KPMG warns operators over continued discounting

02 March 2011
KPMG warns operators over continued discounting

Research by KPMG has struck a warning for hospitality operators that continue to discount in the wake of rising input costs.

The accountancy firm surveyed 200 UK business leaders and found more than 50% of companies said they reduced prices across the board, while 49% entered into price wars with competitors. Almost two-thirds saw recession-driven discounting as contributing to reduced profits at their firm.

Many businesses reacted quickly to the financial crisis, with over half of those surveyed admitting to sacrificing margins for sales. But once prices had been cut those firms have found it difficult to revert to pre-recession levels.

Martin Scott, partner at KPMG Performance & Technology, said: "Companies find themselves trapped - consumers' expectations of prices are lower and buying behaviours have changed, potentially permanently."

The situation has reset the price baseline for consumers, who are now unwilling, and unable, to pay more.

Horizons owner Peter Backman said that operators had adjusted their customer base by always lowering their prices. "This has put off the people who were used to paying a higher price, while new customers are used to spending less than they had," he added.

Extrapolation across the top 500 businesses in the UK found that excessive pricing cost them more than £20bn collectively. Meanwhile, business leaders predicted that it would take 13 months on average to return to prices capable of supporting pre-recession profit levels.

The British Hospitality Association's Martin Couchman said that rising input costs would compound the problem.

He added: "Food prices are rising fast and there is a definite increase in costs. Customers have got used to discounts and it will take time to wean people off. This has become even more difficult with the VAT increase."

It was estimated that a more effective pricing model would have increased the firms' profit margins by 11%, which shows the impact of reactive rather than pre-planned pricing strategies.

Scott said: "There is an art to pricing in an austere UK that is very different to pricing during the boom years."

Discounting in numbers 69% of business leaders admit their current pricing is not sustainable
62% of business leaders fear recession-driven discounting has hit profits
63% of business leaders say increasing prices from recession discount levels presents a significant challenge
55% of companies are unable to pass on cost inflation to customers
58% said that recession-driven discounting damaged perceptions of their brand
55% of business leaders realised that there was insufficient focus on pricing at board level

By Gemma Rowbotham

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