On Thursday 26th October 2002 it was requested by Dr M. Rafiq that our ‘International Retailing’ lecture group spilt into groups of 3-4 members to undertake the completion of a coursework report. This assignment required us to discuss the evidence for, and against, the charge that retail prices are excessively high in the UK when compared to Europe and the USA, with reference to vehicles and groceries. The completed report should be submitted by 29th November 2002.
3.1 Investigation into excessively high retail prices in the UK:
3.1.1 – Vehicle Prices in UK:
There is compelling evidence that car prices in the UK are higher than the rest of Europe. This has been reinforced in the eyes of the public by the ‘Rip-of Britain’ campaign run by Labour shortly after the 1997 election. The following table shows pre-tax prices in the UK compared to the cheapest prices in Europe:
This table illustrates the huge gap in pre-tax prices and is evidence to the Consumer Association’s claim that ‘British consumers are being forced to subsidise car buyers in high-tax countries.’ Car taxes in Britain are 17.5% of the sales price compared to 180% in Denmark and pre-tax prices are almost twice as high in Britain as in Denmark although the end price paid by consumers may be the same as or lower than the UK.
Marjorie Miller of the Los Angeles Times states that;
‘When it comes to cars, it appears that neither the free market nor the European single-market has been working for the British consumers. This is the most expensive new-car market in the EU for 60 of the 74 best-selling models, with Britons paying up to 40% more. No matter that Britain is the third-largest car market in Europe, has some of the lowest automobile taxes in the region and even produces some of the cars at home.’
For as long as the Euro is not used in all Member States, exchange rates will be an issue. Nowhere is this more evident than in the current debate about car prices in the UK. Indeed, we should not forget that in 1996, car prices in the UK were amongst the lowest in Europe. At that time, 1 Pound equaled 1.20 Euro. Today, 1 Pound equals 1.60 Euro. Purely as a result of this change, prices in the UK today are the highest in the EU. However, this hides the fact that car prices in the UK are actually falling faster than in any other EU country except Greece. Data published by the European statistical office. Eurostat show that in real terms, car prices in the UK dropped by 5% last year. The EU average was only 2%.
Although this evidence does clearly show that prices for vehicles are high in the UK, there are arguments against this accusation. Unlike the rest of Europe the UK has a very strong fleet car market (company cars) and because of the number of units sold to fleets they receive heavy discounts. In examining the differences in car prices across Europe it has been claimed frequently that UK prices are higher because of discounts to major fleets. SMMT spokesperson Roger King explained:
‘It is a perfectly normal business practice to give discounts for large orders, whether it is loaves of bread being bought with the massive purchasing power of a major supermarket chain or computers bound for the shelves of a major electrical retailer. It is completely false to suggest that the private buyer suffers when he or she goes to a dealer to buy a single vehicle nor is it realistic to expect the dealer to offer the same price as it would for an order of 1,000 vehicles. In fact UK buyers have benefited from the higher standard specification often demanded by fleet buyers’.
The prices of best selling fleet cars such as the Ford Focus, Vauxhall Vectra and Toyota Corolla are sometimes misleading because these cars are usually bought in bulk by dealers and pre-registered to meet sales targets and then are heavily discounted before being sold to the customer. Therefore the real price paid for these cars is significantly lower than the manufacturers recommended retail price. This results in a problem when comparing UK prices with the rest of Europe because the RRP figure is used in price surveys rather than the real price
In addition to exchange rates any investigation of new car prices across Europe will, according to the SMMT, highlight other factors which also influence prices. In countries such as Portugal and the Netherlands taxes imposed on new car purchases are very high. In order to make cars affordable, carmakers have historically lowered the pre-tax price, compared with France and Germany for instance. In Portugal and the Netherlands, VAT and car specific taxes can add between 40 and 60 per cent to a car’s basic list price compared with the standard 17.5 per cent VAT rate in the UK.
