Lure of discounters will raise price awareness

Consumers campaigning for lower prices may be a tiny group, but their push for cut-pricing will become a powerful market force.

The pressure on prices is hotting up. Last week, Tesco unveiled yet more sizzling sales results – four per cent like-for-like sales growth over the last quarter – and announced a further £380m worth of price cuts for the coming year. Catalogue shopping outfit GUS saw its share price fall 20 per cent as its clothing sales sagged, hit by rising market shares of low price operators such as Matalan, New Look and Peacock.

Meanwhile, the Confederation of British Industry (CBI) reported that, for the first time in its 16-year history, there was no overall increase in retail prices over the past three months. And Bank of England boffin Sushil Wadhwani predicted that mounting price competition from e-retailers would lead to lower inflation rates.

But just how intense is this price pressure going to get? The latest research from the Henley Centre’s Planning for Consumer Change series claims there is no need for retailers to panic. According to the centre, “a full 50 per cent of consumers are exempt from the ‘active bargain-hunter’ label, and a large proportion of the remainder lack the will or the influence to cause much trouble.”

Much of the noise about “rip-off Britain” comes from a tiny group of “confident campaigners”, who account for only six per cent of the population, adds Henley Centre researcher Justin Worsley.

Henley breaks down the rest of the UK population into the following groups. About 19 per cent are very poor and are always loyal to the lowest price. Another 24 per cent are bargain hunters, either because they are thrifty by nature or love the bargain-hunting game. Sometimes, however, they adopt a “bi-modal” approach, paying full prices in categories they really care about, and bargain-hunting in others. A further 25 per cent will take a bargain if it is offered to them but won’t bother seeking it out; while an additional 25 per cent actively shun bargains, largely because they equate cut-price with shoddy, or because they take pride in paying the full price for the best brands.

The Henley Centre also notes that when consumers are quizzed about their shopping priorities, they rarely put price at the top of the list. It claims that there is a generally low awareness of actual prices among consumers, especially the young.

Financial pressures on households are also easing. The average household has half as much again to spend on non-essential items compared with 12 years ago. As high-street prices have dropped and people have become wealthier, there is less consumer concern over finding the lowest prices. Therefore, the research concludes, warnings of consumer revolution in the high street have been “over-hyped”.

Perhaps. But looked at from the sharp-end of day-to-day competitive trading, these Henley figures tell a different story.

Whatever their different reasons, 75 per cent of the UK population – including confident campaigners, bargain hunters, the genuinely poor, and the “I’ll take a bargain if I’m offered it” brigade – is swayed to some degree or other by the discounter’s lure. And there are at least three immediate reasons why we are likely to see more of this.

The first is internationalisation in all its forms: increased travel (such as the “Booz Cruise”), the introduction of the euro, entrepreneurial grey-market shenanigans, and Internet shopping, for example.

The second can be summed up as the “Wal-Mart effect” (although to be fair, Asda and Tesco have been doing it for years). What this boils down to is a realisation that every-day-low-pricing does work if it is based on every-day-low-costs. The job of a business is to drive cost out of its supply chain and to pass the savings back to its customers. In return, they will reward it by giving it a bigger share of their purse (which means bigger market share and greater economies of scale), and by transferring their trust to it, because it has proved that it is “on their side”.

A live test of this theory is being played out in the battle between Boots and Asda/Tesco for the toiletries and cosmetics market, where according to one senior City analyst, margins are “obscenely” high.

Echoing the Henley Centre research, Boots’ Lord Blyth, who is to take up chairmanship of Diageo next year, recently insisted that its customers are not all that price sensitive. This remark spurred US Wal-Mart expert Gordon Wade into predicting that “soon he won’t be Lord Blyth but Lord Wretched”, and Space retail consulting managing director (and Asda adviser) Andy Thornton into saying that “Boots has lost the plot”. Watch this space.

The third key driver is the Internet. It is no surprise that the Henley Centre’s small group of confident campaigners are heavy Internet users, accounting for 80 per cent of all Internet buying. As the Internet rushes from niche market to ubiquity, they are a likely pointer to the future.

Boston Consulting e-commerce guru Philip Evans points out that one critical effect of the Net is that it slashes the cost of bargain hunting. In the real world, the time and money consumers need to spend finding the lowest possible price often exceeds the money they save by achieving it. But on the Net, that trade-off disappears. Bargain hunting becomes so easy, it is almost automatic.

The Net also makes new business models viable – including those which generate profit not by helping sellers sell more efficiently and effectively, but by helping buyers buy more efficiently and effectively. They open up a new dimension of competition: that of “affiliation” or whose “side” you are on.

Put these inexorable trends together and we are faced with an intriguing scenario. Marketers have long assumed that an acid test of brand loyalty is the price premium consumers are prepared to pay. The emerging era turns that on its head: the test of a brand’s loyalty to its consumers is that it strives to charge the lowest sustainable price. Its reward comes in other forms, such as increasing share of requirement, goodwill over mistakes, willingness to receive and impart information, and a degree of brand advocacy.

At all events, in a growing number of categories for a growing number of brands, the discounting tide is rising. King Canutes, watch out!

Alan Mitchell can be contacted at asmitchell@aol.com

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