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Based on the plethora of Christmas television advertising in most of Europe, you would imagine that this is the absolute bonanza time for department stores and supermarkets.  Well, it is and it isn’t.  It is for all retailers, as considerably more goods are sold at this time of year during the long build up to the excess materialism which characterises Xmas.  But it isn’t because we live in strange deflationary times and although certain production costs have risen, manufacturers and retailers are finding it very hard to raise prices because when they do, sales fall.  Like the majority of the European population I was born after the Second World War so I have no actual experience of deflation where prices remain stable or fall, but don’t go up.  Unless you were born in the 1930s you will not have experienced deflation either.  I wrote about this in December last year when I forecast that the European Union (EU) was heading for a period of deflation that would make the rich even richer and the poor even poorer.  Unfortunately I was only too prescient and now the President of the European Central Bank (ECB), Mario Draghi, is expecting deflation to exist well into 2016.  Draghi is optimistic that inflation will return when the previous year’s higher oil prices eventually drop out of annual comparison.  He may well be right although, as I explained last year, historical evidence shows that as deflation takes hold and people’s expectations change, it develops into a quagmire that becomes hard to escape.  And that is exactly what retailers are currently discovering, and what the data in the chart above shows.  Remember that all the manufacturers, wholesalers and retail managers behind the products you are buying in the shops, or on-line, have never experienced a period of deflation before.  So their background experience, training, and education hasn't equipped them in any way to cope with today's fundamentally different trading conditions. As a sobering example, one chief executive with no understanding of how to react in these deflationary times, is Marc Bolland, the Chief Executive of Marks & Spencer (M&S), the retail chain that has shops on most U.K. High Streets.  The stores sell clothes, the category for which it’s best known, and food.  Bolland in early November announced that M&S’s financial results for the last six months showed that sales of clothing and general merchandise were down 1.9%.  As he then remarked, M&S had chosen to: “hold our breath and say we make sure we deliver our gross margin by maintaining prices,” rather than joining in with the widespread discounting on the high street.  Bolland may well live to regret this.  He has struggled for several years to increase M&S clothing sales and trying to squeeze more profit out of customers, as well as cutting investment, is not wise when deflation rules.  This is the time to improve what’s on offer for clients. Wringing more profit out of M&S sales may please City speculators, help the share price, and bolster Bolland's ego but it is very poor retailing practice to take such a short term view.  I expect that the next time Bolland reports financial results clothing sales will have fallen further.  I have anecdotal evidence showing the effect that Bolland's strategy is already having on M&S’s clothing business.  A couple of weeks ago, my wife bought several pairs of trousers and jeans at M&S to try on at home - she'd learnt by experience not to trust the colour when viewed under the M&S store lighting.  Bear in mind that M&S always had a good reputation for the high quality of finish of their clothes, as well as the technology of the fabrics used.  So my wife was subsequently dismayed to find that the trousers and jeans she’d chosen, on examination, were of really poor quality, finish and fabric.  In fact they were so poorly made they were barely on a par with Primark quality (the very cheapest on the high street) but all, of course, at the most expensive of M&S prices.  They were promptly returned and my wife explained the reason.  The charming M&S sales girl commiserated with her and told her that a lot of women are saying the same thing…  I was shocked by this dramatic decline in M&S quality and dug around to find how it had come about.  I discovered that in November last year (2014) Bolland hired the two Lindsey brothers, Mark and Neal, under a confidential contract worth reportedly “millions”, and the results of this decision are just feeding into the shops now.  Indeed, Bolland says as much.   Although not really known outside the rag trade, the secretive Lindsey brothers, based in Hong Kong, are credited with improving margins by using Asian dealers, squeezing suppliers, and radically cost cutting for the retail chain Next.  However many millions are being paid by M&S it was clearly enough to motivate the two multimillionaire brothers, now in their sixties, out of retirement to “improve” the M&S supply chain.  Bolland credits this move, as well as not discounting, with the when he announced improved M&S profits in early November.   But squeezing suppliers to the bone can only result in poorer quality, and combining this with uncompetitive pricing will alienate previously loyal customers.  Charging more for less may increase profits in the short term but it will destroy a brand like M&S in the longer term, especially in these deflationary times. As for its food sales, M&S likes to consider itself as a high end grocers specialising in relatively expensive ready to cook meals as well as general groceries, bread, fruit and vegetables.  The quality of the ready meals and the groceries has always been high and, because of the convenience of being in the middle of most high streets, the food stores have developed a steadfast following.  