The packages offered to potential new car buyers also vary considerably across Europe; something the SMMT believes has not been taken account of when making comparisons. Consumer offers have traditionally been the most generous in the UK where instances of long warranties, free servicing, free insurance, subsidised finance and more generous trade-in prices on second-hand vehicles all present considerable benefits to the buyer. Many of these features are completely absent from other European markets. The high residual value of cars in the UK also ensures that the cost of ownership is not out of line with other markets.
3.1.2 – Grocery Prices in UK:
In the ‘Rip Off Britain’ campaign another area that came under scrutiny were supermarkets where the prices of goods were thought to be unduly more expensive in the UK than abroad. Fair trade watchdogs in 1999 referred supermarkets for investigation by the Competition Commission. In October 1999, the commission found that, really, retail giants had little to answer for. Tesco itself says that prices are 11% lower in real terms in the past five years. The commission found the industry was ‘broadly competitive’, and ‘overall, excessive prices are not being charged, nor excessive profits earned’.
So why does the bulk of the UK feel that we are living in ‘Rip Off Britain’? A possible reason is the huge profit figures that the top companies are making. Recently Tesco became the second British retailer in history, after Marks & Spencer, to post profits in excess of ï¿½1 billion. Some consumer and farming groups reacted angrily to this news and although the National Farmers Union (NFU) preached that it would be beneficial for farmers to work with retailers, a very influential group of these aggrieved farmers (whose incomes had fallen by a third in the past 5 years) joined forces and exacerbated the ‘Rip Off Britain’ campaign.
These farmers found these huge profit figures hard to comprehend, especially as many of their businesses had been devastated by the foot and mouth crisis. They automatically related their drastic drop in income to the increased profit the supermarkets were making. But using Tesco as an example it can be seen that these profits can be justly explained when investigated a little deeper. The groups 12% profit increase was almost exactly in line with the rise in sales, indicating that it had not raised prices. The firm credited the growth in profits on increased volumes of sales, on its success in selling rather than charging customers more, or indeed paying suppliers less. They concluded that the fall in farm gate prices has been swallowed up else ware in the supply chain.
Indeed there is evidence that prices have been falling. Tesco says it cut prices by ï¿½380m in 1999 and in the same year Asda promised to reduce the price of 10,000 goods to US levels. In the year 2000 Government inflation statistics showed that competition within the retail industry had resulted in the steepest food price falls in the month of December for 40 years.
Although it can be seen that prices are falling there is evidence that Britain’s consumers are being forced to pay over the odds for their groceries. It has been found that the gap between food prices in Britain and some foreign countries is becoming wider. In the year 2000 British consumers were paying about 30% more for their food than the French, and in 2001 this figure increased to 43%. In Germany the price difference fell from 35% to 32%.
In two surveys conducted by a major British newspaper, a basket of 22 grocery items was bought from various stores in Britain, France, America and Germany. The items were chosen because they were available in each country in similar sizes. In the most recent survey the goods cost ï¿½81.46 at Sainsbury, but in France they were more than ï¿½34 cheaper, in Germany the saving was almost ï¿½26 and in America the saving was more than ï¿½19.
Although these shopping basket comparisons do highlight differences, it must be pointed out that they are based on superficial comparisons, disregarding the factors that contribute to prices. They ignore the fact that, as we have seen, UK shop price inflation has been consistently below the Retail Price Index (an explanation or the RPI can be found in appendix 7.0). Similarly, the accusations have disregarded the host of problems that affect international shopping baskets, which we have investigated this in the next section.
3.2 Problems when comparing prices in different countries:
3.2.1 – Taxes:
There is a sales tax placed on the majority of goods in every country. In the UK this sales tax is known as Value Added Tax (VAT) and is set at 17.5% by the government. But, there are variations in sales tax across the EU ranging from 15% in Luxembourg to 25% in Denmark and Sweden. This is also apparent in America where for example, New York City’s sales tax (8.25%) is amongst the highest in the US, whereas 0% is incurred in Georgia. In the UK, shop price labels include sales taxes whereas in the US they generally do not. This is a contributory factor to why shopping basket comparisons can lead to visual biases in prices.
