(*) This opinion article is not intended to represent anything or anyone other than the author's reflection. It is not written with the intention of arguing or judging anyone but only to serve as a constructive debate on the market situation discussed.
The market of products of hygiene and beauty in Spain has gone in from does some years in what it could designate a war of prices. In reality this situation is not so new neither specifies of our market. In the markets of high gross margin creates an opportunity to compete by price, reducing the margin and looking for additional volume that compensate said descent of the profitability. But this effect accelerates with the e-commerce where the prices are more visible:
- For the consumers is easier to compare and look for the lower price and his sensitivity to the price increases.
- For the retailers is easier averiguar the prices of his competitors and change his of instantaneous form with his algorithms of fixation of dynamic prices. In reality the algorithms are not the main factor that generates said intense competition in prices, but is a big facilitador that intensifies it.
Who is the causante of this situation? The retailers blame to the marks and the marks to the retailers. It is possible that both parts have influenced in causing this situation, but remember that the fixation of the PVP makes it the retailer that has the total freedom to do it and the protection of the current laws. The marks have a capacity limited to influence in the decisions of prices, that although they could not to like us, are legitimate whenever it do not sell underneath of cost of purchase.
In my opinion the cause comes given by strategic decisions of some retailers that choose the low price to compete:
- Ones that look for to increase his volume to win buyers and quota of market. They expect that said increase of volume of sales compensate the lower margins and the result was satisfactory. The first that does it has greater probabilities of success (first move advantage) as more easily wins this necessary incremental volume so that the resultant net margin was not inferior.
- Others, usually new retailers (digital), that use the low price to generate traffic to his new sites. They opened his on-line shop thinking that sell in digital was easy and to the not to achieve it go down the prices of sales to generate income. Usually it does not work, because no only with low price does not achieve sell, needs generate traffic, confidence in the consumer and good experience of purchase.
These decisions are used to to drag to the rest of retailers that equalise them prices to keep on being competitive, but do not are used to to achieve sufficient incremental volume to compensate his descent of margin and to face his operative and structural costs. The situation can generate an effect of sum zero where the market does not grow in units sold but reduces in value (and therefore in margin) by the reduction of prices.
The marks do not wish this situation, have not created it neither have promoted it, but have to accept it, taking the decisions that created more adapted for our competitive strategy. No they can us ask responsibility by the situation, neither demand that we take individual business decisions that put us in risk and can not do collective actions as they are totally illegal.
How it will evolve this situation? Probably anybody know it. One of the possible effects is that some operators will not be able to survive economically and will disappear. Others will have to adapt his operative models and costs to survive with lower margins, others will obtain additional income (by advertising, by a service premium, by additional services,...) Others will centre in marks or products less competed, others found ways to sell to an upper price to his competition offering other different advantages to the low price, or other ways to compete of profitable form. The true is that these dynamics of reduction of prices have difficult return as although the prices go down fast "by contagion", go up is much more complicated.
Ask to the marks that limit his distribution like measure that solve the problem does not seem logical. To the equal that the retailers decide his strategy, the marks do the same and is legitimate to decide your strategy of distribution. Aseverar That the marks expand the distribution by despair and available need in the short term is to simplify a lot the situation and despise the capacity of vision on a long-term basis of the marks.
A market with healthy margins for all his operators generates more wealth, more innovation, more investment, more put of work and a more stable and attractive situation for all, marks, retailers, employees and consumers. However it is legitimate that each one compete of the way that choose and the peak of the e-commerce with the big visibility that gives them to the prices and the algorithms of fixation of dynamic prices has created the perfect storm.