Pricing changes need careful consideration
And as well as the logistical challenge the 2½ percentage point increase presents, the question of pricing is also one which appears to be at the front of many retailers’ minds.
The economic downturn placed enormous pressure on UK businesses, forcing them to implement discounting to maintain volumes. Therefore the intention to raise prices is an understandable and necessary reaction. In fact KPMG research showed that the majority of firms felt extreme, industry-wide discounting that has become more common place is unsustainable in the long run. It seems that some kind of price rise around the VAT increase is therefore necessary to protect margins.
However, retailers are bearing in mind that the timing must be right, as in today’s price-sensitive market, any increases may well have a damaging effect on sales volumes. In the wake of the downturn, discounting has re-set the price baseline for consumers, who are now often unwilling to pay more for goods and services, meaning that companies need to be wary of first mover disadvantage.
Even if retailers chose to absorb both the VAT increase, and the ever rising fuel prices the country is subject to, then the extra cost would surface elsewhere along the supply chain. While on the face of it lower prices may seem beneficial to the consumer, those who have money tied up in relevant pensions or investments will need to see some return.
So, the bottom line is that retailers need to understand the overall impact on profitability.
Large-scale price increases could risk damaging consumer confidence and economic recovery, by causing an unexpected inflation spike on the high street at a time of fragile market conditions.
And any short-term boost to profitability may be offset if longer term demand in the economy is dampened by pushing up inflation. With economic forecasts predicting a slowdown in the New Year, this could threaten an already precarious recovery.
Businesses need a robust pricing strategy, built on a thorough understanding of their customers, and need to be aware that their customer base may have changed during the recession. In the US, for example, bargain stores are picking up a broader range of shoppers and have become the success story of the recession.
It’s worth bearing in mind too that according to some KPMG research, almost two thirds of business leaders admit that recession price reductions were implemented without fully understanding the impact on demand. Furthermore, 64% of firms face a significant challenge to obtain accurate data on the impact of price on sales performance.
In this fragile economic environment, it is more important than ever for businesses to have access to the data and analysis to understand the impact of price changes on overall profitability and performance and the research demonstrates the difficulties retailers have in accessing and analysing that data.
Given that the majority of companies recognise that it will be a challenge to increase prices from the levels set during recession, it is critical that they understand the impact of price rises on their markets, before making any sudden changes to pricing structures to coincide with the VAT increase.
Helen Dickinson is Head of Retail, KPMG
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