Promotions damage UK brands

02 March 2011

LONDON: A majority of UK companies believe discounting policies executed in the recession have damaged brand equity, a study has found.

Professional services specialist KPMG surveyed 200 executives from the country's 500 largest corporations, and estimated some £20bn ($32.5bn; €23.5bn) in profits may have been lost as a result of strategies implemented during the downturn.

"Firms reacted very quickly to the financial crisis and went in to near-panic mode, discounting prices across the board without fully understanding the impact on demand or profitability," the study said.

"In many industries recession-driven discounting has fundamentally eroded the value of the market. Consumers' price expectations are lower and buying behaviour has changed."

More specifically, 55% of organisations had sacrificed margins for volume sales, 54% cut the cost of almost all goods, and 49% entered "price wars" with rivals.

Just 53% of businesses focused on maintaining margins when formulating tactics, while 62% stated discounting had hit net income, and 58% said the same regarding brand equity and reputation.

Elsewhere, 55% of interviewees posited that board-level staff paid insufficient attention to price, 69% described reductions made in the crisis as unsustainable, and 46% shared these views for their wider price architecture.

Another 63% thought reversing the current situation presented a significant challenge, and 55% argued they were unable to pass on rising expenses to customers.

Worse still, 51% of respondents did not think shoppers benefitting from discounts would be willing to meet higher prices, and 43% proved "undecided".

Critically, 62% of participants feared incurring a disadvantage by being the first to make such a shift, and 49% are delaying parallel actions given the uncertain economic climate.

This comes despite the fact 46% of corporations were experiencing input cost inflation, and 47% anticipated a continuation of the same trend.

"Reactive pricing decisions have left UK firms in an unsuitable position in terms of their price structures and customer base, suggesting longer-term damage to value creation," KPMG said.

If companies can increase prices, profit margins should improve by an average of 11%, but 13 months may elapse before pre-recessionary price levels are attained again.

Equally, 70% of the panel said determining a coherent strategy was complicated, and 66% encountered obstacles in gathering accurate data on the influence of pricing on profitability.

Indeed, 59% revealed their enterprise did not have the requisite in-house tools and skills to achieve these objectives.

Similarly, 57% had attracted less profitable consumers during the "race to the bottom" following the credit crunch.

Understanding popular perceptions of value was perceived as difficult for 71% of contributors, reaching 64% concerning identifying the most profitable goods and services.

Meanwhile, 59% cited equivalent barriers when it came to distinguishing the clientele yielding the greatest returns, standing at 53% for gaining an insight into the products desired by shoppers.

Looking ahead, 72% predicted creating a "tiered" pricing system will be of vital importance in the next two or three years, and 62% were confident they could engineer the introduction of this kind of model.

However, more than 40% of those polled did anticipate being able to concentrate future promotional activities on their most profitable or highest-spending buyers.

Data sourced from KPMG; additional content by Warc staff