Research establishes impact of unit pricing on retailers

Posted by Daniel Palmer on 15th July 2008

Insight Partners and Citi Investment Research have today released a comprehensive report outlining the impact of unit pricing on retailers, consumers and suppliers in Australia. EBIT (Earnings Before Interest and Tax) are likely to be affected with a drop of about 5% anticipated for retailers and suppliers of packaged goods.

The issue of unit pricing has been on the agenda for about a year and has been heavily promoted by consumer advocates CHOICE and Family First Senator Steve Fielding. It was initially questioned by the major supermarkets but, with their support, it now appears a mere formality that unit pricing legislation will be introduced and passed in the near future.

“We expect the ACCC to recommend the introduction of unit pricing and the Rudd Labor Government to accept this recommendation,” Dr Alan J Kallir, Director of Insight Partners, advised upon releasing the report.

Dr Kallir added that there were three compelling reasons for the introduction of unit pricing. “First, unit pricing responds to voter concerns and it fits well with the Federal Government’s commitment to empowering consumers. Second, unit pricing is a simple, effective and evidence based policy which reduces inflation. Third, it is a low cost initiative with low political and implementation risks. Both Coles and Woolworths have indicated they are happy to see unit pricing introduced,” he said.

The report cited past overseas research, which has established that consumers, on average, reduce their spending by one per cent following the introduction of unit pricing, as a key argument for its introduction. “We expect an effective implementation of unit pricing to transfer about $810 million of wealth from retailers and suppliers to consumers per year. That is, savings of about $100 on average per family per year,” Dr Kallir reported.

The research also established the substantial extent to which individual consumers could save, with cost reductions of approximately 21% on packaged groceries for consumers who switch from the highest to the lowest unit price package of the branded products. Consumers could save about another 34% by switching to the lowest unit priced private label product, according to a pricing survey completed by Citi at a Coles and Woolworths major suburban supermarket.

The impact on retailers will be a short-term concern as consumers may make an initial shift and systems will need to be updated. “The initial burden of unit pricing is felt by retailers as consumers shift towards more economical pack sizes net revenue will decline,” Craig Woolford, of Citi Investment Research, said. “We estimate packaged goods profitability could fall 5% across the grocery retail sector.”

Mr Woolford added that the impact could be felt by some retailers more than others. “We expect the largest impact to be on Coles’ supermarkets, given the company’s inefficient cost base,” he stated. “The profitability on packaged groceries could fall by 6% at Coles and 3% at Woolworths.” Additionally, a reduction of 2.6% in packaged grocery earnings is estimated for Metcash. The impact on group earnings is, however, expected to be minimal, with Wesfarmers only estimated to see a 0.8% fall in EBIT, Woolworths Limited a 1.8% drop and a 2.1% decline for Metcash.

Suppliers may also notice a reduction in profitability, according to the research. “The impact of unit pricing will be felt by packaged grocery suppliers,” Mr Woolford warned. “They will lose some premium for convenience and are susceptible to losing share to private labels.” The report looked into two major packaged goods firms and highlighted that Coca-Cola Amatil could be susceptible to a 2.6% reduction in EBIT while Goodman Fielder may witness a 0.5% drop.

Across the supply chain total falls in EBIT are estimated by Citi to be 5.1% for retailers, 5.3% for suppliers and 1.7% for commodity input providers.

The ACCC’s recommendation (or disapproval) of unit pricing will be made available at the end of the month when they release their findings from the Grocery Price Inquiry.

More information about the concept of unit pricing can be found here.