Creating a Win-Win Relationship by Maximizing Both Manufacturer Sales and Retailer Profits

Takashi Kondo
Model Development Group, Research & Development Office, Marketing Intelligence Division, INTAGE Inc., Japan

PRICE DESTRUCTION PLAGUES MANUFACTURERS AND RETAILERS ALIKE

Since 1990 the Japanese economy has been mired in a prolonged economic slump. In these difficult times, consumers have developed a critical eye for prices, and the phenomenon known in Japan as “price destruction” has advanced.

Price destruction has taken a particularly high toll in the market for FMCG. Figure 1 depicts the change in price from 1992 to 2003 for four major FMCG categories. Prices for all four categories have fallen sharply. The category that has undergone the greatest price decrease is laundry detergents: the unit price fell from ¥592 in 1992 to ¥286 in 2003. If the price for 1992 is taken as 100, the price for 2003 is 48, or less than half. Two reasons for this dramatic change can be presumed. First, because laundry detergent is a product for which both purchase frequency and price are high and which retailers use as a loss leader for discount promotions, discounting to attract customers has become widespread. Second, the emergence of drugstores, home centers, and other retail channels that offer more affordable prices than supermarkets has given rise to consumer channel switching. As a result, reference prices – that is, the prices that consumers expect to pay for certain products – have decreased. The upshot is that unless a retailer lowers the price of a product still further, consumers are unaware that the product is being discounted. Also, the increase in the number of competing stores in neighborhoods has triggered a fierce price war among retailers who are always conscious of their competitors when setting prices. This price war has escalated, and in extreme cases the selling price is often lower than the purchase price so that the more the retailer sells, the more money it loses.