers quality products at the best possible price. Our suppliers realise this and we work closely together to achieve a shared goal of putting our customers first.”

The Aldi philosophy is mature. It understands that its customers keep coming back because of the excellent value they receive (the best combination of quality and price) – not because of ‘low prices’. This is the challenge for any corporation that wants to play a responsible part in society. Their purpose cannot be having to choose either shareholders or customers; it has to be both, at the same time.

Price wars are inevitably a race to the bottom – value is always a race to the top.

* Google ‘supermarket race to the bottom’ and you will see the trend    **See ‘Capitalism, Socialism and Democracy’