Up until fairly recently.  Apart from special, ready-meal-deals occasionally available in selected food stores as an incentive to draw customers in, (three courses and a bottle of wine for a very reasonable £10), the high price of M&S food means that it is bought mainly as an emergency or top-up buy.  There are very, very few offers to tempt the less well-off.  And, of course, nowadays more and more people consider themselves to be less well-off. No other major retailer is behaving like M&S.  Walk around any European supermarket and you cannot fail to notice the number of special offers, like the infamous ‘buy one get one free’ (bogof), or ‘buy two for a special price’, or ‘buy at half price’, etc.  A number of these offers may not be authentic in that the offer price has been running longer than the normal price, so the offer is now the normal price, but nevertheless many offers are genuine.  In fact, according to market research company IRI Infoscan data, more than a quarter (26.8%) of all the goods available in European supermarkets have some kind of promotional offer.  IRI is globally the fifth largest market research group and they collect scan data from supermarkets to help them analyse and predict sales.  This data is showing that at present it is very hard for manufacturers and retailers to raise prices whilst deflation prevails.  The supermarkets are finding that the sales volume (the quantity of goods sold) rises when goods are on promotion, but the overall value (the profit the retailer and manufacturer make) in most categories falls.  This causes a dilemma – do you sell more using a promotion but make less money, or do you hold your normal price and sell less?  Nobody else seems to be following the M&S strategy of maintaining prices but cutting quality. The tactical struggle to survive deflation is being fought across the whole retail sector, although it is particularly visible in supermarkets.  But it is evident when you look into the figures that this holds true for almost any product at the moment, not just food:  Increase the price and fewer customers buy, in fact, unless goods are on promotion fewer customers buy.  Right across Europe, up until March last year, the biggest price rises in supermarkets were in the alcoholic drinks category, where prices rose 2.6%, causing a 1.1% fall in volume sales.  However much customers like a tipple there is a limit to what they will pay for the pleasure, particularly during a period when salaries and wages haven't risen significantly, if at all.    At the moment, due to the deliberate policy of the Central Bank, the only thing going up in price is housing and that, of course, means that people have even less to spend on clothes and food.  This is especially true in the South East of the U.K., particularly in London.  After increased essential housing costs, most people are very careful how they spend their money.  Their expectations about values have changed and they are now used to a high volume of low promotional prices. IRI Infoscan scan data shows that an astonishing 55.8% of the products available in U.K. supermarkets are on some kind of promotional offer.  In living memory this is a unique situation for the retailers, and shoppers are primed to assume supermarket goods will continually be discounted.  The prices for goods are being set at a lower, deflationary level and shrewd shoppers expect that.  Some supermarket retailers and manufacturers did try to improve their profit margins, and prices rose 3.2%, but the result was a fall in volume sales of 2.8%.  This situation is partly the result of the general deflationary situation across Europe caused by the low aggregate demand created by the credit bubble that popped in 2008, and partly the success of the German discount brands Aldi & Lidl.  Both these privately owned yet huge international supermarket chains have shown U.K. shoppers just how complacent their national supermarkets, led by Tesco, have been. British food shopping produced some of the fattest profit margins in the global grocery business before 1990 - when Aldi opened up shop in the U.K., followed by Lidl five years later.   Around that time I was helping Sainsbury's present their annual financial results and I was always surprised at how dismissive the directors were when any comparison with “discounters” was made.  Today the financial strength and efficiency of Aldi and Lidl is really hurting all the native British supermarket groups as their market share shrinks.  The reaction so far from these former supermarket titans is to put a high proportion of their goods on promotion to appear to be competitive.  They could all learn from the French response to competition from Aldi & Lidl.  The French quickly slashed prices and expanded a network of convenience stores across the country, unlike the complacent British supermarkets who took a very long time to respond before slowly introducing convenience stores as well as “click and collect,” which so far neither Aldi or Lidl offers.  And the French supermarkets have cleverly formed purchasing groups so they can order in greater quantities and drive manufacturers’ prices down.  The results have been that in the last three years the French have cut the German “discounters” market share from 15% down to 12%.  Interestingly, this proven method of success would make a good model for M&S to follow, although Bolland seems intent on going in an almost opposite direction.  Are promotions a good thing?  I'll leave the last word to Aldi U.K.'s Joint Managing Director, Roman Heini, who recently said: ‘Shoppers are cynical of promotions – they just want low prices.’ December 2015
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The Ups and Downs of Pricing

