NCSI-UK Commentary Fourth Quarter 2008
Results for Supermarkets, Electrical Retailers, Department Stores, Petrol Stations, and E-Commerce
Customer Satisfaction Strong for Some Retailers despite Fears of Recession; Online Retailing Leads All Categories
Waitrose, John Lewis and Play.com among the Leaders; Somerfield, House of Fraser, and Currys Struggle
Commentary by Patrick Barwise,
Emeritus Professor of Management and Marketing, London Business School
February 24, 2009
The UK National Customer Satisfaction Index (NCSI-UK) releases its annual results for the retail sector, which debuts with a score of 74.8 on the NCSI-UK’s 0-100 point index scale, very similar to the U.S. retail average of 75.2 reported for the same period by the American Customer Satisfaction Index (ACSI). Of the five retail categories measured in the fourth quarter of 2008, e-commerce easily outpaces an otherwise tightly-packed field, suggesting that further investment in the online channel could provide retailers with opportunities to drive sales and customer loyalty through a more satisfying shopping experience.
Among the other categories measured, department stores top the list at 76, while a sharp drop in the price of petrol during the fourth quarter keeps satisfaction with petrol stations slightly above average at 75, probably somewhat higher than it would otherwise have been in this largely value-driven category. Supermarkets and electrical retailers score 74, slightly below the average for all retail, although customer satisfaction improves for supermarkets from the baseline score of 72 in the first quarter of 2008. This still differs slightly from the U.S. experience where both supermarkets and specialised retailers outperform the retail sector as a whole at 76 while department stores rank at the bottom at 74.
As the economy slows, the big challenge for retailers of all types will be how to retain shoppers who are becoming increasingly careful with their spending. Here customer satisfaction is key: companies that provide the most satisfying experience stand the best chance not only to survive, but to thrive financially in a slower economy. One approach to improving customer satisfaction is through price discounting, and retailers took this approach heavily throughout the fourth quarter, especially in the lead up to Christmas. Some offered savings of up to 70 per cent on certain items in an effort to combat sluggish sales, appealing to current trends which suggest that seeking out discounted products or special offers is becoming an increasingly popular method for saving money. But it is difficult to sustain growth in the long term by focusing on price alone, especially when all retailers are relying heavily on promotions to drive sales. Discounting may win over a new customer, but high quality merchandise and good customer service will differentiate a retailer from the rest of the pack and create the most advantageous conditions for keeping that customer and generating positive recommendations to others.
Supermarkets: Waitrose Leaves the Competition Behind; Somerfield Falls Further Behind
The supermarket category was first measured in NCSI-UK in the first quarter of 2008, where it debuted with a score of 72. For the fourth quarter of 2008 satisfaction with supermarkets rises slightly to 74, an impressive achievement given the continued high cost of food. Traditional discounters Asda and Morrisons lead the way, with Morrisons catching up to Asda at 76. Supermarket giants Tesco and Asda engaged in a head-to-head pricing war for much of the second half of 2008, apparently to Tesco’s slight advantage. While the UK’s largest supermarket chain still lags its largest competitor by a significant margin despite rebranding itself as “Britain’s Biggest Discounter”, Tesco’s gain of 3 per cent to 73 closes the gap somewhat with Asda, which remains at 76.
John Lewis-owned Waitrose retains its market-leading CSI score of 82, unchanged from the first quarter 2008 and well above nearest competitor Asda. Waitrose has succeeded by offering high quality merchandise and good customer service at a premium price, but even the perennial industry leader had to engage in some discounting as the economy slowed in 2008, investing some £30 million mid-year in various pricing promotions.
At the opposite end of the spectrum is Somerfield, the only decliner among supermarkets this quarter. Somerfield anchored the bottom of the category in the quarter one 2008 measure, and the chain falls 3 per cent to 61 this quarter, well below not only the industry average but every other supermarket chain. In October Somerfield’s acquisition by the Co-operative Group was completed, making the newly merged business the fifth largest grocery chain in the UK. The Co-op has also inherited a portfolio of customers who perceive Somerfield’s small-format and convenience food stores to have the lowest quality merchandise and poorest customer service in the industry. Typically mergers in the service sectors create lower levels of customer satisfaction in the short term as customers often become lost in the shuffle of reorganising and integrating operations, a circumstance that does not bode well for the Co-op improving on Somerfield’s low satisfaction ranking anytime soon. The hope is that customer satisfaction will increase once the operations are better integrated.
Overall, supermarkets rank lowest among all types of retailer for perceived quality, in terms of both products and customer service. Supermarket customers also register the highest volume of complaints among the retail categories at 14 per cent, in part possibly the result of the frequency of grocery shopping - the higher the number of customer interactions, the greater the chances of something going wrong. The upside for supermarkets is that this offers more opportunities to practice successful complaint resolution, and the industry leads all retailers on how well customer complaints are handled.
