MarketLoop #11, December 1999

No More Price Wars

An earlier BrandLoop looked at how manufacturers should adapt their pricing strategy to reflect changing consumer views and knowledge about pricing. It focused on how many brand manufacturers have not fully understood their price-value equation. This has had implications such as allowing the growth of private label products and confusing consumers about true product value, hence undermining brand trust. A study by Research International (Marketing Week 12 August 1999) has shown that the overwhelming majority of consumers believe that the proliferation of special offers and sales makes them think that the full prices must be too high and that UK stores are greedy in the prices they charge to customers. The same study showed a low level of agreement with a statement that UK stores charge the lowest prices they can to consumers.

MarketLoop shows that the pricing issue has an even wider impact than this. This impacts across categories and countries although some of the conditions are currently more advanced in the UK. "Rip-off Britain" is currently a hot media topic with retail prices seen to be frequently higher than in other countries. The UK situation should be viewed as an indicator of an overall trend that will face marketers. Consumers are looking for pricing transparency.

There are a number of factors that are leading to lower prices:

• Pressure on prices from an anticipated economic slowdown or slower growth scenarios.

• Specific to the UK:

• Media pressure comparing prices with those in Europe and the USA.

• The threat posed by an Office of Fair Trading (OFT) review of supermarket operations.

• The entry of Wal-Mart.

• The rise of cross-border shopping such as via the Internet allowing comparisons.

The implications for retailers and manufacturers are quite substantial. Downward pressure on prices will force manufacturers and retailers to rethink their pricing equation.

An Economic Slowdown?

Through the Loop has been tracking the evolution of marketing strategy through a period of slow economic growth with the Brand Positive™ programme. This tracking has shown that the latest round of price wars started towards the beginning of 1999, at a time when there was still talk of a possible recession and some time before Wal-Mart’s acquisition of Asda. Wal-Mart had already moved into the German market. Consumers have also become more price-aware although they do not buy on price alone. Quite simply, there is more information available about pricing on a national and international scale. Consumers know if they are being overcharged.

Pressure on prices at the retail level will have a significant impact on brand manufacturers. They will be forced to hold their prices steady or, under a worse case scenario, reduce them. Outside pure savings through efficiency, they will have to look at ways in which they can justify their price to the consumer and to the retailer. Consumers do not buy on low prices alone and are prepared to pay a higher price if there is sufficient added-value. There are a number of ways in which this added value may be generated such as by building the brand experience.

The Effect of the Media and Fair Trading

There is intense pressure on retailers to provide transparent pricing policies. Improved consumer information through media campaigns or through comparison shopping over the Internet has shown that UK retailers are maintaining higher margins relative to other countries and that prices are being kept artificially high. This has led to possible government intervention in other sectors as well as supermarkets. The most notable areas under investigation are new car retailing and electrical retail.

In the automotive sector there is a clear reaction to the government threat with both Ford and Vauxhall (GM) announcing that they will be offering substantial discounts on new cars purchased via their Web sites. In this market sector there is additional pressure from the Consumer’s Association, which has announced plans to set up its own car retailing operation.

Reaction to Wal-Mart

Wal-Mart is moving into new markets and having a major impact on them. Its recent entry into the UK grocery market through its takeover of Asda has generated a large number of headlines with some predictions that this move will revolutionise UK retailing, bringing in a low price regime that will transform the whole market. However, it is important to realise that this apparent media hype hides the fact that the UK supermarket price wars are indicative of a whole series of issues in the marketplace. Without the action of Wal-Mart there would still be intense pressure on stores’ prices although changes may have happened at a slower rate. Similar situations are likely in other countries where a new competitor arrives with a different operating model to that already in use.

