The UK has not formally left the European Union yet, but the effect of Brexit is already taking hold across the economy in the form of inflation.
At a time when price rises threaten to derail brands’ carefully cultivated relationships with consumers, how should marketers respond?
A Marketing Week poll on Twitter reveals 44% of marketers currently have primary responsibility for pricing, while 27% say they don’t but should. More than a third of respondents (36%) do not think pricing should be a marketer’s responsibility.
Does marketing have primary responsibility for pricing in your organisation – and do you think it should?
— Marketing Week (@MarketingWeekEd) January 10, 2017
Even marketers who have control of pricing currently have limited room for manoeuvre. The steep fall in the value of the pound since last June’s EU membership referendum has shaken brands and consumers by putting price rises firmly on the agenda for 2017. As the weakening currency has pushed up import costs, eating into margins, more and more companies have warned that customers will have to foot the bill at the checkout.
This is a huge adjustment after years of record low inflation and even temporary deflation. The latest consumer prices index shows that rising food prices and air fares pushed the headline rate to 1.6% in December, up from 1.2% in November and the highest level since July 2014. The Bank of England has predicted that inflation could reach close to 3% this year as the Brexit fallout continues.
No department is better placed that marketing to understand how pricing affects customer buying habits, yet in recent years many marketers have ceded responsibility for prices to other business functions. They therefore face a challenge to regain control or at least influence, over this vital activity.
It is the responsibility of the buying directors within the business to forensically track the prices of our competitors.
Adam Zavalis, Aldi
Approaches to pricing vary from brand to brand, requiring marketers to work closely with other business stakeholders. For example, the remit of Aldi marketing director Adam Zavalis extends to corporate buying, meaning that both business functions work on pricing.
“It is the responsibility of the buying directors within the business to forensically track the prices of our competitors and ensure we offer our customers unbeatable prices,” he explains. “The marketing team communicate our price leadership proposition through innovative and engaging campaigns to consumers.”
How to cope with inflation
Retail brands are taking matters into their own hands to deal with the effects of the weak pound. Earlier this month, clothing retailer Next warned that its prices could rise by up to 5% in 2017 as it issued a profit warning following disappointing Christmas sales figures. Premier Foods, maker of Mr Kipling, Homepride and Bisto, also announced this month that it is in talks with retailers about raising prices by around 5%.
There appear to be few product categories where consumers will escape the sting of hiked prices. The Society of Motor Manufacturers and Traders has predicted that the average cost of a car could rise by £1,500 if the UK withdraws from the European single market following Brexit, as prime minister Theresa May has indicated it will, while companies such as Unilever, Mothercare and Carpetright have also warned of price rises as a consequence of increased import costs.
As inflationary pressures mount, brands are looking to the marketing department to help them reassess their pricing strategies and chart the best way forward. Price remains one of the ‘4Ps’ that make up a marketer’s responsibilities according to classical theory (alongside product, promotion and place) but many marketers stumble with this aspect of their role.
Besides simply putting up prices, many UK businesses are restructuring their operations to offset the impact of inflation. In a statement last September, Next noted that Sterling’s devaluation would not materially affect the business until Spring 2017 “because we had already covered most of our [currency] requirements in the forward markets”. In other words, Next was able to delay the effects of Brexit by purchasing currency trading rates from the markets before the pound slumped.
Such favourable market terms are no longer on the table, and the benefits of such currency ‘hedging’ will soon run out for most companies, but price rises do not necessarily have to be the first recourse if brands can take steps to offset costs internally. Next is reshaping its supply chain in order to bring costs down, such as by developing new sources of supply in Burma and Cambodia. In addition, it will look to take advantage of “increased competition and improving efficiency in mature territories” such as India and China.
When discussing the anticipated 5% price rise, Next shows a careful understanding of how it plans to manage the hike in order to minimise the effect on revenues. It states that a retail selling price increase of 5% “would result in a fall in unit sales of -5.5% and a fall in like-for-like sales value of between -0.5% to -1.0%”.
