Discount price wars

Friday, 25 March 2011 19:55

The media is awash with the major retail chains discounting milk prices to never-before-seen levels. Other sectors are also seeing incredible price slashes for key products, and many businesses are worrying about how this kind of discounting affects their brands.

Welcome to the price wars.

Discounts to branded products are often met initially by consumers with glee, seeing products brought closer to their reach. However this can wreck damage to a brand. Over time if such discounts are continued they tend to dangerously erode the cachet of a brand, and this can lead to a gradual but often irreversible loss of brand power.

The price wars thus far have been around house brand commodities such as milk. These put pressure on processors and then back to farmers. In this case, however pricing wars are putting pressure on brands that companies like Fosters have spent billions of dollars building and protecting. The issue at stake here is protecting Brand Equity.

Fosters vs Loss Leaders

Fosters and other alcohol beverage producers have recently launched into overdrive to stop key retailers (including Coles) from using their products as loss leaders. Fosters have now refused to sell their merchandise to retailers who loss lead with their products, and have gone on raids to Coles to buy back their products.

John Pollaers (managing director at Carlton & Untied Breweries) last month withheld supplying for selling their beer below cost. Chris Flaherty, wine marketing chief, noticed Coles advertising Penfold 389 (baby grange) at less than $37 per bottle. He sent staff to buy as much of it from Coles shelves as possible. He ended up purchasing 10% of its annual allocation (around 1000 cases). The Fosters cellars are now packed to the brim with products that would normally be in consumers' hands and fridges. They will have to decide when to let these back onto the market, and how to further protect their brand from a slide downwards.

Legal Action

Another tactic has been to flex legal muscle by recourse to the Consumer and Competition Act which gives scope to producers to stop supplies to protect their brands. Competition laws rule out price maintenance whereby a producer dictates retail prices. However, the Consumer and Competitions laws do allow producers to withhold their products if goods are being advertised and sold below cost. This has been the exemption argued to defend resale price maintenance cases. The aim here is to prevent brands being treated as cheap and discounted goods that ultimately have deleterious effect on profits and leverage.

Value, Price and Competition

Central to to the way a brand is perceived by consumers is the matter value vs competition. Value can be understood as the relationship between quality and price. However, prices are easier to change and tamper with than quality. Quality is a judgement made within the context of the experiences and predispositions of consumers; consumer commitment ranges from unshakable through to flimsy. For an established brand, discounting can have a severely adverse effect on value.

Value and price exist somewhat inter-dependently in consumers minds. Deep discounts can indicate to consumers that something is wrong with the product. And frequent discounting acts to lower brand value through a subconscious reaction by consumers who believe quality (as well as the associated cachet) has also been lowered. What happens then is that the brand is bought on only through discounts and deals.

Discounting Can Affect Entire Categories

Such discounting can effect not only single brands, but entire categories. People rarely expect to pay premium prices in categories such as tires, mattresses or bottled water. Constant discounting on these products has resulted in categories where consumers expect to be offered discounts no matter which brand they desire.

In the current environment, consumers have access to more retail information than they have ever had thanks to the internet, and the rise of discount aggregation services such as GroupOn. Today brands need to be particularly sensitive about when and how they offer discounts, as well as the way retailers and other onsellers present and price their goods and services.