There are also significant differences in other sales taxes, notably duty on tobacco, alcohol and vehicles across Europe. In many EU countries there is a separate registration tax for cars. These range from 0% in France to 180% in Denmark. It is true to say that these taxes result in some low pre tax car prices, and studies have shown that car prices are cheapest (before tax) in Finland, the Netherlands, and Denmark. However, the taxes that are placed on the price are very high, making the end price expensive.
One of the objectives of the Euro was, and still is to achieve price harmonization across Eurozone countries. However, due to local taxes and other factors it is often the case that one Euro has more “purchasing power” in certain countries. We will now look at currencies in the next section.
3.2.2 – Currency:
Different currencies also make price comparisons difficult. The value of the pound versus the Euro and US Dollar changes on a daily basis. These exchange rates often enable bargains to become available in foreign countries due to the value of one currency. This, along with tax differences are the main reason for the popularity of the British ‘booze cruises’.
In the car market The Society of Motor Manufacturers and Traders has rejected claims of unfair car pricing and highlighted the effect of the prevailing exchange rate to transform the UK from one of the cheapest countries in Europe to buy a car to one of the most expensive: ‘Any suggestion that car makers should constantly change their UK prices to reflect the fluctuations in exchange rate is absurd and would create huge uncertainty for buyers and chaos in the second-hand car market where residual values would be bound to suffer,’ commented Roger King, the SMMT’s acting Chief Executive. ‘Stable new car prices are good for the consumer but it does mean that swings in exchange rates will show UK prices to be lower or higher than in mainland Europe depending upon when the comparison is made,’ he stressed.
3.2.3 – Product Harmonisation:
The manufacturers themselves create a complex web of ‘models’ to confuse and dissuade cross border buyers. Ford calls the UK Mondeo a GLX. In Holland it is called a ‘Business Edition.’ In Germany it is a CLX. In Denmark it is called ‘Flair.’ General Motors goes one step further. It calls an Opel a Vauxhall in the UK – but not in Ireland, another right hand drive state like the UK. Typically only the plastic badges and equipment differ; the cars themselves are disguised but fundamentally are identical. We also saw earlier how the bundled packages that comes with UK cars increases the vehicle price which obviously makes price comparisons hard.
There is also a similar case with groceries where goods are purchased in different sizes, measure and weights, and although companies are trying to harmonise brand names there are still discrepancies, for example, Lynx deodorant is called Axe in France and Benson ; Hedges cigarettes are called Senior Service in the USA.
3.2.4 – High Business Costs:
British retail property is notoriously expensive, with its cost compounded by often onerous and restrictive lease arrangements. According to Morgan Stanley, ‘space generally is around twice as expensive in the UK (compared with mainland Europe), partly reflecting the tight planning regime and the lack of available good quality retail space’. John Bridgeman, Director general of fair trading acnowledged this; ‘I believe that there are now significant barriers to new competitors in high-volume grocery retailing in Britain. For example, sites for new stores are dwindling and this gives the existing stores an advantage. Planning delays, site development costs and the ability of the largest stores to outbid smaller rivals add to the problem’.
UK vehicle excise duty is more than three and a half times the average for the rest of the EU, and more than twice as high as in the US. As well as this, UK fuel duty is more than twice the average for the rest of the EU, and more than seven times as high as the US. This greatly increases British business costs as the UK is not remowned for having the best infrasructure for transported goods. This can be even more constricting when you consider that we are an island that imports a lot of grocerys and there is obviously greater dastances needed to be travelled to get the goods to this country.
3.2.5 – Countries are different:
Another major problem when comparing international prices is that countries are inherently different. There are differences between cultures, demographics, beliefs, climates, etc and it is for these reasons prices can be hard to compare as demand for goods can have a large impact on prices, especially those with elastic demand. For example the demand for ice creams in Scandinavian countries is likely to be a lot lower than in the Mediterranean, where a premium price could be charged. Although food is available all over the world peoples diet is largely dictated by their original staple diet that is historically derived. For example, there is virtually no demand for horsemeat in England but there is a well-established market in France. Another example might be that in a strongly catholic country such as Italy that would have a high demand for fish on a Friday.