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Based on the plethora of Christmas television advertising in most of Europe, you would imagine that this is the absolute bonanza time for department stores and supermarkets.  Well, it is and it isn’t.  It is for all retailers, as considerably more goods are sold at this time of year during the long build up to the excess materialism which characterises Xmas.  But it isn’t because we live in strange deflationary times and although certain production costs have risen, manufacturers and retailers are finding it very hard to raise prices because when they do, sales fall.  Like the majority of the European population I was born after the Second World War so I have no actual experience of deflation where prices remain stable or fall, but don’t go up.  Unless you were born in the 1930s you will not have experienced deflation either.  I wrote about this in December last year  when I forecast that the European Union (EU) was heading for a period of deflation that would make the rich even richer and the poor even poorer.  Unfortunately I was only too prescient and now the President of the European Central Bank (ECB), Mario Draghi, is expecting deflation to exist well into 2016.  Draghi is optimistic that inflation will return when the previous year’s higher oil prices eventually drop out of annual comparison.  He may well be right although, as I explained last year, historical evidence shows that as deflation takes hold and people’s expectations change, it develops into a quagmire that becomes hard to escape.  And that is exactly what retailers are currently discovering, and what the data in the chart above shows.  Remember that all the manufacturers, wholesalers and retail managers behind the products you are buying in the shops, or on-line, have never experienced a period of deflation before.  So their background experience, training, and education hasn't equipped them in any way to cope with today's fundamentally different trading conditions. As a sobering example, one chief executive with no understanding of how to react in these deflationary times, is Marc Bolland, the Chief Executive of Marks & Spencer (M&S), the retail chain that has shops on most U.K. High Streets.  The stores sell clothes, the category for which it’s best known, and food.  Bolland in early November announced that M&S’s financial results for the last six months showed that sales of clothing and general merchandise were down 1.9%.  As he then remarked, M&S had chosen to: “hold our breath and say we make sure we deliver our gross margin by maintaining prices,” rather than joining in with the widespread discounting on the high street.  Bolland may well live to regret this.  He has struggled for several years to increase M&S clothing sales and trying to squeeze more profit out of customers, as well as cutting investment, is not wise when deflation rules.  This is the time to improve what’s on offer for clients. Wringing more profit out of M&S sales may please City speculators, help the share price, and bolster Bolland's ego but it is very poor retailing practice to take such a short term view.  I expect that the next time Bolland reports financial results clothing sales will have fallen further.  I have anecdotal evidence showing the effect that Bolland's strategy is already having on M&S’s clothing business.  A couple of weeks ago, my wife bought several pairs of trousers and jeans at M&S to try on at home - she'd learnt by experience not to trust the colour when viewed under the M&S store lighting.  Bear in mind that M&S always had a good reputation for the high quality of finish of their clothes, as well as the technology of the fabrics used.  So my wife was subsequently dismayed to find that the trousers and jeans she’d chosen, on examination, were of really poor quality, finish and fabric.  In fact they were so poorly made they were barely on a par with Primark quality (the very cheapest on the high street) but all, of course, at the most expensive of M&S prices.  They were promptly returned and my wife explained the reason.  The charming M&S sales girl commiserated with her and told her that a lot of women are saying the same thing…  I was shocked by this dramatic decline in M&S quality and dug around to find how it had come about.  I discovered that in November last year (2014) Bolland hired the two Lindsey brothers, Mark and Neal, under a confidential contract worth reportedly “millions”, and the results of this decision are just feeding into the shops now.  Indeed, Bolland says as much.   Although not really known outside the rag trade, the secretive Lindsey brothers, based in Hong Kong, are credited with improving margins by using Asian dealers, squeezing suppliers, and radically cost cutting for the retail chain Next.  However many millions are being paid by M&S it was clearly enough to motivate the two multimillionaire brothers, now in their sixties, out of retirement to “improve” the M&S supply chain.  Bolland credits this move, as well as not discounting, with the when he announced improved M&S profits in early November.   But squeezing suppliers to the bone can only result in poorer quality, and combining this with uncompetitive pricing will alienate previously loyal customers.  Charging more for less may increase profits in the short term but it will destroy a brand like M&S in the longer term, especially in these deflationary times. As for its food sales, M&S likes to consider itself as a high end grocers specialising in relatively expensive ready to cook meals as well as general groceries, bread, fruit and vegetables.  The quality of the ready meals and the groceries has always been high and, because of the convenience of being in the middle of most high streets, the food stores have developed a steadfast following.  