Why price slashing is bad for employment


It seems that not a week goes by without the newspapers morbidly revelling in the next industry race to the bottom. It’s macabre, I admit, but these stories draw me in like a cheap reality TV program, to watch these once proud companies lining up, one after the other, like lemmings at the cliff, all competing to slash prices, narrow margins, accept a level of profit that was thought unthinkable 18 months ago, and, ultimately, eviscerate their own sustainability in order not to fall today. Last week it was fashion retail and the entrenched trend for cheaper clothing being replicated in the nation’s clothing stores. This week it is groceries and how the big four supermarkets are suffering in the squeeze between the high and low end of the market. On one side there is the haute couture of grocery shopping, the likes of Waitrose and Marks and Spencer, offering Heston Blumenthal’s signature ice cream and the queen’s own Duchy Originals range, catering for shoppers with an exclusive pallet and open wallet. On the other, more economical, end of the spectrum is rapidly growing Aldi and Lidl, attracting the growing middle class trend for prudent shopping on a budget through increased range, clever advertising and peer referral. For Tesco, Sainsbury’s, Asda and WM Morrison’s, stuck in the middle of the two burgeoning forces feeding off our increasingly polarised society, the future is bleak, with trading conditions predicted by many to be particularly tough. Worryingly it is the budget end of the market that is doing most damage, with the big four seeing the greatest migration of customers to the lies of Aldi. The other way – towards Waitrose – indicates the customer has discretionary funds to spend, yet this is not the reality for many. Cutting prices – a once favoured tactic to win back shoppers enticed by bargains – has actually resulted in a decline in our food spending as a nation, signalling that parsimonious tastes are here to stay for now. A dark cloud is swirling overhead. This year alone Tesco has been forced to issue two profit warnings, plus change its CEO as a way of jumpstarting its decline, and, not to be outdone, VM Morrison has recently registered a fall in half-year profits of just over 30%.

The customer has no more to spend. Budgets are so tight that many are having to restructure finances on a regular basis in order to get through to another pay day. Selectivity is constrained, forcing us to compromise on our wants. Needs must. For the big four this means pressure to keep prices affordable through a program of price cutting, margin splicing and uncomfortable profit adjustments. This month Sir Ian Gibson, non-executive chairman at Morrisons admitted that the industry was experiencing ‘unprecedented change’, and that, in the face of this challenge, Morrisons is well underway with building the foundations for a better future, consisting of less megastores and increased resources going into online shopping and a growth in convenience stores, both of which seem wise in this fragmented, internet-fixated, 24hour society.

Yet what does this mean for those employed by the big four, where job security remains a daily issue for many amid such difficult trading conditions. Evidence shows that in an industry plagued by the race to the bottom fixation there are going to be casualties as budgets are cut and cauterised and costs are reduced to massage a drooping top line. Inevitably the casualties will be staff as wages make up a large proportion of a company’s costs. It’s a sad twist of fate that those facing an uncertain future are also those with dwindling food budgets, creating a vicious cycle that is hard to escape without improved employment conditions.

And what of those coming after? Statistics show that they will fair no better, with less jobs available as company’s lock horns to offer affordable products. British companies hiring intentions for 4th quarter of 2014 are down two percentage points on the previous quarter – the largest decrease in 3 years.

The future looks bleak. Money talks. As the famous economist, Milton Friedman, memorably stated, ‘there is one and only one social responsibility of business — to increase its profits’. It is an amazing endorsement of profit above all else, including people. It seems callous and inhuman, but I can see that Friedman is saying that a company wouldn’t survive without profit, and therefore neither would jobs. It brings us to a chicken and egg scenario, forcing us to contemplate what comes first – business or people? Today I think we are aware that it is the people who are a business’ primary asset, its wealth generators, and that, for a company wanting to succeed, employee engagement is an essential part of its growth strategy. People produce profits – people promote products. In the case of the big four, I hope the people aren’t lost, talents wasted and futures blighted in the race to maximise profit share across an industry. Chasing profits has a limited outcome, whereas engaged employees could actually turn this negative situation around and open up new possibilities for the big four.