3.3 Factors that could lead to reduction in price differentials:
3.3.1 – The European Currency
The Euro has been in mass circulation since January 2002. Since its introduction the value of the Euro has fallen against the Pound and the US Dollar which has resulted in increased price differences. As the Euro becomes more established its value has tended to rise against both currencies. Should the value of the Euro continue to rise, or should the Pound fall in value, discrepancies will become less evident when comparing vehicle and grocery prices in the UK to a Eurozone country.
Should the UK enter into the single currency the price differentials will become more apparent as the influence of exchange rates would be eliminated.
3.3.2 – Block exemption
The Block Exemption legislation currently allows selective distribution within the Automotive Industry. This means that manufacturers can select who sells and services their cars within a secure dealer network, which greatly empowers the vehicle manufacturer. However with the release of the new Block Exemption Paper the European Commission have sort to change this by switching empowerment towards the dealers and increasing competition, thus hopefully reducing the price we pay for our cars.
‘By injecting greater competition into vehicle sales, servicing and repair, and the sale of spare parts, Regulation 1400/2002 promotes consumer choice.’
New legislation states that any establishment may become an authorised franchise outlet so long as the retailer adheres to the manufacturers standards and guidelines. This gives the potential for more outlets selling cars that translates to lower prices in the industry.
This form of legislation also allows retailers to enter the European market (coming into effect in 2005). This would allow lower purchase costs for the retailer at the tax rate of the customers home country (this is considered further in section 3.3.3. Taxes). Extra competition in the European Union could also lead to a price harmonisation.
‘The subsequent increase in cross border competition will lead to greater price harmonisation across Europe.'(Mario Monti – Competition Commissioner)
3.3.3 – Tax levels:
There has been no indication that the UK Government is considering altering the 17.5% VAT for goods in their up coming budget, but previous increases on products such as children’s clothes have almost certainly led to higher price differentials.
It has also been recognised that registration tax is one of the major factors in car price differentiation across the EU. The European Commission has published a strategy paper in which it suggests that car taxation throughout the member countries needs to be overhauled and standardised. It’s concerned about improving the co-ordination of current systems so as to remove the present considerable tax obstacles and distortions to free movement of passenger cars within the Internal Market. Registration taxes (applied to the first owner) are identified as the biggest problem, and therefore the Commission recommends their gradual reduction and even abolition to be replaced by annual road taxes and fuel taxes, so that the tax burden would remain the same but related to the use of a car rather than its acquisition.
3.3.4 – Manufacturer price harmonisation:
Manufacturers’ price is a predominant factor that differentiates our vehicle prices from the rest of the European Union.
“Consumer groups say most of the reasons given for higher prices are ‘excuses’ used by manufacturers and traders to keep prices higher than they need to be.” (BBC News.com)
A future solution is the harmonisation of vehicle prices across the European Union. This of course also incorporates the harmonisation of taxes, otherwise countries such as Denmark would end up paying more for their cars.
The experts argue that vehicle taxation in countries such as Denmark of around 200% acts as a leveler in the overall cost of a vehicle, against lower tariffs such as the 17.5% imposed in the UK. (World Markets Research Centre)
The question is; are manufacturers likely to reduce prices inline with lower paying European Countries. Fleet vehicle sales in the UK are already heavily discounted and as a result equate to the higher private consumer prices we pay. Therefore we are more likely to see an increase in vehicle unit cost within the rest of Europe, inline with ‘Rip Off Britain’.
“The economics of car manufacture are sufficiently complex for assumptions about the whole-industry implications of price changes to be at best approximate. However, a margin of 30% between pre tax process and factory gate costs is widely quoted by the industry itself. It will suffice to indicate the potential scale of the problem posed by possible European price convergence.” (www.autoindustry.co.uk)
A gross margin of 30% on the EU average car price of ï¿½15,313 implies a factory gate price of ï¿½10,719. Excluding currency effects, harmonisation to the Greek average level of ï¿½13,997, without any production cost reductions, would reduce industry-wide gross margins from 30% to 23%. Some of that reduction could be offset by the cost benefits that might eventually flow from a genuine single European market. These may include the redundancy of national sales companies in some countries, more efficient shipping logistics, and not least, greater commonality of vehicle specifications leading to greater scale economies.
