Delving into discounting

At any time there are bargains to be had, whether they are buy-one-get-one-free deals or a discount off the standard price! This article delves into advertised 'specialling' by outlining the recent incidence of sale prices observed by consumers price index (CPI) price collectors for some big-ticket household items and electronics equipment.

The extent of specialling can be particularly important when interpreting trends in consumer prices, especially when sale prices can result in significant price reductions, but only for a limited time. While the magnitude of discounts is also relevant, it is beyond the scope of this article.

About 12,000 prices are collected personally by CPI price collectors from Statistics New Zealand, for items surveyed on a quarterly basis. These prices are collected from outlets within the 15 main urban areas. Price collection occurs during the middle of the quarter, specifically the first half of the middle month of the quarter. Prices are collected quarterly for items such as audio-visual and computing equipment, household appliances, clothing and footwear, and furniture. Other items within the basket are surveyed quarterly via other means, or monthly (such as food, non-food groceries, tobacco, alcoholic drinks, and air travel) or weekly basis (such as vehicle fuels and fresh fruit and vegetables). Overall over 120,000 prices are collected each quarter for calculation of the CPI.

If price collectors observe a 'sale' price or a 'special' in place at the time of price collection, then this is recorded.

Defining sale prices and specials in the CPI

The most common type of special is a temporary price reduction on a single item. Price collectors are instructed to collect the special price of an item if it is available to all customers. Specials available only to select customers are generally not collected. However, specials that are available only to select customers, such as to those who hold store loyalty cards, are represented provided information about the relevant proportions of those customers using the cards versus other customers is known or can be estimated.

Discounts are included in the CPI as long as they have been clearly advertised as available to all. For example, an appliance retailer may advertise "10 percent off everything in store – this week only", or display a big banner across the wall that says "10 percent off", or display sale prices for individual items. In these cases, these specials would be represented in the CPI with the discounted prices collected by price collectors. No representation is made where the customer is required to attempt to negotiate a discount – as can happen with new cars and often with whiteware and household appliances. The exclusion of negotiated discounts is for practical, rather than conceptual, reasons, as reliable information about negotiated discounts is difficult to obtain.

Another interesting specialling practice is the addition of 'free' goods and bundling. When an unsolicited good comes with the item being surveyed, an assessment is made as to whether the free good can be used directly with the surveyed good. If so, the value of the free good is deducted from the price of the surveyed item. For example, if the surveyed item to price is a man's business shirt and it comes with free cuff links or a free tie, then an allowance for the value of the cuff links or tie would be treated as a reduction in the price of the shirt.

Bundling is often prevalent where complementary items are sold within the same store. Price reductions are shown either against the item being surveyed for the CPI or both bundled items, depending on the nature of the bundling and whether the bundled items are surveyed separately for the CPI. Examples of bundling include washer/dryer combinations, set-top boxes with flat-panel televisions (these can even now be built-in), or bedroom suite sets.

One point to note is that end-of-line, clearance and priced-to-clear sale prices are not typically included in the CPI once the products being tracked have been superseded by new models, if they have become unfashionable, or if they are not of good quality. Also, reductions in price that are a result of trade-ins are excluded, as the consumer has to give up something of value to gain the price reduction. However, it should be noted that for trade-in offers where very little in the way of an actual working trade-in is required for the discount, some price reduction might be shown depending on the specific circumstances.

top

Reported specials

The incidence of reported specials over the past two years is recorded below for some big-ticket household items and electronics equipment. Incidence here is defined as the number of reported specials within that category divided by the total number of prices collected for that category. These are simple averages – no weighting is applied for outlet type, region, or relative item expenditure weight as is done for calculation of the CPI.

The incidence has been given for audio-visual and computing equipment (from within the recreation and culture group) and selected categories from within household contents and services. The bedding and lounge suite categories are those that have exhibited high levels of specialling recently.

Table 1

It is interesting to note that special prices are always present in the CPI. However, there does appear to be higher levels of specialling in either later 2007 or early 2008, depending on the category considered.

Given the nature of retailing for audio-visual and computing equipment, with high turnover of products and frequent changes in product lines, it is not surprising to see the high incidence of specialling for these goods being recorded. Specialling appears to be more prevalent for audio-visual equipment than for computing equipment, although this has occurred less frequently over recent quarters.

Compared with the high level of specialling in audio-visual and computing equipment, the level of specialling within major household appliances is lower. However, with one in four prices on special in some quarters, specialling is still significant. Within major household appliances, refrigerator-freezers is one product that contributes to the level of specialling. Notable is the high level of specialling in the June 2008 quarter and the low level in the September 2008 quarter. During the June 2008 quarter there was a significant number (roughly half the number of prices collected) of model replacements, with one manufacturer in particular replacing a product line. These replacements appeared to have impacted on the incidence of specialling in the following quarter.

Within furniture and furnishings, beds and lounge suites are two items that have a high incidence of specialling, with beds recording a third of prices on special on average and lounge suites recording four out of every 10 prices on special for each of the past three quarters.

Back to Price Index News: January 2009