Breaking the fall

Faced with grey-market imports, price-cutting retailers and moribund inflation, it’s not surprising that, on occasion, marketers have turned to price-fixing to maintain revenue and margins. But given this is largely illegal, is there any legit

Brand-owners are under attack from all sides as they try to control the prices they charge for their products. Discounting by retailers, deflation and scrutiny by competition regulators are combining to make it ever more difficult for marketers to influence the prices of the brands they create.

Toy manufacturer Hasbro has learned the hard way that there has been a fundamental shift in the power of brand-owners to influence price. The company has been fined &£4.9m by the Office of Fair Trading (OFT) for price-fixing in the UK toy market – the fine was reduced from a staggering &£9m after Hasbro agreed to co-operate with the investigation.

Hasbro is the latest in a long line of companies to face stiff fines for price-fixing, as competition authorities crack down on what is seen as a widespread problem of market abuse. Fines for price-fixing have hit record levels over the past five years, with eight pharmaceuticals companies still smarting from the &£542m in fines imposed last year by EU competition authorities over vitamin price-fixing. Nintendo recently picked up a &£93m price-fixing penalty, and four plasterboard makers received a combined bill of &£306m last month for running a cartel. In the UK, suppliers and retailers of replica football kits are being investigated for price-fixing, and seem likely to face stiff fines.

Spare us the cutter

In the consumer goods sector, price-fixing is emblematic of a wider crisis facing brand-owners. However much effort they put into branding, advertising and all the other methods at their disposal to sustain a price premium, there is always some retailer waiting in the wings to cut these prices down to the bone.

The OFT’s investigation into Hasbro found that, in the first six months of 2001, the toy company forced ten UK wholesale distributors to sign contracts promising not to sell Hasbro toys below list price without permission. This was backed up by the threat of losing access to Hasbro toys and merchandise, which include Action Man and Star Wars. The toy giant hoped that, by keeping wholesale prices at an inflated level, it could stop independent retailers – which source their toys from these distributors – from undercutting the giant chains which buy toys directly from Hasbro. The company insists it was a short-term problem, associated with now-departed sales staff, and says it made no extra profit from it. These claims will be scrutinised in an appeal lodged by Hasbro against the size of the fine. The OFT is looking at further allegations against Argos and Littlewoods, which have arisen from the Hasbro investigation – though it refuses to specify what the allegations are.

Clearly, illegal price-fixing is no way out of the problem of falling prices and brand-owners’ worries that power over pricing is slipping from their grasp. It may offer short-term protection from price-cutting, but it also raises the possibility of a crippling fine. When it comes to the famous “four ps” of marketing – product, place, promotion, and price – many marketers feel they have so little control over the last factor that they give up trying to influence it. Price-fixing is often a symptom of brand-owners’ inability to influence pricing within the scope of the law, and to maintain their own margins rather than boosting those of retailers.

“The days of a command-and-control approach to pricing by brand-owners are gone,” says Dr Susan Baker, professor of marketing at Cranfield School of Management. She sees the Hasbro case as symptomatic of the battle between brand-owners and retailers over how brands should be priced and presented to the market. She says: “Both parties are trying to manage more directly all elements of marketing to support their brand propositions.” But she thinks marketers have lost the battle, and are having to hand over control of pricing directly to the retailers.

Fade to grey

But while some examples of price-fixing are deemed illegal and subject to huge fines, in other cases brand-owners have managed to stop retailers selling goods at a discount. Levi’s victory over Tesco, which had been selling its jeans at reduced prices, could be seen as an example of legalised price-fixing. The brand-owner was able to win its case because Tesco was sourcing jeans from outside the European Union, on the “grey market”, in contravention of EU rules. The EU block exemption on cars, which enables car manufacturers to supply their own named retail outlets exclusively is another example, although it is finally being dismantled.

It took many years of campaigning for resale price maintenance on over-the-counter drugs to be overturned (MW May 17, 2001), and, in the case of publishing, for the Net Book Agreement to be scrapped. While consumers may have benefited from lower prices, brand-owners have long argued that the public will suffer in other ways – by seeing local pharmacies and bookshops undermined while the major chains wipe out all competition by offering lower prices.

The argument that lower prices are good in their own right has taken a knock in the case of meat production. The search for low prices has been held responsible for the chain of events that led to the outbreak of foot-and-mouth disease, and even for mad cow disease. The increasing popularity of more expensive organic food shows that many people are willing to pay extra for reassurance of quality. The consumer revolution of the Nineties, when prices were constantly slashed, has in the eyes of many resulted in a bargain-basement economy of low wages – such as those paid to workers in the Far East – and poor quality. Cheap maybe, but not necessarily cheerful.

Lost in the supermarket

While superstores such as Asda and Tesco have been building their brands by undercutting others’ pricing, it seems that supply-side marketers have lost the initiative in this vital area. Many feel it is time these marketers took the initiative and fought back on behalf of brand-owners.

A survey of 250 marketing directors undertaken in September by PA Consulting found that pricing is the area where marketers feel they have least influence. Only 39 per cent believed that they strongly influenced pricing.

“Pricing is one of the biggest challenges for marketers, it is an area where they struggle most,” says PA Consulting’s Peter Fisk. “They are good at creating value for customers, but poor at recapturing it. When they create a proposition for the customer, they need to think about how they manage that customer’s perception of value.”

Fisk says marketers should take steps to ensure customers understand when they are being offered greater value, and are therefore prepared to pay for it. He points to examples such as JD Sports and Nike, which work together to offer exclusive training shoes at premium prices; and Pizza Express and Sainsbury’s, which have an exclusive distribution deal.

Others believe it is inevitable that pricing will be determined by retailers. Nick Shepherd, a long-serving marketer at Kraft and now vice-president of category development for food across Europe, says: “Pricing has always been critical, but it has never been something that manufacturers have controlled. As a manufacturer, you have ideas about the level at which you would like products to be priced, but the retailer calls the shots with regards to the margins they think they should make.”

Shepherd believes that the most worrying trend in marketing is price deflation. This is occurring in many sectors, and he says it can become as uncontrollable and dangerous as inflation. He points to price promotion activity, which he believes is at an all-time high. Should deflation set in, as it has in Japan and, some fear, will in the US, marketers will see their ability to influence pricing undermined even further.

Pump it up

The Government has hailed falling prices in everything from milk and groceries to cars and perfumes (though not, of course, house prices) as a great victory for its price-busting tactics, which include giving greater teeth to the OFT through the 1998 Competition Act. It has won the backing of consumer groups, such as the Consumer Association. Principal policy adviser Phil Evans says: “Price-fixing is one of those things that, until you start looking for it, you don’t find it. There were cases in the past, but the OFT could only slap people on the wrist. It never ceases to amaze me that you still get people running cartels, no matter how many times you fine them.”

In the value economy, never has the need to build premium pricing – and thus protect brand-owners’ margins – been greater. If Western economies really do have inflation beaten, marketers will have to work harder than ever to explain to consumers why they should pay that little bit more for something that offers greater quality. Stella Artois has positioned its lager brand as “Reassuringly expensive”. Marketers need to get across the message that the flipside of that is “worryingly cheap”.

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