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Hmm, I don’t know. While I agree that what you say is a scenario that might well happen, personally, I think that it is a scenario which assumes that businesses operate in a vacuum and decisions are made in isolation of the wider marketplace.
Yes, a price reduction in milk from $3.40 to $3.32 might seem ridiculous, but that is only 1 good. You need to consider, if we’re talking grocery shopping, that consumers are buying a basket of goods.
So if you take an average weekly grocery spend of say, $100 (which is low for the average family), then multiplied by 52 weeks that 2.5% reduction becomes much more pronounced.
While each consumer will still maintain a brand preference in tight times, and lets assume the will pay more for the preferred brand of milk; it is likely that this will come at the cost of other goods ie choosing Signature Range bread over Tip Top bread. And we all know that in FMCG at least, home/personal brands are very competitive in driving down prices.
So for the milk manufacturer, the decision to introduce a price creep cannot be made in a vacuum. They will be considering the overall impact their price has on the overall basket of goods, because their competitive set is not limited to other brands of milk alone, but to the wider grocery category. They may lose 30% market share for a $0.08 increment on their remaining 70% market share… or they may lose more if people decide that they will sacrifice milk for better meat. This 30% share can be very difficult to claw back from their competitors when times are good again.
For example, I switched to Home Brand Wheatmeal which is at least $1.00 cheaper than any other bread brands in the market. I won’t switch back because I’m finding that Home Brand is actually quite good, and gives me more value for money. I’ve acquired a taste for it over time which has surpassed my previous brand (Quality Bakers). They have lost me as a customer.
On the flipside, competitive retailers will also understand the above scenario. Hence, they are likely to act in accordance with consumer choices to maximise their market share and yields. If Home Brand milk realises that Anchor isn’t reducing it’s price in a GST reduction scenario, while Home Brand chooses too, it will inadvertently gain market share as a result (this will be part of their scenario modelling at least) – and it will be a strategy worth pursuing for a discount brand. Any market share gained will be easier to defend in the future because of their price position, they will also have more room to increase prices later vs Anchor which will have more limited room (any further increase might lose it more market share).
And don’t forget too, that in other areas such as utilities, prices are often set exclusive of GST. When you get a letter from Mercury saying that they are increasing prices, it is always quoted exclusive of GST. On your phone bills cost of calls are also stated excluding GST. Any price increases here are much more apparent than in a retail product and will almost certainly be questioned if it happens at the same time as a GST reduction. It is probably much more difficult to change a utility provider than it is to switch retail brands; but again, if consumers have to spend here that just means less spending elsewhere.
The overall impact, I think, will still be a decrease in prices for consumer, and hence decrease the overall cost of living in tight economic times. It may not happen in all areas but I think in the majority of competitive categories, there will be a downward price pressure, not least because a GST reduction induces consumer perception that prices will be lower, and hence creates an expectation by which the absence of a price reduction on the retail end will cause the consumer to consider their spending in that category. Remember, the consumer is also not making his/her decision in a vacuum.
