Australia tax, price pressure and competition
Brand Strategy Head
Kantar Millward Brown
Australia tax, price pressure and competition
Consumers in Australia are extremely cost conscious and there are many factors that place pressures on pricing structures in this market. Australia tax, the unique phenomenon that leads to higher prices for goods and services than would be expected from a simple currency conversion, is the bugbear of Australian consumers. In some cases, the difference in pricing, like an extra 1.47% on a MacBook Air, is relatively minor, but consumers will pay an extra 50.47% on a pair of Levi’s. Now factor in declining wage growth over the last 10 years, down from 4% in 2007 to 1.8% in 2017, and a 40% increase in house prices from 2011 to 2016, and brands are sitting on a powder keg of potential price backlash. It’s not surprising that Australian consumers across 80% of the BrandZ categories report an increase in price based, decision making over the last 10 years.
The competitive environment in Australia is ripe for disruptive price plays from both global giants and local start-ups.
A great example is the recent launch of Amazon in Australia. The online giant stirred the Australian imagination with its recent launch promising 30% lower prices. Google search trends show that Amazon search volume last November and December easily beat out competitors and overshadowed major local events like the Ashes, and the ever-popular news about Donald Trump. Despite the recency of the Australian launch, Amazon already shows strong differentiation with consumers thinking that their influence on the market will grow in the coming years. In grocery stores, Aldi’s low-price strategy has helped them grow market share from 5.5% in 2007 to 13.2% in 2017.
Other discount retailers like Lidl and Kaufland are likely to enter the market soon to capitalise on the nascent promise that the market will support their low-cost solutions 8. One doesn’t have to look hard for examples in other categories, especially in grudge purchase categories like financial services, in which ING, Youi and Budget Direct have shown strong performances over the last few years.
For brand owners it may feel like the only answer to keep afloat and increase short term sales is to drop prices dramatically. Using price promotion leads to a focus on short term wins instead of long term gains, ultimately leading brands to undermine their own long-term profit margins. The reality is that over the long term, brands with strong media investment and brand building strategies have fared better than those that have simply cut prices.
NEGATIVE BRAND SIGNALS FROM PRICE CUTTING
- Discounting can create a disconfirmation between pricing expectation and reality. Consumers may ask, “Why is this so inexpensive?”, raising questions about the brand’s quality or even the health of the business.
- Consistent price discounting decreases base line price expectations making it harder to get back to original pricing levels: “There is no way I am paying $20 dollars for this, it was only $15 last week”.
- Discounting frequently teaches people to buy and hoard only with special offers: “I’ll just wait until next week when this will be $5 cheaper and buy it then”.
These signals create a cycle of discounting to generate sales, which in turn decreases base sales, triggering further discounts to produce sales. This begins a vicious cycle and a race towards brand failure. This situation is further exacerbated when competitors also discount their products in response as this creates commoditised categories in which price overtakes Brand as the major buying factor. These commoditised categories then necessitate even deeper discounts and a declining response to price promotions. The result is an erosion of the brand’s ability to charge the premium necessary for sustainability.
The alternative to this discounting dilemma is to focus on growing baseline sales by increasing the number of people who want to buy the brand at regular prices. The secret is to focus on what the brand means to consumers rather than its cost. This is borne out in the 10-year period of Australian BrandZ data from 2007 to 2017, brands that focused on brand building and media spending during this period of increasing price sensitivity are the ones that grew and sustained that growth.
Brands that demonstrated growth in each category were more likely to be seen as more expensive rather than cheaper. Look no further than the top 10 Australian brands in this report for examples of this. Combined, they represent a total value of more than $78 billion USD and they are a testament to the fact that the only proven way to grow sales in the long term is through building strong brands supported by effective marketing.