The small consumer battery business is in the midst of a price war. The short-term losers in this war will be the industry leaders. But the longer term losers would be the low-end Price Leader competitors in the market.
Energizer Holdings is the industry leader’s market share, with a 39% share. Procter and Gamble follows closely with its 36% share of the market with its Duracell line. Low-end private label suppliers make up most of the remaining market. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)
The price wars have been a feature of this industry over the last couple of years. In the latest move, Procter and Gamble has offered a discount-in-kind for its packages of batteries. The former 20-pack package will go to 24 batteries. The 16-pack will go to 20 and the 8-pack will go to 10. All of these changes in batteries-per-pack will come without an increase in price for the package. So, the price per battery in these packages will fall 20% to 25%. Analysts estimate that this will translate to an 8% to 10% reduction in average price for the entire Duracell line. This is, indeed, a significant price reduction.
Energizer has no choice but to follow this Duracell price reduction. Consumers have shown little loyalty to either brand when there is a price difference involved in the purchase decision. Energizer will either follow or lose share quickly. It will follow.
Any time an industry leader loses 10% of its revenues, without reducing its cost by an equivalent amount, the pain on the bottom line is extreme. The average business unit makes a pretax return on sales of about 9% (See StrategyStreet/Tools/Benchmarks). The batteries are more profitable than average, but losing 10 percentage points off your previous margin structure will hurt anyone. So, both industry leaders, Duracell and Energizer, will suffer in the short term.
You might ask yourself, why would two companies who, between them, own 75% of the market engage in a price war with one another? In normal situations, they would never do this. But, battery prices have been high for a while. The industry leaders have held a price umbrella over cheap, private label, brands who have gained share over the recent years. This price war is really aimed at the Price Leaders. They will be the long-term losers in this war.
The private label brands do not have the margin structure that will allow them to take equivalent price reductions in order to keep a significant price advantage over Duracell and Energizer batteries. This price war will cripple them and reduce their ability to maintain the quality of their products and services.
Buy your consumer batteries now. Within a couple of years, the cheap private label brands will have suffered and fallen on hard times. Then, they will gladly follow the inevitable future price increase that the industry leaders will institute to make up for the margin losses of today.
This periodic price war to knock back private label competitors is a common pattern in consumer products. You will see it frequently with well-known consumer brands in cereals, soups, cigarettes, detergents and other products. In these markets, high prices support high marketing costs and high margins, and allow private label suppliers to grow market share for a period of time. Eventually, the branded companies reduce prices, sometimes drastically, to remove the private labels’ price advantages and drain them of market share (see the Symptom and Implication, “As large competitors match low prices, other competitors face difficulties” on StrategyStreet.com).
Showing posts with label price. Show all posts
Showing posts with label price. Show all posts
Monday, February 8, 2010
Thursday, February 12, 2009
A High End Retailer in a Leader's Trap
In a Leader’s Trap, an established industry competitor maintains a price umbrella and gives up market share to a discounting competitor. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) The company in a Leader’s Trap believes that customers will stay loyal to the established company’s brand name by paying a premium for its product. Over time, the company in the Leader’s Trap not only loses share, but also sees its prices eventually fall to a level near the price established by the discounting competitor. Abercrombie & Fitch is now in a Leader’s Trap.
The company is refusing to discount its latest clothing lines, even though competitors are discounting their lines. Both American Eagle Outfitters and Aeropostale are offering discounts on their current lines. Not Abercrombie.
Abercrombie is a higher-end retailer, someone we call a Performance Leader competitor. American Eagle and Aeropostale aim for somewhat lower price points. Nonetheless, even though the companies compete at different price points, significant discounting in a marketplace affects all competitors. If an industry Standard Leader, who prices at average for the industry, or a Price Leader, who prices at the low end of the market, begin offering new significant discounts, even Performance Leaders have to follow or be willing to give up market share. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)
So far Abercrombie has refused to go along with discounts. Its market share is also falling. In December, its same-store sales fell 24%. Aeropostale’s same-store sales rose 12% at the same time. Eventually, Abercrombie will have to reduce its prices to stay competitive.
The company is refusing to discount its latest clothing lines, even though competitors are discounting their lines. Both American Eagle Outfitters and Aeropostale are offering discounts on their current lines. Not Abercrombie.
Abercrombie is a higher-end retailer, someone we call a Performance Leader competitor. American Eagle and Aeropostale aim for somewhat lower price points. Nonetheless, even though the companies compete at different price points, significant discounting in a marketplace affects all competitors. If an industry Standard Leader, who prices at average for the industry, or a Price Leader, who prices at the low end of the market, begin offering new significant discounts, even Performance Leaders have to follow or be willing to give up market share. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)
So far Abercrombie has refused to go along with discounts. Its market share is also falling. In December, its same-store sales fell 24%. Aeropostale’s same-store sales rose 12% at the same time. Eventually, Abercrombie will have to reduce its prices to stay competitive.
Monday, January 26, 2009
Growth Rates that Count
No matter the rate of growth in a market, the key growth measures to watch are those of the various Price Points. Here is an example.
The U.K., as the U.S., is in a recession. As a result of tougher times, customers are trading down their purchases in retail stores, including grocery stores. A beneficiary of this trade-down in the U.K. is the supermarket chain, J. Sainsbury PLC. Sainsbury is the U.K.’s third largest food retailer. It picked up customers from some of its more upscale grocery competitors.
Sainsbury has three lines, or Price Points, in its market. These Price Points grew at significantly different rates than the company grew during 2008. The company’s “Basics” brand is the smallest of its three Price Point labels. It is also the least expensive. This brand reported a 40% rise in sales in the third quarter from a year earlier, as customers traded down to less expensive groceries. The company’s higher Price Point brand “Taste the Difference” saw a decline in sales during the same period. The company’s sales for stores open for at least a year grew 4.5% in 2008. But the growth rates at the two Price Points were very different from the company overage.
In any market, whether growing or declining, a company should know the growth rates, not just of the industry as a whole, but of the Price Points in the industry. The real growth or decline story comes at the Price Points. And it is at the Price Points, rather than at the overall market, where the company focuses its decisions.
The U.K., as the U.S., is in a recession. As a result of tougher times, customers are trading down their purchases in retail stores, including grocery stores. A beneficiary of this trade-down in the U.K. is the supermarket chain, J. Sainsbury PLC. Sainsbury is the U.K.’s third largest food retailer. It picked up customers from some of its more upscale grocery competitors.
Sainsbury has three lines, or Price Points, in its market. These Price Points grew at significantly different rates than the company grew during 2008. The company’s “Basics” brand is the smallest of its three Price Point labels. It is also the least expensive. This brand reported a 40% rise in sales in the third quarter from a year earlier, as customers traded down to less expensive groceries. The company’s higher Price Point brand “Taste the Difference” saw a decline in sales during the same period. The company’s sales for stores open for at least a year grew 4.5% in 2008. But the growth rates at the two Price Points were very different from the company overage.
In any market, whether growing or declining, a company should know the growth rates, not just of the industry as a whole, but of the Price Points in the industry. The real growth or decline story comes at the Price Points. And it is at the Price Points, rather than at the overall market, where the company focuses its decisions.
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