The Profit Margin Bloodbath of UK Recession

A significant piece of research from accountants KPMG estimates that price discounting by UK firms cost them £20bn - and things may be getting worse as the economic conditions in 2011 worsen further…

Lots of coverage last week in the media about the growing intensity of a price war between Asda and Tesco. So this report from KPMG is timely.

Firms that entered into downturn discounting, to keep shoppers on the high street, may have dented UK profits by over £20bn - according to new research from KPMG.

The study, Paying the Price for Recession, shows that price wars in the downturn fundamentally downgraded the value of the UK market, by changing the buying habits and expectations of consumers. Slashing prices may have helped the consumer during austere times but businesses have picked up the true cost in terms of reduced profit margins and lower returns on investment.

KPMG surveyed 200 UK business leaders (across financial services, retail & consumer goods, telcos and utilities) and found more than 50 per cent of companies said they reduced prices across the board, while 49 per cent entered into price wars with competitors. Almost two thirds see recession-driven discounting as contributing to reduced profits at their firm.

According to the KPMG survey, over the half the businesses surveyed admitted they sacrificed a lower profit margin for sales. This might have been an obvious and understandable short-term tactic. But there may have been some longer-term damage. As a result of extensive price discounting, companies find themselves trapped - consumers’ expectations of price are lower and buying behaviours have changed, potentially permanently.

That means bad news for UK firms on two fronts. Pressure to lower profit margins is coming from both sides. Customers expect continued price wars and discounting. But on the buying/production side, firms are being hit hard by rising inflation and input costs.

KPMG conclude that “an effective pricing structure is integral to overall business strategy and is critical to creating a competitive edge that’s needed to achieve growth in today’s low-growth economy.
“Firms have priced themselves into a corner and it will take time to return to pre-recession profitability. There is an art to pricing in an austere UK that is very different to pricing during the boom years,”

Fascinating stuff and perfect material for advanced business students. But bad news if you are trying to grow the returns from your business.