17/08/2020

Stealthflation means consumers have to brace themselves for hidden price increases.

Recession is always a time for businesses to reposition themselves as consumer champions. Tesco made a pre-emptive strike last month, demanding that suppliers contribute towards (or pay for) their latest round of price cuts.

In parallel with this there are some big inflationary drivers too. We’ve managed to avoid too much mention of the B for Brexit word recently, but with hopes of a comprehensive trade deal receding fast, January 2021 promises no end of complications around tariffs and duties.

It’s far from certain that product availability in the new year will be as good as we’re used to, but even for products we can source it’s likely that prices will rise.

Even more pressing are the additional costs borne by business to ensure distancing guidelines are complied with. Those lucky enough to be up and running – pubs, hairdressers, gift shops and more – have already spent on plastic screens, sanitiser, face masks and the like. And this is without guarantees that customers will return.

Restaurants forced to space out diners are questioning whether they are viable with lower revenues and already theatres are cancelling Christmas pantomimes. Whatever the government’s rules, the harsh financial realisation is that for most hospitality venues attendances of under 50% are simply incompatible with quality service.

Brexit and Covid compliance are two very visible drivers of inflation and, though they may not like it, consumers will understand the reasons. What we’re also seeing, though, are some less transparent ways of clawing back costs which might not be as well tolerated, something we’re calling Stealthflation.

VAT reduction on hospitality

VAT on hospitality was reduced from 20% to 5% in July, lasting until August 2021. Intended as an incentive to lure cautious consumers to part with their cash, it’s surprising how many businesses have simply pocketed the 15% variation as margin.

Consumer prices in the UK are rarely advertised as ex VAT so this wheeze isn’t obvious. If you bought a meal for £12 in June then the restaurant would take £10 with £2 handed on to HMRC. Today only 57p goes to HMRC so the restaurant is left with £11.43, a 14% price increase.

The more you think about this the worse it appears. It’s highly unlikely the restaurant’s cost increase will be precisely 14.3%. If it’s less than this they are ripping off customers. More than this they are ripping off themselves.

So what’s the justification? You get the sense it’s just convenience: It saves printing new menus. If this is the case I’d suggest it’s officially the second-worst justification ever for a price increase. Number one being “because we can”.

The worst aspect of this misguided strategy is that regular customers will notice it most. The consumer who visits every week for a chicken korma and naan will notice the price hasn’t changed when it should. Then what?

What happens when VAT goes back up next year, will prices rise by a further 15%?

It’s a lazy approach to pricing that can cause real reputational damage. Stealthflation

Surcharges for PPE

As became apparent when I booked a dental appointment recently, some businesses are now charging extra for PPE. It came as quite a surprise when the receptionist told me “we’re adding £10 to cover PPE, is this OK?”.

From a price strategy point of view I applaud them adding this as a surcharge. It indicates to the consumer that it’s out of their hands and gives them the option of removing (or indeed increasing) it in future.

Rarely have I so looked forward to a dental visit knowing that this time around I’ll be assessing whether the PPE I receive is actually worth £10!

The question is where does it stop? Could coffee shops charge more for the cost of plastic screens? Pubs for the extra cleaning of tables?

Where do you think it’s reasonable to draw the line?

Reductions in promotions

Early in the crisis most supermarkets reduced the number of promotions in store. With concerns about availability nobody wanted unnecessary spikes in demand.

On top of this, stores were rightly focused on keeping staff and customers safe, making the effort involved in rotating stock on and off promotion space a luxury few could afford.

This appears now to be normalising, with The Grocer reporting there are currently more than 20% fewer promotions than previously.

Despite Tesco’s best efforts to nudge down every day price, if you’re a consumer who actually wants the three in a “3 for 2” then this equates to a hidden price increase.

It’s more Stealthflation.

We have no problem with businesses increasing price. In fact it’s one of the most important strategic levers a business has in effectively managing profitability.

Doesn’t it look better, though, when a business makes its pricing simple and clear? No subterfuge or hidden meaning: This is what we charge and why.

Being confident in the prices you charge conveys a subtle message to customers that you’re worth it: That the value you provide justifies the price. Far better to take this approach than risk the reputational damage of Stealthflation.

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