Pricing Initiative Targets Deep Discounters

2 Apr, 2012

The insert for Best Buy in Sunday US papers represents a cornucopia of consumer electronics available at the retailer – tablets, TVs, laptops, PCs, cameras, smartphones and an abundance of accessories are spread across its 28 pages.

The latest star of the front cover is the new iPad, its $499.99 tag exactly matching Apple's set price for the device. But inside, 46in and 55in Samsung and Sony flat-panel televisions were being offered at $200-$300 discounts on the regular price.

From this month, Apple's rivals hope that situation will begin to change so they, too, can sell products at the higher prices they say their brands merit.

The introduction of a so-called unilateral pricing policy (UPP) from April 1 by LG, Panasonic, Samsung, Sony and others threatens to punish retailers with a withdrawal of supplies if they sell products below a fixed minimum price.

It is a tougher stance than their existing minimum advertised pricing (Map) strategy. Under these Map rules advertising subsidies to retailers, such as those that help pay for Best Buy's inserts, can be cut if minimum price guidance is disobeyed.

The aim is to curtail the growing practice of "showrooming", whereby consumers view consumer electronics items in bricks-and-mortar stores and then go online to buy them from deep discounters who may undercut recommended pricing.

The tougher price support initiative could, if successful, help lift retailers like Best Buy out of a sales slump.

But the biggest bugbear of bricks-and-mortar retailers would still remain: internet retailers do not collect sales tax on many transactions, which in many states translates into an instant discount of 6-10 per cent.

Flat-panel TV shipments to the US have never fallen year-on-year before, but the IHS iSuppli research firm last week predicted a "decisive turning point" in 2012 - a 5 per cent fall to 37.1m units, as the market matures and struggling manufacturers try to ship fewer sets at higher prices.

Sony, whose television business is on an eight-year run of losses, is combining UPP with a "strategic investment programme" which rewards retailers based on their performance in promoting its products.

"It's been more about the special offer of the week than the value of the product," Phil Molyneux, Sony Electronics US president, said at a recent briefing. "We talked to leading retailers and said we would like to take a leadership position and work with you for the betterment of the industry."

Best Buy has been losing market share to online competitors – it announced the closure of 50 of its big box stores on Thursday to make savings of $800m. To revive its sales growth it is also shifting its focus to smaller stores that specialise in mobile devices such as smartphones and tablets.

Jim Willcox, senior electronics editor at the Consumer Reports watchdog, says: "Sony and Samsung are bringing in UPP for products where features can be explained on a sales floor and hopefully the customer can be convinced to step up from a basic product that has low margins to a product with more features that offers higher profitability."

With online retailers forced to match the UPP prices of the normal stores, this will "level the playing field", he says.

Wes Shepherd, chief executive of Channel IQ, which monitors online pricing for brands, says the growing influence of Amazon and other online retailers has prompted the move by the big brands.

"Everything's becoming commoditised online and it's been a downward spiral – companies are realising they need to wrest back control of their brands," he says.

Amazon declined to a comment on UPP, but Jonathan Johnson, Overstock.com president, said that equal prices would benefit retailers offering better customer service, including his own company.

He was sceptical that UPP could be enforced, in effect, beyond "hot" products similar to the iPad. Citigroup analysts, in a note last week, also predicted "limited effectiveness" given the lack of exclusive and proprietary products.

Jim Willcox of Consumer Reports the impact of the pricing support scheme remains uncertain given not all electronics makers are taking part in it. "This does create an opportunity for secondary brands to price their products lower," he says. "It's a dynamic that's going to play out over the next eight to nine months and then companies will say 'we will continue doing this' or it's an experiment that didn't play out as they hoped."

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