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The Importance of Pricing for UK Retailers

 4 min read / 

Despite Christmas day being the least active shopping day of the year, the Christmas shopping period as a whole accounts for a quarter of the year’s spending in the UK. Having a successful Christmas period is, therefore, crucial to a company’s success.

Profit Warnings

However, this has not been the case for many major retailers. Debenhams, a British department store, and Mothercare, a British retailer for mothers, both issued profit warnings as sales over the December period fell by 2.6% and 7.2% respectively. Sales are unlikely to be generous in the months to come as company restructuring and further product differentiation is required.

Mark Newton-Jones, chief executive of Mothercare, adopted a similar philosophy to JC Penney’s approach to pricing in 2012.

This was to remove any opportunity for sales and maintain a ‘fair’ price throughout the year, in an attempt to build trust with customers. What he should have known was that JC Penney scrapped that strategy and re-introduced sales and coupons 1 year later, as company shares fell 51% and the CEO was fired. With Amazon offering huge discounts on a daily basis – and providing moments of joy to consumers – the relevance of sales is only continuing to grow.

Pricing

Importantly, offering discounts must be combined with an effective digital marketing strategy – and this is where Debenhams went wrong despite the price cuts. Brick-and-mortar shops have been closing, including those of Marks & Spencer, Toys R Us and Forever 21. Retailers must become more flexible and adapt to consumers who are offered more choice than ever before.

Morrisons, for example, sold more than expected. Morrisons‘ online sales are operated by Ocado – a solely online supermarket – which allows Morrisons to sell more products and deliver to more locations. Morrisons strategically invested in a premium range to customers who are willing to spend more and are more price inelastic, but maintained the exact same prices for everyday goods, despite food inflation.

By sacrificing margin for some goods, and recovering the loss from elsewhere, Morrisons attracts a larger customer base and had its sales rise by 2.8% in the past 10 weeks compared to an estimated 1.7%. This is a similar pricing strategy that Amazon introduced after its acquisition of Whole Foods Market – a failing premium supermarket – which had resulted in 25% more customers in-store one week after the takeover. Amazon is constantly innovating, and has set the benchmark for retailers to match.

Backdrop

In the background to all of this, real wages are falling as inflation rose to 3.1% in November. Food inflation in particular hit 3.6%, and emphasises the risk Morrisons took in maintaining the same prices as 2016 for everyday goods; brussels sprouts and Christmas puddings were both 8% more costly than in 2016. With regards to consumer confidence, Sophie Michael – head of retail and wholesale at BDO – had this to say:

Consumer confidence is low, and shoppers have exercised extreme caution or shopped strategically online, rather than visiting bricks-and-mortar stores or making impulse purchases.

Next, a clothing chain and a competitor to Debenhams, had predicted a fall in sales over December. Surprisingly, Next’s strong online store resulted in sales rising by 1.5% instead.

Since the Brexit vote in 2016, the pound has fallen by 20% relative to other currencies. What this has resulted in is a U-turn of the supermarket industry who were cutting prices in a super-competitive market – but costs are now rising, as 50% of food in the UK is brought in from overseas.

Conclusion

In an increasingly dynamic environment, pricing is not only about being ‘low’, as evident with Mothercare and JC Penney. Attracting customers means strategically pricing products, even if that requires artificially inflating prices – this is what consumers want. The value of purchasing a table for £150, reduced from £210, and forcing the customer to buy within a time frame, is significantly greater. There will always be winners and losers, and manipulating human behaviour will prevail over ‘fair-and-square’ pricing, at least for the time being.

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