Price arbitration shaving off margins in retail and consumer goods

The internet and changing supply chains mean that access to goods across borders has become simplified. This, however, comes with various new challenges for traditional retail, consumer and supply businesses – prices across borders can in many instances differ substantially, resulting in price and margin erosion.

As part of Europe’s integration policy, goods, services and people can travel freely across borders. Due to a range of factors, prices can vary considerably between one country and the other, which gives rise to cross border shopping trips. Buyers are increasingly crossing neighbouring borders in search of lower prices, hunting deals for toys, spirits, tobacco, consumer appliances, food and electronics.

The rapid growth of e-commerce has taken cross-border purchases to a new level. Consumers can now buy basically any product online, meaning that they can compare prices offered in different countries and decide to make a purchase in a specific country. According to a study by Oliver Wyman, the resulting arbitrage risk (retailers sourcing products at lower prices in different markets) for consumer goods manufacturers on the continent amounts to a fifth of total market size. “This endangers the financial performance – and even the survival – of many consumer goods makers,” state the authors.

An analysis of branded grocery goods illustrates the financial impact. In the segment, the arbitrage risk amounts to €17.5 billion in Northern Europe, €6.6 billion in Southern Europe, €6.6 billion in Central Europe and a much smaller amount in Eastern Europe where price differentials between adjacent countries are considerably lower. With the rise of price comparison sites and deal sites, the share of cross-border sourcing is expected to grow in the coming years.

Price transparency

New technologies make it considerably easier for price comparison portals to benchmark cross-border prices. Traditionally these portals would compare domestic prices between shops, however, the likes of Amazon and regional platforms are rapidly gaining ground, threatening to wipe out a large share of price differentials. On average, Oliver Wyman found that prices of a range of identical consumer products can be 1.5 times higher in some European markets than in others. Health-and-beauty care products, for example, are over two-thirds more expensive in some European markets than in others.

A-grade products are particularly at risk from the effect of cross-border access to goods – particularly for high-priced goods such as electronics and spirits. Retailers often run sales on these products as part of wider strategies to attract customers – however, brand perception in part is reflected in price differences. The risk from cross border acquisition is that prices come down rapidly, while brand perception is negatively affected.

The study looked at a number of examples for value loss from A-grade brands in Germany over a six-month period. For brown goods, price erosion for A-brands was -38%, compared to a segment average of -27%, while for sporting goods, A-brands saw prices drop an average of -20%, 3% more than the segment average. “Mass-market brands – or “A-brands” – are prime targets for arbitration: As retailers like to promote them aggressively to create traffic, cross-border price imbalances trigger price erosions especially quickly,” stated the authors.

The threat from international arbitrage comes amid massive disruption in the retail sector. Traditional retailers are under mounting pressure from online competition, the continued rise of discounters, changing consumer behaviour and the growing importance of price as a differential. These and more factors have led to an intensifying competitive landscape.

When it comes to price arbitration, the researchers note that there is no silver bullet. “Some consumer goods companies have found their way to deal with these challenges, using a myriad of non-exclusive tactics. These include offering a portfolio of differentiated products for different markets; harmonising prices and trade conditions throughout Europe; and more closely managing the retailer relationship. These tools depend on a strong and consistent trade invest management scheme, which should include both fundamental capabilities and more-specific measures.”

The starting point is according to them to create transparency in trade spend as a way of understanding where a manufacturer is vulnerable and where opportunities lie. Then, there are numerous approaches and digital tools that can help combat the threat – “it’s up to each manufacturer to figure out the ones which will work and to combine them effectively.”

Related: Artificial intelligence has potential to save retail companies $300 billion.