Price-marked packs have flooded the independent channel but are the margins right and does the bigger issue of value perception need to be addressed?
Once upon a time, price-marked packs (PMPs) were few and far between. But today, they have flooded the independent channel, helping retailers to compete head-to-head with the multiples and offering consumers the promise of better value. But not everyone agrees that price-marks are good.
When we started a discussion about price-marks on social-media site LinkedIn, we never anticipated the response we were about to get – a mixture of good, bad and downright ugly views with some industry-experts condemning PMPs as ‘dangerous’.
“If you look at some categories now, almost every SKU is price-marked. The danger is that is that it could reduce the margin in the category. I still think that tactical price-marking, which runs for a promotional period, is better – it gives suppliers the chance to be more aggressive on price.”
managing director, Landmark Wholesale
The debate boiled down to four key issues: firstly, how to tackle PMPs on low-margin products like tobacco – is it fair or sustainable to have margins of less than 5%?
Secondly, there is the issue of under-cutting price-marks: does selling at less than the price-mark undermine the concept itself?
Thirdly, are there too many PMPs being forced into the channel, creating a dependency on promotions that may damage businesses in the long-term?
And finally, there is the perception of value – independents are seen as ‘premium priced’, despite often being cheaper than the multiple retailers. What can we do to change this?
These are the questions we will tackle in this feature.
PMP tobacco: dangerous? Reduced profits but more incremental sales
The first wholesaler to voice an opinion on our PMP discussion was David Armstrong, former head of buying at Makro, who suggested that PMPs may not be for everyone. “This is a ‘Marmite’ subject,” he said. “Some independents don’t like to have their prices fixed for them – either too cheaply or too expensively.”
“Before Tesco and Sainsbury were hitting small towns, independent retailers didn’t have much to compete with – PMPs now help them to offer consumers confidence. City centre retailers now stock strong lines of PMPs, compared with a few years ago when they wouldn’t have even thought about it.”
managing director, United Wholesale Scotland[/quote_right]
Steve Parfett, chairman of Parfetts, pointed out that the issue of ‘fixed pricing’ is worse for some categories. “A dangerous issue at the moment is the huge popularity with consumers of PMPs on cigarettes, but at margins that are too low for long-term survival,” he said.
This is supported by the fact that most symbols have “rejected them” in favour of plain packs, Steve explained. “Manufacturers need to address this issue as soon as possible for the independents who are still supporting these packs as it will otherwise cause major concerns in the future,” he warned.
With margins on some tobacco products as low as 5%, it’s no surprise that retailers jumped at the chance to put their view across, albeit anonymously.
One symbol group retailer explained that he is not happy with the influx of PMPs into his stores, particularly on tobacco. “Every time a retailer sells a value product price-marked, it makes less than 5%. What happens next is that other companies see this and reduce margins on their PMPs.”
This is eating into retailers’ profits, and worsened by the use of credit cards, he explained. “This means even less profit is being made. If a product doesn’t have margin, don’t stock it. That’s how the multiples work.”
In response to some of these issues, tobacco suppliers have emphasised the choice that retailers have between PMP and non-PMP. “Retailers are free to choose their retail prices… Price-marks are entirely optional,” says Zoe Smith, marketing director for Phillip Morris.
And having competitive prices on tobacco is a good way to attract incremental sales – losing this could be detrimental to business, explains Zoe. “Selling overpriced cigarettes compromises all the associated sales from other categories, most notably newpapers, bread, milk and soft drinks.”
Under the price-mark? Unsustainable, confusing – but sometimes acceptable
While price-marks are designed to be a clear way of communicating good value, some symbol groups and retailer clubs are under-cutting the official price-mark to drive traffic to promotions. But some industry experts explain that wholesalers could be treading a thin line.
“There is a danger that selling for less than the price-mark could undermine the whole purpose of PMPs,” explains Mike McGee, managing director of The Whole Sale Company.
“Taken to its logical conclusion, should a consumer assume that they are being overcharged if a product is not sold below the price-mark?”
One supplier agrees that selling below a price-mark could confuse retailers’ customers.
