A couple of blog entries ago, I discussed how many supporters of Brexit misunderstood the effect price has on market demand particularly in relation to the sale of luxury and prestige goods. In that blog entry, I focused on the German car industry and how the likes of BMW do not see themselves in the same market as family car makers such as Fiat and Nissan.
I therefore sat agog listening to the speech made by the UK Secretary for International Trade, Doctor Liam Fox MP, on Britain’s future outside the EU. Doctor Fox, in a rambling lecture, which covered topics such as the Corn Laws, 19th century engineering and the lack of free trade in North Korea, seemed to outline his preference for a ‘hard Brexit’ where Britain relied on WTO rules as the basis for trade.
Doctor Fox’s speech was also contradictory. He praised NAFTA, North America’s version of the EU. He also praised the EU’s trade agreement with South Korea; and its positive effect on the UK car industry; with seemingly little realisation that the UK leaving the EU would mean the UK car industries exclusion from that very agreement.
In truth, the speech was equivalent of that made by a first year economics student at a further education college and Dr Fox came across as pompous, egotistical, out of his depth and, quite frankly deluded. He seemed convinced that the UK could have a better free trade agreement with the EU from outside than it does as a member; an idea that is quite frankly bonkers!
So let’s imagine that Doctor Fox gets his way. How does a business go about mitigating the cost increases applied to their products by the application of tariffs and the increased administrative cost of customs regulations?
Well, that is much easier for those companies selling luxury of prestige goods, such as champagne or executive cars than it is for those selling more utilitarian goods.
Firstly, they can alter their marketing strategy and their marketing mix to retain their position in the market. As stated in my previous post, the market for luxury goods is likely to be more price inelastic than that of goods aimed at the mass market. Some consumers in that market may actually see the higher cost of goods as a cache. Luxury goods manufacturers can play on this promoting the exclusivity of their brand and how it plays into the self esteem needs of their target customers.
High end manufacturers can also offer their goods using a ‘more for more’ marketing strategy. They can bundle other services and accessories into their product offer on the basis that consumers will pay a higher price but receive more for that price. When you buy a Mercedes, a BMW or even a Volkswagen, you will often find that accessories which come as standard on other manufacturers are optional extras. They could bundle in services such as valeting or servicing into the price. The secret of a good ‘more for more’ strategy is to identify additional features and services which are of value to your target customers but which can be provided at a cost which has a marginal effect on your profit margins. Ideally, cost neutral services can be bundled into the product.
Firms can alter their product mix to give a more prominent position to those which are least effected by the tariff. For example, BMW may decide that it wants to offer fewer one series vehicles to the UK than five or seven series models.
Finally, larger manufacturers can use their market power to renegotiate their relationship with their suppliers, reducing the unit price of components whilst retaining the market price, offsetting increased tariff cost and avoiding price increases at the point of sale.
Of course, some of these strategies are available to those operating in the mass market but they may find them harder to implement or they may have a larger effect on margins.
The response to Doctor Fox’s speech from the car industry has been interesting. Shortly after the speech Nissan announced they were holding off on the decision as to where new models of their cars are to be produced until after the Brexit negotiations are completed. The implication is that models may be moved away from Nissan’s Sunderland plant if WTO tariff’s are applied. In short, there would be a phased withdrawal from UK production.
The following day, Jaguar Land Rover announced that it was reviewing its position as its research in Europe showed a reluctance from consumers to buy British vehicles.
Let’s hope there was wiser and cooler heads in government than that of Doctor Fox, or British trade could be in peril.