78-Price Increases at the Time of a Sales Decline
The world’s largest manufacturer of home appliances, Whirlpool Corporation, has seen a substantial decline in revenues and unit sales in the last few months. The company, as well as the rest of the industry, has responded with lay-offs and other overhead streamlining. And one other thing…a price increase. Despite the price increase, Whirlpool expects to gain market share in this troubled time for its industry.
Hertz Global Holdings, Inc. raised its car rental rates at North American airport locations an average of $5 a day, or $30 a week. The problem is that fewer travelers are renting cars, so the industry is struggling with higher costs.
In the magazine industry, newsstand sales of magazines are falling at the fastest rate in decades. Here again, the industry can point, in part, to increases in the cover price of magazines for a fall-off in sales.
The international food giant, Unilever, raised prices more than 9% world-wide in the fourth quarter of 2008. At the same time, world-wide commodity prices had fallen with a collapse in demand. The result: a bunch of unhappy food retailers. Oh, and private label food sales are taking more market share.
These price increases, at a time of declining demand, are dangerous moves. (See the Perspective, “How Price Kills Profits” on StrategyStreet.com.) If everyone in the industry follows along with the price increase, it will prove to be a boon for all industry competitors. But there’s the problem. In most declining markets, at least some competitors, if not most, will discount to maintain their current sales volume at the expense of their higher-priced competition. If these discounting competitors succeed, the industry leaders will see their market shares fall and will, eventually, have to reduce their prices.
The real purpose of a price in a tough marketplace is to discourage a competitor. Do that and everything else will work out, eventually.
Both Whirlpool and Hertz have had their struggles with new competition over the last 12 years.
In 2020 the worldwide household appliance industry was led by Medea Group at $40 billion in sales. Gree Electric Appliances followed at nearly $29 billion in sales. Whirlpool ranked 3rd with $20 billion in sales. In 2018 Samsung accounted for nearly 20% of all refrigerators, washing machines and microwaves sold in the US, its Korean competitor, LG, held 15.7% of the market while Whirlpool owned 15.4%. The Whirlpool market share has been on a slow decline.
There was a great deal of turmoil in the automobile rental market over the last decade or so. First, came the emergence of many forms of alternative mobility solutions, including bicycle and scooter rentals, ride hailing, ride sharing and car sharing services. There was turmoil as the industry Standard Leaders acquired many of the low-cost Price Leader competitors. The Avis Budget group bought Payless rental car in 2013 and Zipcar the same year. The Hertz Corporation bought Thrifty and Dollar rental car in 2012.
By 2021, Enterprise had become the dominant leader in US auto rentals, in both cars in service and US revenue. The Avis Budget group was a distant 2nd followed by Hertz at number 3. These 3 competitors controlled the large majority of the rental car market. The number 4 competitor in the industry had less than 10% of the revenues of number 3, Hertz.
Price increases, unless done judiciously, can reduce rather than increase profits. See what we mean HERE.
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.