Who, What, Why: What happens to £9.99 when VAT rises?

 
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The standard rate of VAT has gone up from 17.5% to 20%. What will this mean for the familiar "price points" to which consumers are accustomed?

They are the magic numbers of retail - usually ending with 99p, in a bid to convince us that we are spending less than we actually are.

But the rise in the sales tax pushes the psychologically all-important figure of £9.99 up to the rather more ungainly £10.20. Will shops really change their pricing habits?

The British Retail Consortium (BRC) insists the competitive pressures of the current UK economy mean there will be no repeat of the introduction of the euro, when consumers complained about shops grabbing the opportunity to round up prices.

But Neil Saunders, consulting director at retail analysts Verdict, warns: "Retailers will be reluctant to change the magic numbers like £9.99 on some products - but this may mean other items going all the way up to £10.99."

In December, a survey by accountancy group KPMG warned that 60% of retailers and consumer product manufacturers planned to use the VAT rise to "mask" more extensive price hikes - a prediction dismissed by the BRC.

The Answer

  • Consumers have been warned that chains will "round up" prices - a claim denied by the retail industry
  • But analysts say holding one product line at £9.99 means the price of another will have to go up above the VAT increase
  • Retailers could reduce costs and lay off staff to keep prices lower
  • The British Retail Consortium says prices could more accurately affect costs

Certainly, many large chains have said they will delay passing on the increases. Tesco has said it would freeze VAT on all its non-food products until 25 January, while John Lewis has also promised to hold off raising its prices until its competitors have done so first.

However, as Mr Saunders points out, most chains are currently in the midst of their January sales period anyway and are focusing on clearing out old stock. Consumers will notice the difference, he predicts, when new product lines for spring hit the shelves.

"Every retailer has a margin and the first thing they will think about is what the VAT rise will do to their profitability," he says.

"It's a well-proven fact that 'price points' like £9.99 do sell, and some items will be left where they are. But to balance that out, other products will have to go up further to make up the difference."

The 99p factor is certainly well established. A 2008 French study of the phenomenon found that lowering the price of a pizza from 8.00 euros to 7.99 euros boosted sales by 15%.

Of course, retail chains may have other options if they wish to balance the goodwill of their customers with their own need to protect their margins, argues Richard Dodd of the BRC.

Firms can look for costs savings in their staffing and in their supply chains "That's why retail costs are lower than they were historically," he says.

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But consequently, he adds, waste and inefficiency have already been stripped away, meaning there is not much more in the way of savings to be made from laying off staff and squeezing suppliers.

With competition fiercer than ever in the post-credit crunch climate, he argues that retailers are under too much market pressure to profit from eurozone-style rounding up.

What this could mean, Mr Dodd suggests, is an end to the preponderance of number nines on display in the nation's shops.

"In the past few years a lot of retailers have moved away from £9.99 because there's a feeling that it doesn't work any more," he says.

"In the last few years we've seen a lot of £9.56 and £9.84 and these kind of prices which are a better reflection of the costs involved."

Consumers may be sceptical about the prospect of a fair pricing structure, but whatever happens, retailers will continue to make the most of the numbers game.

 

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