Why retailers may live to regret recession price-cuts

KPMG suggest that reactive price-cutting in the downturn may have changed behaviour and expectations for good...

by James Taylor
Last Updated: 19 Aug 2013
It won't come as a great surprise to learn that many retailers slashed prices as the downturn hit, to keep the punters coming through the doors - or that many saw their margins plummet as a result. But this strategy may turn out to be short-sighted: according to a new report by KPMG, it has not only wiped £20bn off UK plc's bottom line in the short term, but it may have even more damaging consequences in the long term - because consumers have got so used to paying rock-bottom prices that they won't be willing to pay more when things pick up. So the margin damage may be permanent.

KPMG's findings are based on a study of 200 UK business leaders. More than half said they'd reduced prices across the board in response to the recession, while 49% admitted to getting into price wars with their competitors. And the majority recognise that this has led to lower profits. In fact, the report suggests, if retailers had adopted more sensible discounting strategies, it would have resulted in an extra £20bn of profit for the UK's 500 biggest firms.

Some retailers would probably argue that they had no choice; if they hadn't slashed prices, they might not have lived to tell the tale. But KPMG's argument is that prices were slashed too far, too quickly - without any strategic consideration of the long-term consequences for the brand or the market. 69% of these leaders admitted that current price levels were unsustainable - but KMPG reckons all this discounting has 're-set the price baseline for consumers, who are now unwilling, and indeed unable, to pay more... Firms have priced themselves into a corner.'

We're inclined to agree that price expectations are now lower across the board as a result of the last couple of years, and it will be hard to get prices up again without customers crying foul. Retailers can still get away with hiking prices, as we've seen recently before and after the VAT hike; but the key will be raising prices in such a way that it's not too noticeable. So at best, it's going to be some time before retailers can get back to pre-recession profit levels.

One thing's clear, though: they don't have much choice but to try. With input costs (like cotton, for example) on the rise, and demand likely to be weak at best, there's going to be even more pressure on margins this year than last...

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