Up until fairly recently.  Apart from special, ready-meal-deals occasionally available in selected food stores as an incentive to draw customers in, (three courses and a bottle of wine for a very reasonable £10), the high price of M&S food means that it is bought mainly as an emergency or top- up buy.  There are very, very few offers to tempt the less well-off.  And, of course, nowadays more and more people consider themselves to be less well-off. No other major retailer is behaving like M&S.  Walk around any European supermarket and you cannot fail to notice the number of special offers, like the infamous ‘buy one get one free’ (bogof), or ‘buy two for a special price’, or ‘buy at half price’, etc.  A number of these offers may not be authentic in that the offer price has been running longer than the normal price, so the offer is now the normal price, but nevertheless many offers are genuine.  In fact, according to market research company IRI Infoscan data, more than a quarter (26.8%) of all the goods available in European supermarkets have some kind of promotional offer.  IRI is globally the fifth largest market research group and they collect scan data from supermarkets to help them analyse and predict sales.  This data is showing that at present it is very hard for manufacturers and retailers to raise prices whilst deflation prevails.  The supermarkets are finding that the sales volume (the quantity of goods sold) rises when goods are on promotion, but the overall value (the profit the retailer and manufacturer make) in most categories falls.  This causes a dilemma – do you sell more using a promotion but make less money, or do you hold your normal price and sell less?  Nobody else seems to be following the M&S strategy of maintaining prices but cutting quality. The tactical struggle to survive deflation is being fought across the whole retail sector, although it is particularly visible in supermarkets.  But it is evident when you look into the figures that this holds true for almost any product at the moment, not just food:  Increase the price and fewer customers buy, in fact, unless goods are on promotion fewer customers buy.  Right across Europe, up until March last year, the biggest price rises in supermarkets were in the alcoholic drinks category, where prices rose 2.6%, causing a 1.1% fall in volume sales.  However much customers like a tipple there is a limit to what they will pay for the pleasure, particularly during a period when salaries and wages haven't risen significantly, if at all.    At the moment, due to the deliberate policy of the Central Bank, the only thing going up in price is housing and that, of course, means that people have even less to spend on clothes and food.  This is especially true in the South East of the U.K., particularly in London.  After increased essential housing costs, most people are very careful how they spend their money.  Their expectations about values have changed and they are now used to a high volume of low promotional prices. IRI Infoscan scan data shows that an astonishing 55.8% of the products available in U.K. supermarkets are on some kind of promotional offer.  In living memory this is a unique situation for the retailers, and shoppers are primed to assume supermarket goods will continually be discounted.  The prices for goods are being set at a lower, deflationary level and shrewd shoppers expect that.  Some supermarket retailers and manufacturers did try to improve their profit margins, and prices rose 3.2%, but the result was a fall in volume sales of 2.8%.  This situation is partly the result of the general deflationary situation across Europe caused by the low aggregate demand created by the credit bubble that popped in 2008, and partly the success of the German discount brands Aldi & Lidl.  Both these privately owned yet huge international supermarket chains have shown U.K. shoppers just how complacent their national supermarkets, led by Tesco, have been. British food shopping produced some of the fattest profit margins in the global grocery business before 1990 - when Aldi opened up shop in the U.K., followed by Lidl five years later.   Around that time I was helping Sainsbury's present their annual financial results and I was always surprised at how dismissive the directors were when any comparison with “discounters” was made.  Today the financial strength and efficiency of Aldi and Lidl is really hurting all the native British supermarket groups as their market share shrinks.  The reaction so far from these former supermarket titans is to put a high proportion of their goods on promotion to appear to be competitive.  They could all learn from the French response to competition from Aldi & Lidl.  The French quickly slashed prices and expanded a network of convenience stores across the country, unlike the complacent British supermarkets who took a very long time to respond before slowly introducing convenience stores as well as “click and collect,” which so far neither Aldi or Lidl offers.  And the French supermarkets have cleverly formed purchasing groups so they can order in greater quantities and drive manufacturers’ prices down.  The results have been that in the last three years the French have cut the German “discounters” market share from 15% down to 12%.  Interestingly, this proven method of success would make a good model for M&S to follow, although Bolland seems intent on going in an almost opposite direction.  Are promotions a good thing?  I'll leave the last word to Aldi U.K.'s Joint Managing Director, Roman Heini, who recently said: ‘Shoppers are cynical of promotions – they just want low prices.’ December 2015

The Ups and Downs of

Pricing

Click here to download the PowerPoint chart: Click here to download the PowerPoint chart: