Magazine article Marketing

Helen Dickinson on Retail: Price-Cutters Will Soon Count the Cost

Magazine article Marketing

Helen Dickinson on Retail: Price-Cutters Will Soon Count the Cost

Article excerpt

These are confusing times to be a consumer in the UK. On the one hand, we believe that the cost of living is going up and that everything is so much more expensive than it used to be. At the same time, the ever-lower prices we pay for products such as a pair of shoes, jeans or even a DVD player would make one think that these are actually deflationary times.

So what's going on? Are we paying more or less overall? Headline inflation is currently running at 2.4% - hardly what you would call out of control.

However, the reality of the situation is that we are experiencing a rapid divergence of costs for goods and services. Think of all the service-related costs we shell out for - public transport, council tax, meals and entertainment, for example. There is no denying that there has been a reasonably steep upward curve on most counts.

Now consider the costs of goods. With the exception of oil, many of these prices are being squeezed further down. Data from the Office for National Statistics showed retail prices fell 0.6% in August compared with a year earlier.

While this trend may be good news for bargain-hunting consumers, it is bad news for retailers who operate in a purely goods-oriented arena. Scan the retail trade press and you will see many references to retailers struggling to cope with the stresses of operating in a deflationary environment. The problem is that the harder they try to shake themselves clear of it, the more mired in deflation they can become.

Think of it in terms of a 'share of wallet' calculation. Out of a nominal pounds 100, let's imagine that exactly half that sum used to be spent on services and the other half on goods. If service costs rose 20%, that would leave only pounds 40 to be spent on goods, meaning that retailers would suddenly find themselves scrambling to secure their market share in the face of falling spending levels. Inevitably, they look to reduce prices and entice more customers.

Their competitors then follow suit and prices just continue to tumble. Before you know it, more products have become commoditised and those lower prices become the acceptable norm. Do you remember when no one would sell jeans for less than pounds 10 or when a DVD player could not be bought for less than pounds 100? It is really not that long ago, but it seems like an age.

Much of this price-lowering has been made possible by improved technology, more efficient manufacturing and supply chain processes - and, yes, in some cases, the impact of cheap Chinese imports. …

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