Globalisation in the last two decades, along with the lowering of trade and investment barriers, advances in telecommunication and transportation technologies, has given rise to a faster price discovery of commodities. Hence, price wars have increased and profit margins have declined for commodity companies. In commodities like edible oil, wheat flour, basmati rice, milk and spices, a large number of companies are trying to beat the price trap of the commodity market through branding. Access to information (price, demand-supply and arrivals) has made it difficult for information arbitrage to remain for long on a sustained basis. Commodity-based sourcing advantages are narrowing which make it harder for companies to extract a price premium in most markets.
Just about every company is engaged in differentiation through branding. Edible oil companies can be seen often propagating virtues of good health through expensive advertisements (though doctors may suggest to the contrary). But, very few of them feel that continuous differentiation is a solution. They simply don’t get the results that they expect because everyone else is doing a similar thing. In some cases, the gestation time is long to break even with high brand-spend. This raises a fundamental question: does branding add any value to the bottomline of commodity companies?
The branding of commodities started in 1983 with the Tatas lending their name to salt to create product differentiation and to take advantages of a premium pricing in a commoditised product line. However, what difference does this make by branding commoditised petroleum products from IOC (Xtra), BP (Speed), HP or IBP? All brands of petrol (gasoline) and diesel are derived from same crude and in India it is sometimes from the same refinery (distributed through swap trades). Petrol and diesel retail prices remain regulated (irrespective of brands). Crores of rupees have been spent on the branding of the petroleum products. What value does it really add to the companies?
Companies are trying to sustain competitive advantage through product differentiation by highlighting unique features and benefits which are valued by retail buyers. In the bulk commodity world, the buyer’s perception has remained unchanged: It is price, price and price. This very “price trap” is where a company sees its competitive position being eroded so that it can no longer command a premium price in its market. In a price trap, buyers receive more product benefits for their money or pay lower prices for the same or lower levels of benefits. The result is that companies find that they can hold their prices and lose market share or they can hold market share only by lowering prices. In either case, the companies have lost their pricing power.
While many companies take commodity management as a core competency, almost all have experienced squeezed profit margins whether input costs rise or remain stable. Over time, product supplies become indistinguishable from others in the commodity market and consumers buy on price alone.
No comments:
Post a Comment