Price wars


Identifiable objectives, depths of resources and strength of commitment are the keys to success in a price war. Don’t launch one if you don’t have them.

You have missed your chance to make twelve trips between London and Oxford for £15. The price war on the M40 is over. But there are plenty of other bargains around. Call in at your local Esso or BP station, cross the channel, visit you local supermarket. There is a mortgage sale at the building society and if you live in the South-West there is 25% off gas.

Between January and March 1980, there were 13 references to price wars in the Financial Times. In the same period of 1996, the phrase was used 180 times. Such is the change in the intensity of competition.

A successful price war was the one Philip Morris began on Marlboro Friday, 2nd April 1993. The company cut the price of the world’s best-selling cigarette by almost 20% – and in the process knocked almost $10 billion off the market value of the company. What the market did not understand was that Marlboro Friday was not so much the beginning of a price war as the beginning of the end of a price war.

Marlboro’s share of the US cigarette market, once around 30%, had fallen back to 22%. Producers of premium cigarettes, like Marlboro, had responded to falling volumes of cigarette consumption by pushing up prices to maintain profits. Manufacturers of generic cigarettes had held down prices to maintain volume. The widening gap between premium and generic products had been filled by low cost brands. American Tobacco – who had once dominated the US industry but had since undergone steady decline – were leaders in that intermediate segment.

A price war can only pay if its long run result is to change market structure or market behaviour. Philip Morris succeeded in doing both. The price war largely destroyed the cheap brands, and American Tobacco quit the market altogether, selling the remains of their operations to BAT (a committed segment manufacturer). And the thread of continuing price competition forced the terms of an armistice between the generic manufacturers and the premium producers. By 1995 Marlboro hd regained its lost market share and premium and generic prices were drifting up together. The PM share price more than recovered its lost ground.

A few months after Marlboro Friday, News International cut the price of both the Sun and the Times and began a price war in the British newspaper market. Three years later, it does not seem that they have succeeded in making a permanent change either to market structure or market behaviour. The Independent is still there, and the only paper to quit has been News International’s own title, Today. Somewhat reluctantly, the Telegraph accepted that it could maintain only a limited price differential over the Times.

Oxford remains the showpiece of bus deregulation. In the early days the city’s traffic, never fast moving at the best of times, was brought to a halt by the density of competing bus services. But even today it is not worth enquiring about the schedule if you want a coach to London: there is always a bus about to leave. Last autumn, the simmering rivalry between Thames Transit and the Oxford Bus Company became open warfare when the former company offered an alternative to the latter’s established monopoly on the Heathrow run. Successive price cuts and price reductions culminated in both companies offering a £3 return fare.

The price war continued through the winter, with both companies filling their coaches but draining their revenues. The cheapest way to London became a subject of conversation on High Tables as well as junior common rooms. But as the academic year ends, the students disperse and the dons make their last trip to Heathrow until the September academic conference season. The balance of traffic shifts from knowledgeable and price conscious regulars to the occasional tourists, uncertain how much £3 is in dollars. Thames Transit offered an olive branch with a modest price increase. And last weekend both companies put their prices back to last summer’s level.

There seems no benefit which either company can show for their long bleak winter. No change in market structure: and pricing behaviour is as it was. Why did Philip Morris succeed, and Oxford coach companies fail? The Marlboro cowboy war succeeded because there were clear, if necessarily tacit, objectives, and overwhelming commitment on the part of the initiator.

Philip Morris’ aspirations were to squeeze the middle segment of the market and to impose price discipline on the generic products. One of the reasons they succeeded in both was the more or less infinite resources which one of the world’s largest companies could bring to bear, and the certainty that senior management reputations and jobs were on the line could have left competitors in no doubt that the company was determined to achieve its objectives. The Oxford bus battle, by contrast, looks more like an instance of two firms drifting into a costly and unproductive mistake. The newspaper war fell somewhere in between: less clarity, less commitment, and a strategy which when it failed to kill any rival seemed itself destined to fail.

So where does this place Esso, who launched the petrol price war at the beginning of this year? Petrol seems more like tobacco than either buses or newspapers. Esso can hope to achieve both a change in market structure and a change in market behaviour. They can force out independent retailers and wholesalers who, like the generic brands in the US tobacco market, have no sustainable position in a market focussed entirely on price. And they can establish a price accommodation with the supermarkets. These can be allowed to discount by a penny or two but the majors have now signalled that too much aggression on price or market share will be very costly for everyone. Sainsbury’s abortive attempt to raise petrol prices indicates that they are already prepared to accept that compromise.

Identifiable objectives, depths of resources and strength of commitment are the keys to success in a price war. Philip Morris and Exxon have all of these. But don’t launch one if you don’t.

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