Get set for the euro pricing game

There is much speculation about euro pricing, pricing transparency and the impact of the single currency. The reality is that very few companies in the engineering industry will be affected directly. But the likelihood of them being affected indirectly by heavier concentration on pricing by large buyers is another matter. The arguments are well known. […]

There is much speculation about euro pricing, pricing transparency and the impact of the single currency. The reality is that very few companies in the engineering industry will be affected directly. But the likelihood of them being affected indirectly by heavier concentration on pricing by large buyers is another matter.

The arguments are well known. Brussels wants the introduction of the single currency to result in buyers being able to compare prices across Europe easily, so that goods from low-price areas will move to high-price areas. Companies are required to have a single Eurozone pricing strategy by the end of next year. The resulting price transparency, the argument runs, will cut prices in Europe. And if the market does not produce this outcome, legislation from the eurocrats will.

For most companies, it is not going to happen quite like this. Pricing legislation usually leads to the opposite of what was intended. Anyone old enough to remember George Brown’s National Plan to control inflation in the 1960s with a price freeze will recall that the following year inflation rose to a record 22%. I produced a paper at the time entitled Twelve easy ways to get round any price legislation. It looks as if I’ll have to dust it off again for this Europricing exercise.

Here is how the game will really run. No managing director will give up profits in any territory willingly, unless they get an equal or extra profit somewhere else. But if a company can increase its profit by raising prices in any territory it will do so, and blame the Europricing policy and Brussels.

So big engineering companies will produce smoke-and-mirrors pricing policy statements appearing to meet the Brussels goals. Then they will sell for the most they can get from distributors. Big firms will give evidence that they are meeting the goals, but their subsidiaries will use any one of a dozen ways to get around the rules.

Where large and powerful buyers place high-volume orders with suppliers they will use threats and coercion to cut prices to the lowest they can see on the euro screen. Weak sellers and weak negotiators will concede. This will cut margins for the supplier and may reduce product quality. But it will enhance profits for the buying company.

Some prices will go up, particularly among market leaders and dominant players in territories like Spain, Greece and Italy, and also in markets where local competition is weak, such as the Nordic countries. They shouldn’t hold their breath for price reductions.

Only the market and competition can make a company cut its prices, by damaging its sales and market share. But Europe is not genuinely one market and will not be for as long as I live. It is a series of country markets with distinct preferences.

Adverse publicity by itself will not make much difference. We have known for 10 years that we pay too much for British cars, but it has not brought the prices down.

This, then, is what to expect.

First, the behaviour of market leaders in each sector needs to be watched. They’ll show the way.

Second, real prices will get more confusing, not less. Only core prices for standard products will be quoted, but no one will actually sell at those levels. In a given deal, the real price will be determined by extras and add-ons.

Third, suppliers in Spain and Italy will still be the cheapest. If buyers can source from these countries they will, if the purchase is significant.

Fourth, expect to see new products, specialist products and local variants replace generalised European brands, with different levels of add-on service so prices will be difficult to compare.

Fifth, big buyers will remain big buyers and call the shots, but only with companies which can be coerced and which need their business badly.

What will bring prices down is deflation, recession and weak growth. The eurocrats will take the credit, but the markets will rule. Given 20 years, there may be some slight price convergence in most markets. But it will make buyers everywhere search out lower prices as a matter of course.

And in facilitating this, the internet will have a greater impact on price transparency and competition than the euro. The biggest change will be the impact of electronic buying on distribution. The process of getting goods to the users will be altered out of all recognition. Big distributors will copy UK supermarkets and go for private label products wherever they can. With customers able to buy direct over the internet, small, privately-owned distributors will be marginalised.

If in 10 years’ time you have no way of reaching your users and buyers direct, without going through the trade, you will be in trouble, euro or no euro. Electronic buying will see to that.

John Winkler is managing director of pricing specialist Winkler Profitbuilder. The research study British Pricing Weaknesses is available free from its website: www.winkler.co.uk/profitbuilder