Alan Mitchell: Brands will pay the price of ignoring discounters

According to retail researcher Verdict, discount clothing retailers such as Matalan, Peacock and Primark have doubled their market share in the past five years, and are set to do so again. Meanwhile, Tesco is entering the fray with its deal to sell the US-based Cherokee casual fashion range.

Price competition is upsetting the apple cart for brands in the fields of clothing, airlines, cars, food and DIY. Or is it? Are brands really under pressure?

Marketers have known for donkeys’ years that consumers are prepared to pay more for recognised, trusted brands, and that low price is rarely a key driver in any market. The reasons for brand premiums are well understood.

A higher price can be a signal of superior quality. A well-known brand name reduces the risk of buying a substandard item. Brands make shopping easier by streamlining and simplifying choice.

In some categories, the “badging” role of brands – what a brand says about me to other people – is extremely important. In addition, a sense of affinity – what a brand says to me about myself – can also be crucial. Brands which provide consumers with such emotional benefits, in addition to the benefits of the product itself, can command a high price premium.

We also know that price and segmentation go hand in hand. Poor people can’t afford to pay as much as rich people, so knowing which price and quality segments you are targeting is vital.

Likewise, price and market strategy go together. Given that a brand can command a premium in the market, brand owners have two basic options. They can sell more at approximately the same price as their competitors (an approach driven by market share and economies of scale), or they can sell about the same quantity at a higher price (a margin-driven approach).

The trouble is, the ease with which these basic principles can be stated seems to be inversely proportional to the ease of applying them. Brands’ emotional added values are forever shifting. For instance, when consumers grow confident about a product or category, the risk-reassurance premium can collapse. Look at the rise of own-label goods in food and of “clones” in personal computing.

Brand-as-default choice is not the only strategy used by consumers to simplify shopping. Consumers can become promotions junkies, for instance, opting simply for what is on special offer. The interplay between these different consumer behaviours quickly creates mind-boggling complexity. Meanwhile, calculating price elasticity seems to be an activity reserved for rocket scientists.

“Brand as badge” can also be a risky strategy: what was to-die-for yesterday can be passé by tomorrow. Affinity is tricky too: “who I am and want to be” fluctuates endlessly with age, experience and mood.

All of which means that getting pricing strategies wrong is as easy as falling off a log. But two other factors seem particularly important today – especially in the UK. First, given a choice between these two basic market strategies (volume versus margin), most UK marketers seem to plump instinctively for margin.

Plainly speaking, the dominant philosophy is: “Forget the oiks with no cash and focus on the guys with bulging wallets”. But when everyone chases after the easy money, the easy money becomes hard to get. Meanwhile, a large part of the market gets neglected, creating a juicy target just waiting to be attacked by upstart low-cost newcomers – as British Airways has discovered with easyJet and Ryanair.

The second crucial factor is related to the first. It is one thing to observe that strong brands can command healthy price premiums – an effect of that strength. It is quite another to conclude that the purpose of building a strong brand is to maximise the money a brand owner can make out of consumers. This philosophy is self-defeating in the long term, because it undermines the foundation of consumer trust upon which brands are built. Nevertheless, it is a very seductive strategy.

What we are seeing today is a consumer backlash against both these tendencies. Companies underestimate this consumer mood at their peril, because the emotional signals sent by a pricing strategy can work equally powerfully in opposite directions. The same emotional drivers of risk and reassurance, convenience and simplicity, badging and affinity, that work so powerfully to create brand premiums can also be appropriated by the discounters.

When the price of a brand varies wildly from outlet to outlet, or from time to time, the consumer incurs a significant risk every time they make a purchase. This creates real pressure to shop around. To reduce this risk, stress and inconvenience, I as a consumer may choose to buy from an outlet with consistent, guaranteed low pricing. In other words, the discounter addresses the same emotional needs – relating to risk and simplicity – from another angle.

“Smart, expert, savvy shopper” is a sort of badging. And it is extremely difficult to feel affinity with a brand if we suspect it is motivated by a desire to rip us off. Thus, a recent Cap Gemini Ernst & Young (CGEY) survey of 16,000 consumers in the US and Europe shows that while “lowest price” is not at the top of most consumers’ minds, “honest” pricing – where the price “has not been artificially increased” – is crucial.

What consumers want from brands nowadays are human values – honesty, respect and consistency – suggests Fred Crawford, global managing director of CGEY’s consumer and retail division. And a brand’s pricing strategy is the acid test of such values.

That’s what lies behind the relentless success of retailers with a “discount” image, such as Aldi in Germany, Wal-Mart in the US, and Tesco and Asda in the UK. It is not about low prices in themselves, but about the emotional signals generated by pricing strategies.

How these emotional signals compete with those offered by traditional brands will vary by product, category, brand and circumstance. But any brand marketer who continues to see the rise of discounters simply in terms of “price-based competition” versus brands’ “emotional added value” is utterly – and dangerously – missing the point.