The UK acts a model to show the impact of Wal-Mart in an already highly competitive market. Safeway, Sainsbury’s and Tesco have all announced wide-ranging reductions in response to Asda’s claim that it would bring US-style pricing to the UK. Asda had stated that it would cut the prices on 10,000 lines by the end of 2000 only a matter of weeks after the takeover although Asda claims that it had been planned beforehand. Tesco responded with a pledge to cut 20% off 1,000 branded lines. Part of Tesco’s strategy is aimed at developing long-term low prices through moving away from one-off promotions. Furthermore, Tesco is a self-appointed "consumer watchdog" with newspaper advertising directing consumers to competitive price comparisons published on the company’s own Web site. Sainsbury’s provided shoppers with a personal letter from the Chief Executive that was also printed in daily newspapers. This promised to continue to provide its customers with "the highest quality food at the most competitive prices." Sainsbury’s also pledged to match its competitors’ prices.

One of Asda’s weapons to promote pricing transparency is the development of a new shopping Web service in which it has invested over £1 million. This compares prices across Web sites for books, CDs and other goods. Valuemad.com will access not just the Asda site but also other retailers. As well as reinforcing Asda’s claimed low prices, this initiative will encourage the retailer to maintain its competitive pricing. This is the first move of its kind from a traditional UK retailer. Similar initiatives are in place that compare prices across e-retailers in different countries.

Cross-Border Shopping

The rise of the Internet as a communications and retailing channel has accentuated the situation. Consumers are able to compare prices across retailers and countries much more easily. In addition, there are so-called shopping-bots that are the new intermediaries. These are intelligent agents that search for products across different on-line retailers, displaying the range of prices on the screen to enable easy comparisons. While the purchase criteria may be wider than just the price, this development highlights the speed and ease of comparison. Furthermore, it makes it increasingly difficult for manufacturers or retailers to operate discriminatory pricing policies and transparency becomes increasingly important.

Summary

Price war? What price war? The recent developments in the UK are a clear indicator that markets are moving towards a longer-term position where price ceases to be a differentiator. This reflects the consumer perspective on the pricing issue where consumers are able to differentiate between different stores’ pricing much more easily as they have the information to help them.

The rise of new intermediaries on the Internet make it even easier for consumers to compare prices across retailers and countries. This has implications not just for manufacturers but also for retailers as it effectively removes price from the purchase criteria. It will become increasingly difficult to sell at a higher price unless there is sufficient added-value.

The move away from price competition is already visible in forecourt retailing where petrol prices are at the same level across different operators. Simply stated, any operator cannot afford to sell at a higher level than its competitors and the prices are the lowest possible. Added-value may be provided through additional services on the forecourt or improved customer knowledge. Major price initiatives from the grocery retailers are becoming increasingly frequent to the extent that they are moving rapidly towards a general lower level of prices. UK inflation has been relatively low for several years and is forecast to remain at this level. The retail issue and use of emerging purchasing channels such as purchasing via the Internet will ensure that it stays low for some conceivable time. Cross-border shopping will enable comparisons to be made of prices in different countries, allowing consumers to choose in which country they make their purchases.

The implications are further pressure on suppliers throughout the value chain to minimize their costs. While there will inevitably be a move away from short-term price promotions, as these will have less relevance, there is little doubt that manufacturers and their suppliers will have to make significant price reductions. Furthermore, it will not be possible to hide price rises within inflation and it may be necessary to reduce them. There are signs that prices are being held steady in the car market, possibly in anticipation of an unfavourable MMC report for the industry.

However, cutting costs through greater efficiency is only part of the solution. It will become increasingly difficult to command a price premium unless there is a very clear product differentiation that can be recognised by consumers. Some leading brands are already pointing the way forward in this respect. Nescafé, amazon.com, Persil, Stella Artois and Virgin have shown that a positive marketing orientation can help them to build the necessary added value. This not only protects them against difficult trading conditions but also allows them to build market share, sales and brand value. Building brand values and going beyond them to create brand experiences is a positive orientation. This ensures that a company’s products and services avoid commodity status and there is added value for consumers. Other companies and brands may find the new environment more difficult and will struggle to provide any significant differentiation and consumer value.

This situation in the UK market should be taken as an indicator of what can happen in other market sectors and in other countries where manufacturers are faced with intense pressure on their prices, either from retailers or from long-term low inflation. Through the Loop is tracking a number of leader brands as part of its Brand Positive™ programme to identify key brand management issues under this scenario. This builds into a comprehensive analysis of brand management best practices that can be applied to different countries, brands and categories.