This suggests that the brand plans to reshape its product and marketing mix to encourage customers to spend more on higher-priced items, thereby reducing the effect on profits of an overall fall in customer numbers.
More careful promotions
In the UK grocery sector, meanwhile, retailers are reducing their reliance on promotions to allow them to pass on more costs to customers without necessarily raising standard prices. The latest figures from Kantar Worldpanel show that the proportion of sales sold on promotion in the 12 weeks to 1 January 2017 fell to 37% – the lowest level over Christmas since 2009.
Overall, grocery prices rose in the period by 0.2 percentage points, the first increase in over two years. “Both consumers and retailers will be looking at ways to avoid increasing the cost of the weekly shop [in 2017],” notes Kantar’s head of retail and consumer insight Fraser McKevitt.
Much will depend on how successfully suppliers and retailers can negotiate new price deals. Last October, Unilever became embroiled in a public dispute with Tesco after reportedly demanding a 10% price rise for its brands to account for higher import costs. Tesco refused, Unilever cut its supplies and panic ensued as brands such as Marmite and Ben & Jerry’s temporarily disappeared from shelves.
Although Unilever and Tesco resolved their dispute, this kind of conflict seems likely to recur among other suppliers and grocers – particularly as retail brands try to keep customers on-side by holding prices as low as possible.
Richard Lim, CEO of research consultancy Retail Economics, believes retailers will come under increasing pressure to pass on price rises to customers. “In the supermarket and grocery industry, retailers typically work on around 3% to 5% margins, so they have very limited ability to take on the burden of additional costs,” he says.
Lim adds that while retail analysts were surprised by the public nature of the Unilever-Tesco dispute, “that would be typical of thousands of negotiations that are going on” across the UK economy. “All retailers will be talking to suppliers to look at how they can spread the pain of the increase in exchange rates throughout the supply chain,” he says.
The role of marketing
Marketers play a vital role in helping companies get their pricing right. In the price section of Marketing Week’s Mini MBA training course, professor Mark Ritson contrasts the other ‘Ps’ in the marketing mix, which create value for the customer, with pricing’s role in “harvesting” value for the company. “In that sense the pricing P is often seen as the most important marketing moment because this is the chance to find out whether our offer meets with customer satisfaction,” he says.
Ritson also runs through some of the different approaches to setting prices, such as cost-plus pricing. This involves simply working out the cost of making each product, then adding a margin on top to arrive at the price. Many companies adopt this approach because it is simple and easy to execute, but Ritson suggests it is poor marketing because it does not take into account wider market conditions or what the customer is really prepared to pay.
The marketing director will be the key influencer, but it’s also important that marketing is collaborative across the business.
Chris Daly, CIM
Instead, he argues in favour of value-based pricing, which involves conducting research to understand market orientation and customer segments before setting prices that match the level of value that customers attach to a product or service. “Ideally we’re going to set our price as closely to, or directly on, the perceived value so [that] we are harvesting the maximum amount of profitability,” he says.
Chartered Institute of Marketing CEO Chris Daly agrees that marketers need to have a firm grip on the intricacies of pricing. Although price decisions are often taken at board level with input from finance and data specialists, he believes that marketers should have a decisive say by speaking from the customer’s perspective.
“A fundamental part of the marketer’s role is to understand the buying journey of customers right from beginning to end,” he says. “Therefore they must be able to analyse and measure the customer data that’s available across multiple channels these days to understand whether a product or service is resonating with customers and, if not, whether pricing has a part to play.”
Daly suggests that marketers are needed as a check against finance directors who may wish to raise prices as an antidote to falling margins. This could include marketers undertaking “scenario planning” to understand how price rises could impact customer perceptions or the brand’s position in the marketplace compared to its competitors.
“The final decision [on price] sits with the chief executive but before he makes that decision, the last person he should speak to is his marketing director or chief customer officer,” says Daly.
“He should ask: ‘Are you confident in the assumptions you have made if we take this decision?’ [The marketing director] will be the key influencer, but it’s also important that marketing is collaborative across the business.”
