We know how the retail culture of discounting has affected retailers but the pressures on manufacturers are if anything more acute
A recent White Paper issued by the KPMG/SPSL retail think tank warned that "the current retail culture of constant discounting, sales and promotions is unsustainable and likely to lead to increasing numbers of insolvencies. Retail in the UK is at a turning point and requires a new set of strategies to survive."
We agree with the conclusion that discounting damages the profitability of the retail sector, but we also believe that pressures on manufacturers are genuine and in some cases may be more acute. What is clear is that their story is not being addressed in the KPMG/SPSL report. The think tank report referenced the effect promotions have had on retailers, but it failed to address the fact that the manufacturers set up and fund these promotions at their own expense.
Through analysis conducted as a core component of our business, we are able to discern that pricing strategies have allowed consumers to pay less in real terms for core grocery items over the past several years to the extent where the average shopping basket of goods has significantly dropped in price. Our findings show that between 2002 and 2007 the price of a shopping basket of 29 like-for-like branded toiletry items actually fell 12% .
The decision to cut prices is made by retailers in an attempt to ensure that they are consistently pricing core goods competitively compared with their competitors. Popular comparison websites, which allow selection and completion of transactions online, have made today's consumers much more knowledgeable about pricing and choice. This increases the scrutiny and pressure on retailers to deliver the best prices.
To preserve operating margins and market value created by this environment, manufacturers have increased their focus on premium product development and retailers have established premium own-label ranges.
It is often the case that a retailer's premium own-label products are actually priced higher than the equivalent branded products even though the perception and initial positioning of own label was purely as a low price alternative offering value for money. In the UK alone, an estimated 20,000 new products are being introduced to stores each month.
Our research also suggests that it is conceivable for today's informed consumer to purchase most, if not all, of their daily essential items on some sort of promotion. By doing so, a wise shopper can live a normal existence in a frugal and inexpensive way, which in itself is a metaphor for the bigger problem at hand.
Not only are prices constantly being pushed down because of competition, but as the amount of products bought on promotion increases it is only logical to assume that the cost to manufacturers continues to rise as they need to maintain these promotions at the store level.
With the recent hikes in cost of several raw materials for staple food products, manufacturers are being squeezed at both ends of their cost base.
The paper's findings concluded that there is excessive pressure on retailer cost. However, this is an industry-wide issue that impacts manufacturers as well as retailers and needs to be understood in the context of the market, which is now more competitive than ever and facing an uncertain economic short-term outlook.n
Jeremy McNamara is the regional managing director of northern Europe for IRI
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