Department Stores: John Lewis Reigns
The department store category debuts with a score of 76, slightly above the retail sector average. While for supermarkets, below-average perceived merchandise quality and lackluster customer service are partly salvaged by superior value, the opposite is true for department stores. The quality of products and service rate well above the mean for retailers, while value is perceived to be merely average. This fits the image of department stores as places where shoppers are accustomed to paying somewhat higher prices in return for a better shopping experience. This is not to say that value is lacking; although about one-third of department store customers do feel that products are overpriced. With higher satisfaction comes a lower level of complaints: only 4 per cent of all department store customers have complained about their experiences in the past year, equaling petrol stations for the fewest number of complaints in retail.
Just as its Waitrose chain dominates the supermarket industry, John Lewis tops department stores by a wide margin, scoring 80 to lead Marks & Spencer, which comes in at 76 and Debenhams at 74. Customers expect a great deal from John Lewis relative to the competition and the department store does not disappoint, providing superior merchandise with outstanding customer service. The one area where John Lewis does not lead the industry is perceived value for money, though it still surpasses the industry average. In November 2008 M&S and Debenhams briefly surged ahead of John Lewis in sales on the strength of substantial discounting, but neither store was able to convert its price-cutting into customer satisfaction levels that rival John Lewis.
At the bottom of the industry is House of Fraser, slightly behind Debenhams with a score of 73. Efforts throughout 2008 to reinvent the chain through a new advertising campaign, a new website, and the refurbishment of several stores seem to have done little to position it among the industry leaders in satisfaction. Even a foray into discounting during the holiday season could not rescue House of Fraser from the lowest rating for perceived value among department stores.
Electrical Retailers: Currys Last in Satisfaction
The NCSI-UK score for retailers specialising in electrical items is 74, tying with supermarkets and just below the average for all retailers. The recession, especially the decline in the housing market, has been especially hard on electrical retailers and has most recently seen Empire Direct, an online electrical goods retailer, go into administration. Cautious consumers have scaled back on purchases of household appliances and other electrical products. Deep discounting in response to this trend has somewhat improved the value proposition, but below-average customer service is a problem. Electrical retailers will not be able to price their way to sustainable improvements in customer satisfaction - survival in this challenging economy will depend on improving service quality as well. With the arrival of successful U.S. giant Best Buy looming in mid-2009, there is increased urgency among UK electrical retailers to raise their game.
Unlike other retail categories, the aggregate of other smaller chains leads the electrical retail industry, scoring an average of 80. The three largest chains all score below the industry average. Comet and Argos are level at 73, despite Comet’s recent efforts to reinvent its store image with a new “showroom” feel and Argos’s well-known catalogue shopping format, now increasingly imitated by Tesco and others. Well behind both is the UK’s largest electrical retailer Currys with a score of 69. Among all of the measured retailers in the NCSI-UK, only Somerfield scores lower. Customers rate Currys’ service by far the weakest in the industry, but this may not be a major concern since Currys traditionally competes more on price than on service. Another bigger concern may be the mismatch between Currys’ online and in-store product availability: customers complain that items researched online are not accessible in the stores.
E-Commerce: Play.com, Amazon UK Lead the Field
The brightest spot in UK retail is the growth of a highly satisfying alternative to the traditional in-store shopping experience: the purchase of a vast array of merchandise via the Internet. The average NCSI-UK score for online retail is 82, well above the retail sector average of 74.8. This is nearly identical to the US experience, where online retail also scores 82 to outpace the retail sector average of 75.2. Both the quality and value of the online shopping experience are rated superior and consumers who have purchased merchandise online are highly loyal to this emerging retail channel. It is no coincidence that much of the recent effort by traditional retailers such as Tesco, Argos, Currys and John Lewis to improve customer satisfaction has involved launches, re-launches, and other investments to upgrade their websites. The linkage is clear: companies that drive an increasing volume of business online are doing a better job overall of satisfying their customers, while those that fail to capitalise on the emergence of e-commerce are being left behind. Debenhams is a case in point. At the end of 2008, the department store ranked 28th among UK online retailers, far behind John Lewis and M&S. Likewise, Debenhams lags both competitors in customer satisfaction.
NCSI-UK measures only the largest pure Internet retailers by name in the e-commerce category, while the online business of traditional brick-and-mortar retailers is included in the aggregate score for “other providers.” Among the measured companies, play.com leads with a score of 87, the highest customer satisfaction score to-date in the NCSI-UK, followed closely by Amazon UK at 85. Apple’s iTunes store matches the industry average at 82, while the UK version of eBay scores somewhat lower but still reasonably strong for a retailer at 79. eBay’s popularity of recent years may be on the wane - it receives the highest volume of complaints and deals with them rather badly, in stark contrast to iTunes which has the highest NCSI-UK complaint handling score to-date.
Only Ticketmaster fares somewhat poorly in the category, scoring 74. This is largely the result of high prices leading to very low perceived value for money. With service charges, processing charges and delivery fees, the total price can reach 35 per cent or more of the cost of the ticket itself.