3.3.5 – Internet:
The competition commission has considered forcing major supermarkets to post their prices on the internet so that consumers could shop around for the best deals. This would definitely indicate price transparencies as many of us have access to the internet and would be interested to see these variants.
The new block exemption legislation permits any company to distribute a particular brand of car. This then creates the way for massive car supermarkets in the industry, with the potential to heavily discount vehicles which could utilise the Internet as their marketing, ordering and communication system.
From bypassing the dealer network manufacturers are already cutting costs with less support systems needed. There is also the question of ‘bulk buying’ and fleet sales which can drastically reduce the cost per unit of a car. There are already relationships forming with vehicle manufacturers and other large retailers such as MG Rover and the Virgin group.
“MG and Rover brands with prices starting from ï¿½11,500 – a significant reduction on the UK list price.” (MG Rover Group)
3.3.6 – Internationalisation of companies:
Markets are becoming more and more multinational; this could have positive and negative effects on the price of goods. International companies are gaining and developing many new skills from their multicultural customers. The knowledge, and economies of scale these companies benefit from, can result in lower costs, which can be passed onto the consumer.
It is likely that the block exemption legislation will result in larger retail groups which are formed through the decline in smaller retailers or acquisition by larger companies.
‘With increasingly competitive selling environment, consolidation of players is a forgone conclusion.’ (Accenture)
It is hoped that these larger retail groups will have the buying power and the economies of scale to reduce prices in the UK Automotive industry. However it should be pointed out that a healthy level of competition is imperative in both the vehicle and grocery market as these top companies can force the weaker ones out and before we know it we could find ourselves in a monopolistic situation where prices could be exploited.
The Harmonisation of brands will also encourage a reduction in price differentials as this will lead to greater price transparencies as consumers will be able to identify the product they use in their country when they are in others. Examples of these would be ‘Jif’ being renamed ‘Cif’ inline with the rest of Europe and ‘Marathon’ being renamed ‘Snickers’. It could also be suggested that in the future car manufacturers may also follow suit, and although it would be complicated and lengthy to implement harmonised brands (i.e., renaming Vauxhall to Opel in line with Europe) it would make price differences easier to spot.
In this report we have highlighted differences in consumer prices for groceries and vehicles and we have found that these vary greatly between the UK and other countries. Where as other studies would conclude that retailers set these prices to high, we have taken it a step further and tried to identify reasons for these variants. We have found that a combination of factors such as taxation, exchange rates, differences in costs of doing business and ultimately differences between markets account for these discrepancies in consumer prices.
Although countries are slowly becoming a lot more internationalised it is still difficult to compare them due to problems ensuring, for example, that products are identical, the outlets in which the products are bought are the same, any effects of promotion, tax and exchange rates are discounted and consumption patterns are comparable. Another important factor is that retail services are not transferable and these, as we have found, also have a great effect on prices.
We have identified that there are factors in process that are working to reduce these costs but ultimately…. we are different countries and, at present, literally ‘do business’ and trade in different manors. We have investigated future developments that could reduce these price differences and with factors such as the Euro and the breaking down of trade barriers prices are becoming a lot more transparent and as more and more consumers are picking up on this it will exert greater pressure towards parity on major commodities.
Competition Commission Issues for Public Interest in Supermarkets Inquiry
Office of Fair Trading, notably (Commission Regulation (EC) No 1400/2002 31/07/2002)
British Retail Consortium, Shop Price Index, October 2002
Texts & Journals from section 5.0
Ahmed, P.K., Rafiq, M., Internal Marketing, 2002
Jobber, D., Principles and Practice of Marketing, 2nd Edition, 1998
Aaker, D.A., Building Strong Brands, 1996
Davies, G., & McGoldrick, P., J., International Retailing, 1995
McGoldrick, P., J., Retail Marketing, 1998