Winners and losers
So which brands will make the most of this new era of inflation, and which look likely to struggle? The 2008 financial crash and subsequent recession led to a fundamental realignment of the UK retail sector as customers flocked to discount retailers at the expense of much bigger, mid-market alternatives.
Since that time Lidl and Aldi have doubled their combined market share from 5% to 10%, forcing the ‘big four’ supermarket chains to respond by cutting prices and increasing promotions. The likes of Tesco and Morrisons have shown signs of recovery over the past year, but the economic uncertainty generated by Brexit looks set to spark a fresh price war.
Lidl’s new strapline ‘Big on quality, Lidl on price’, shows a reaffirmation of its price messaging after focusing on product provenance in recent campaigns. Zavalis at Aldi, meanwhile, says the retailer is committed to “increasing our price leadership position in 2017”, irrespective of grocery price inflation.
“Our current campaign highlighting being voted Britain’s best value for money supermarket by Moneywise reaffirms that no matter what the economy might throw at us, customers can trust Aldi to remain the UK’s lowest-priced supermarket as we continue to offer British shoppers award-winning and responsibly-sourced quality products at the lowest prices,” he says.
Lim at Retail Economics agrees that price rises and falling consumer confidence will prompt more customers to opt for discount options. He adds, though, that the ‘big four’ are better placed to compete on price than they were during the recession thanks to steps they have taken to make their UK operations more efficient.
“We’re predicting that inflation will hit 3% this year and that real earnings will be declining by the second half of the year,” says Lim. “That will really squeeze disposable incomes, so we’re expecting to see what we saw in the last financial crisis, which is consumers trading down – such as going from luxury brands to own label brands. That puts the discounters in a really good position.”
A Marketing Week article from 2011 supports this assertion. A YouGov study at the time showed 60% of shoppers had started buying more supermarket own-label products, and an article the following year revealed a 6% decline in the sale of premium own-label goods coupled with a 13% rise for budget ranges.
On the flip-side, some UK brands with a strong focus on exports are prospering from the fall in the pound as their goods become cheaper to sell overseas. A report by ratings agency S&P last September predicted a £20bn boost to exports in the year following the Brexit vote. Protective clothing maker Armadillo Merino, which exports to countries around the world, is one UK brand that has seen its overseas business expand significantly since Brexit (see Q&A below).
— Enda Conway (@EndaConway) November 8, 2016
Regardless of how brands choose to tackle rising inflation in 2017, the example of Toblerone should serve as a cautionary tale for all marketers. In November, the Mondelez-owned brand reduced the weight of some of its chocolate bars in the UK by increasing the space between its triangular segments. Toblerone explained that the change was due to the rising cost of ingredients and that it had opted to reduce the product’s weight rather than put up prices. However, the move proved to be a PR disaster for Toblerone as social media users complained about feeling short-changed and deceived by the brand.
As more and more companies face up to rising costs and squeezed margins, marketing must play a central role in navigating post-Brexit price pressures – and averting similar blunders.
Positive news for export brands
Q&A: Andy Caughey, managing director, Armadillo Merino
Have you seen a positive impact on exports from the falling value of the pound?
We have seen a lot of positivity as a result of the weaker pound. We’re predominantly export driven, and a lot of our sales are in the EU. We are buying and selling production into the EU so our exposure is reduced by trading in the same currency. The upside is that our profits can be taken in Sterling.
What are your routes into the export market?
A lot of our business is sold [wholesale] into commercial organisations and institutions and they want to buy in local currency. European consumers are pretty savvy about what’s been happening with Sterling so we are seeing more activity on the website from them. That’s upsetting some of our European retailers because they say consumers are buying from us directly instead of their retail stores.
Have your import costs gone up?
Yes, and we’re very aware of that because we’re pushing certain price points [in the UK] as it is. We are trying to hold critical price points as much as possible but you get to a point where, with the ongoing weakening of the pound, you can’t carry that anymore. We have made some incremental changes, because we didn’t want to hold off and then make it all at once. We made one correction in December last year but it looks like we’re going to have to make a further correction as well.