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Should portfolio pricing replace MRP?

September 25, 2009 11:59 IST
The idea of the MRP is becoming less relevant and should be replaced by portfolio pricing, says Shobhana Subramanian.

The mood at the Indian Retail Forum, the annual meet for retailers, held last week was clearly far more upbeat than it was last year when Lehman Brothers was about to collapse.

Clearly retailers believe the worst is over and even if most of them are reeling under losses they're consoling themselves with the thought that things could have been worse.

As usual a number of subjects were debated but one idea that was revisited was that of doing away with the MRP (Maximum Retail Price).

K Radhakrishnan, CEO (value format) at Reliance, believes that the time has come to do away with the MRP for retailers. If that happens, he says, it would usher in the concept of portfolio pricing.

That means charging more (than the MRP) for products that customers are willing to pay more for and less for goods that are at lower price points but typically sell in bigger volumes.

So, for instance, the price of Pure Magic biscuits could be raised above the MRP while Tiger biscuits could cost less than the MRP because typically only 20 per cent of shoppers would buy Pure Magic while the remaining 80 per cent would pick up Tiger.

Portfolio pricing should, therefore, bring more people into shops. Radhakrishnan argues that had fruits and vegetables been subject to MRP, he wouldn't be buying 1,000 tonnes a day; the headroom pricing, he says, allows him to pick up large quantities for key stock keeping units (SKUs) and bring down the per unit cost.

He may have a point. The government imposes an MRP ostensibly to protect the public, especially those not so well-to-do, from being fleeced by shopkeepers.

But then most of the goods that this socio-economic class is buying are not subject to an MRP because their basket comprises staples; indeed 50 per cent of any consumer's food and groceries (F&G) basket comprises staples like rice, atta, pulses or sugar for which the shopkeeper anyway charges whatever he feels he can command. And these are the items that have seen the maximum price rise in the past year.

So, if the government wants to help the less privileged classes, it needs to control inflation in staples and vegetables, something it has completely failed to do.

Of course, the government would worry about tax collections and the fact that it might lose out on revenues but Pinaki Ranjan Mishra at Ernst & Young believes the problem isn't insurmountable; there could be ways to monitor prices and the switch to GST, he says, should make things easier.

As to whether retailers will push up the prices so that they become unaffordable, the answer is no. No retailer would want to lose out on volumes especially for high-value products where the margins are more lucrative.

Moreover, he can scarcely afford to lose customers to a rival retailer. Competition will ensure that customers are not overcharged; given that there's a kirana, or perhaps two, at every street corner, it's highly unlikely that any retailer can get away with overpricing. In fact there are categories where retailers sell at below MRP and give up some of their margins to push through volumes. And this is true even for big brands.

Also, gone are the days when a shortage of products prompted shopkeepers to hoard them and charge a premium. The shortages today have often to do with staples, and grocers jack up prices anyway.

The surfeit of brands in the marketplace will ensure enough choice for the customer, and private labels from organised retailers will make for even more crowded shelves.

So perhaps the idea of the MRP is becoming somewhat less relevant and given a chance, prices of more popular products can be brought down through portfolio pricing. In countries where the MRP doesn't exist, convenience stores actually charge a hefty premium on several products because they are providing you with, well, convenience.

They're open for long hours, they're located in the neighbourhood and they stock what you want. So a product that costs a certain amount in a convenience store can cost as much as 25-30 per cent less in a hypermarket, which could be some distance away.

But then that's how convenience stores cover their rents - which would be way higher than that for a hypermarket - and other costs and manage to stay in business. And customers don't mind paying.

So if retailers back home need to pay high rents for good locations, perhaps they too need to be allowed some flexibility when it comes to fixing prices.

Shobhana Subramanian
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