“Shoppers will be left unsure about the proposition and begin to distrust the price-mark. This goes against everything the price mark should represent,” says Brett Grimshaw, business sector controller for Tata Global Beverages.
At the recent FWD Conference, Charles Wilson told Better Wholesaling that more PMPs are good and give the consumer “confidence”. But he warned suppliers that they mustn’t be greedy. “There’s nothing worse than a PMP that takes too much. Apart from that, bring it on.”
chief executive, Booker[/quote_right]
However, there are times when it is acceptable, provided that it is “short term” and there is a “reason for doing so – like a temporary price promotion supported by clear point-of-sale, which then makes sense to the consumer,” explains Brett.
One wholesaler we spoke with says he supports going under the price-mark within a retail club structure because it helps consumers to feel confident that they are “genuinely buying a good deal”.
HT Drinks director Sanjay Thakrar says, “It’s only for a promotional period and if [the retailers] buy in bulk, when the promotion is over, they can still retain their trading margin. The multiples are doing it so why can’t independent retailers do it, too?”
A nation addicted to promotions How to ween consumers off them
For some industry experts, the concept of PMPs is fostering an ‘addiction’ to promotions. “PMPs have suppliers laughing all the way to the bank – they help consumers to switch brands and become more fickle”, says Jason Finch, director of technology supplier Hubtill.
“Promotions are a drug and the industry is hooked… If everything becomes price-marked, then what are you going to do? Where’s the differentiation?” asks Jason.
Another symbol-group retailer, who has also asked to remain anonymous, agrees: “What happens when the hard times are over and customers have more money again? They’ve developed a habit around PMPs equalling ‘good value’ and it’s going to be hard to get them off it.”
A similar situation occurred in the foodservice channel not so long ago. When the recession first took hold, a flurry of discounts hit the big eateries.
But in our September 2012 issue, Anya Marco warned about the dangers of slashing profit margins: “The rise of discount meals in the branded restaurant sector has fostered an addiction to two-for-one meals and 50%-off promotions.”
This put the pressure on other sectors, such as pubs, which began to find it difficult to keep up – so Anya suggested taking a different approach.
“Rather than offering 50%-off discounts or two-for-one offers, restaurants must move towards meal deals, which still make the consumer feel they are getting more for their money but without slashing the profit margins.”
And the market has responded: today, you’d be hard pushed to get more than 30% off with any deal at Pizza Express. The good news is that it hasn’t done the market any harm. Could the independent retail channel learn from this?
Perceptions of value Break the belief that c-stores are premium
One issue that has driven the rise of PMPs into the independent channel is the idea that independent retailers’ stores are expensive. But “this is often not the case”, explains Stephen Burnett, managing director of The Retail Data Partnership.
“The multiples have done a great job of convincing consumers that they are getting great deals when they’re not always doing so.” So the question is, “How can wholesalers and retailers break down the belief among suppliers and consumers that indie c-stores have premium‑pricing?”
Jason Finch suggests that the industry needs to get to “the heart” of why consumers like PMPs. “If you believe in them [PMPs], then find what aspect of them makes you think they’re great. If it’s about customers having a perception of value think about better ways to create that perception.”
Jason points out that while shoppers are price-savvy, they rarely know RRPs. “Perception and reality are very different. Ask a really fat person if he overeats and he’ll probably tell you he doesn’t. Trust me – I used to weigh 21 stone.”
But to smash the notion that all c‑stores are ‘premium priced’, work needs to be done to ensure that competitively priced products, whether they are PMPs or not, are well marketed.
Parfetts is doing this particularly well with its retail club Go Local, which recently hit the 1000th member mark. “We have always made a feature of actively highlighting the very favourable comparison of our consumer promotions against pricing activity in the multiples”, explains Steve.
While many wholesalers and retailers will still agree that PMPs offer consumers assurance that they are being treated fairly, and suppliers’ piece of mind that promotions are being passed on, it’s still worth keeping the future in mind.
Independent retail expert Nick Shanagher summarised the bigger picture well when he posted: “It [PMPs] will get them [independent retailers] through this year and maybe next year without addressing the real changes that they need to make to be competitive five years from now.”