Shoppers are bombarded with promotions whenever they visit a store. Offers are no longer considered an occasional activity and consumers have come to expect them as the norm. Because of this, sales of many products, including frozen food, can often decline dramatically if they are not on offer. This has led to greater scrutiny of promotional pricing by regulators, particularly in the food sector, as evidenced by the recent conviction of Tesco for a misleading half-price promotion.
In the last year, misleading pricing has risen up the agenda for regulators, leading to The Office of Fair Trading (OFT) issuing new guidance last November in the form of its Pricing Principles. While manufacturers of both fresh and frozen food usually support the promotion of their products in shops, responsibility for pricing ultimately lies with the retailer. However, manufacturers should still be aware of the issue and its potential implications to ensure they are fully protected from the aftermath of an improperly executed promotion, particularly if they are putting flash price promotions on packaging.
What are the rules?
The law in this area is simple: traders should not mislead customers on pricing or misrepresent the value of any offer, either by act or omission. This rule is general in nature and does not go into detail about what is needed for compliance. Therefore retailers and manufacturers are dependent on the existing guidance provided by The Department for Business, Innovation & Skills (BIS) in its Pricing Practices Guide and the OFT’s newer Pricing Principles to help steer a safe course.
Was/now offers
One of the key focuses in the guidance is reference pricing or ‘was/now’ type offers. Known as the ‘one for one’ principle, the guidance states that the previous, higher price must be genuine and the discount should not be used for longer than the product was for sale at the former amount. There is also advice on using recommended retail price (RRP) or maximum retail price (MRP) as a reference point.
Percentage off deals
In addition, it sets out requirements for ‘percentage off’ offers, for example ‘save 50 per cent’, stating that at least 10 per cent of the stock in question must be marked as for sale at the reduced price at the beginning of the promotion. For retailers and manufacturers, this promotion is easy to demonstrate and justify to consumers, as the discount is based on the original, higher price and is applied at the checkout. However, the guidance only applies to was/now and percentage off mechanisms, and not to ‘two for one’ or ‘two for £x’ type offers that do not require a reference price. These methods work differently, as the cost of a single unit of the product is always being sold at the full price, meaning they can, in theory at least, be used almost indefinitely.
Signage
The Pricing Practices Guide permits the use of signage to make price comparison explicit for any promotion that deviates from its rules. According to the guide, an offence has only been committed if the offer leads a reasonably observant and circumspect consumer to make a transactional decision they wouldn’t otherwise make. In this case, the consumer is given all the information they need to determine the merits of the discount, thereby avoiding a breach in regulations. These pricing rules apply to all products, including frozen food, and a breach can result in a fine. As Tesco found out, the cost can be significant indeed.
What is the future of supermarket pricing?
Concerned about the promotional pricing activities undertaken by certain supermarkets, the OFT recently negotiated with retailers to encourage them to commit to its Principles on Food Pricing Display and Promotional Practices. The principles make a number of subtle changes to guidance under the Pricing Practices Guide, and some of the key points are summarized below: 1. With regards to unit pricing, it is misleading for a product to carry a claim that it is the ‘best value’ when it is possible to purchase a smaller pack for a lower effective cost. 2. There is confusion as to when a price becomes a genuine selling price and when it is a price reduction. This particularly impacts on seasonal products, such as soft fruit.
These products are sold year-round but, prices drop when more products are available in season. The OFT believes that comparing peak season costs with off season ones is misleading, but why is this? If the product was for sale and sold at the higher price, surely it is a genuine selling price and the consumer is entitled to be informed that the price is now lower? 3. The OFT appears to be subtly shifting what is expected of reference pricing in a number of ways, stating that:
• Comparisons should only be made against prices that were charged fewer than two months ago, whereas previous guidance allowed six months
• A product can only be available at the ‘now’ price for less time than it was available at the higher price
• It would not typically be concerned with the length of time a product sat at a higher price if it does not exceed a 1:1 ratio with the lower price
• Actively establishing a higher price in order to advertise a later discount is not acceptable However, it does not comment on the acceptability of using text to explain the basis of the price comparison, leading to ambiguity over the best practice. While all the principles (Pricing Practices Guide, Pricing Principles and Principles on Food Pricing Display and Promotional Practices) agree that savings must be genuine, what that entails appears to be changing.
The OFT suggests that a price would not be genuine if a retailer has actively established a higher price in order to engineer a reduction, raising the question of the intent behind pricing strategy and history for every product on the supermarket shelf. With the Pricing Practices Guide currently being rewritten, the OFT may clarify this point and it is not impossible that, in future, regulators will require the product’s entire price history to establish whether the price reduction is ‘genuine’ or ‘artificially created’. For retailers – and food manufacturers supporting their promotional activity – considering a product’s price history when planning offers and cost reductions is more important than ever.
What lessons can be learned from Tesco?
The recent conviction of Tesco underlines the importance of getting the timings correct for price reductions, particularly for seasonal products. At issue was the pricing of the retailer’s fresh strawberries, a seasonal product. In winter, when there is less availability and lower demand, the price of the fruit is high, but as peak season approaches, the price drops quickly until it reaches the usual market level. The question, therefore, is whether supermarkets can advertise the reduction from, say, £4.99 to £1.99 as a saving, or whether £1.99 is simply the new cost. In this particular case, the strawberries were only for sale at the higher figure for a few weeks and for less time than at the reduced price, so the Court found that the timeframe was insufficient to allow the comparison to be valid, making it misleading.
According to the judge: “If a product is offered at ‘half-price’, it is implicit that the referable full price was the normal price for the product, meaning it had been on offer at the full amount for a much longer period, and so would be a genuine advantageous bargain at half that price. In making such promotional offers, it seems to me, it was a matter of common sense that if something was being offered at half-price the customers were being in effect told this is a real and genuine bargain.” Tesco had procedures in place to prevent such an issue from occurring, but on this occasion they had not been followed and, as a result, it entered a guilty plea. The fine of £300,000 serves as a stark reminder that when promotional activity goes wrong, the Courts are prepared to take action. As the OFT’s scrutiny of pricing continues, it is very likely that others will find themselves in a similar situation to Tesco, particularly if they do not display signage to explain price history. It is more important than ever that both retailers and manufacturers remain vigilant and ensure that their due diligence measures for promotions are robust and demonstrable to minimise the risk of a fine and the brand damage that will follow.
Why does unit pricing matter?
As products are often sold in a range of sizes and for a variety of prices, consumers are not always able to compare prices quickly. The intention behind pricing in ‘unit format’ is to make the comparison process easier, by requiring all products to be listed per kilogram or litre. However, when looked at more closely, this is not so straightforward. For example, it is not uncommon for foods within the same ‘category’ to be compared using alternative units, so retailers will need to judge for themselves which the product belongs to or if it should retain its default position. This can lead to similar foods being treated very differently in the event of a promotion, with raw meat priced in a different manner from cooked and ready-to-eat meat products. In a related issue, where the unit price is also the product price, guidelines state that no further declaration is required. With such varying situations and guidance, it is no surprise that consumer confusion is high, with consumer group, Which?, expressing concern in its recent report.
Will the scrutiny continue?
With the Tesco fine and the OFT’s redrafting of the Pricing Practices Guide, it is highly likely that pricing and price promotions will remain at the top of the regulatory and media agenda for the near future. It will, therefore, pay dividends for food retailers and manufacturers to ensure that they have the systems in place to ensure that their pricing and offers comply with guidance. This is key to minimising the risk of their product being the next news story.