Tesco: Pricing structure on organics is all over the place

Tesco, which saw sales of its own-label organic range “drop 50 or 60 million”​ in value to £368m in the past year, was speaking at a conference organised by Organic Farmers & Growers in Oxford yesterday.

Tesco category manager for produce Alain Guilpain said that the “huge​” variation in the price premium between organic and conventional products across different product categories was sending mixed messages to customers.

“I think that everybody understands that there should be a price premium attached to organic, because the costs of production and distribution can be significantly higher. But I think there also needs to be a clearer price hierarchy. ​

​“Currently there is a huge variation. Organic garlic is cheaper than standard garlic while organic pineapple can be 250% more expensive. In other areas there is price parity.”​

​If the aim was to encourage people who only buy organic food occasionally to buy it more frequently, this had to be addressed, he said.

“My personal view is that we’ve got to make organics a bit more affordable for everyday. Bringing organics to the masses will ultimately return more revenue to producers.”​

Retailers also needed to take some “bold decisions”​ where it was not possible to reduce prices, he said. “If products are carrying a premium of well over 150% you need to ask the question is that really what the customer wants? Are people prepared to pay two or three times the price?”​

EDLP or deep promotions?​

As for promotional strategies, investing in a keener price all year around on selected organic products might be more sensible than pumping all available trade spend into, say, three deep cut promotions a year, but trading at a premium price for the rest of the year, he suggested.

“People are buying these products on deal, but they are not buying them again.”​

A lower standard price and a higher rate of sale on fresh organic products would also tackle waste, which was a big problem, he added. “On conventional fresh produce waste levels are around 4%, on organic it’s more like 12%. The key way to tackle that is to increase the rate of sale and lower the fixed costs.”​

More strategic relationships​

But Tesco also recognised that suppliers needed the confidence to invest and this would only come through building more strategic relationships with growers and food manufacturers, he accepted.

“We need to have a more strategic relationship with our supplier base, to give them longer-term commitments and help them drive down their fixed costs.”​

He also acknowledged that Tesco, which saw overall organic sales slump 12% in the year to September 5 according to Kantar Worldpanel data, had “probably overreacted a bit​” by delisting so many organic products when the recession first started to bite.

But this had not been a co-ordinated attack on the sector, he stressed. “It wasn’t the case that we sat down and said ‘let’s cut down space for organics’. Buyers were just doing their job, identifying what were their poorest performers, and in many cases, they were organic products.”​

Hey big spender​

Shopping basket analysis from Tesco Clubcard data analysed by Dunnhumby had also highlighted that alienating committed organic customers was a risky strategy given that they were typically high-spenders, he said.

“Organic customers spend 2.7 times more in Tesco than other shoppers. We’ve got 470,000 loyal Tesco organic customers that spend more than £5 a week on organic food.”​