Falling prices mark out `losing' sectors

THE BATTLE against inflation tends to be characterised as a crusade in which the goal of prices rising at only marginal rates is shared by all. But for a growing number of businesses, such a situation is bad news.

Although general price deflation in the UK is unlikely, falling prices have become a reality in certain sectors, according to the business regeneration group at PricewaterhouseCoopers (PwC), the accountancy firm. Indeed, the group believes the UK stock market is becoming sharply divided between "deflation losers" and "deflation winners". Steel, oil and basic chemicals, along with glass, paper, textiles and agribusinesses, are among the losers. Telecommunications, information technology and pharmaceuticals are among the winners.

All of the evidence suggests that the deflationary state is likely to be permanent or, at least, long-lived.

Bruce Gregory, a director of the group, said that the difficulty was being exacerbated by some managers' apparent refusal to accept the conditions. "All too frequently" he and his colleagues were shown projections that featured revenues growing, margins growing and prices increasing.

Mr Gregory said that having spent their whole working lives in a period of inflation, managers could not adjust to a situation in which this was no longer the case. Although PwC highlights certain sectors that fall into the losers' or the winners' camps, the dividing line is not precise. An examination of the evidence indicates that service is often the differentiator.

As recent results have shown, service organisations have seen strong growth in revenues at a time when other businesses have suffered. But service can be added to even hard-core manufacturing operations with a view to maintaining prices and improving revenues.

Mr Gregory pointed out how General Electric of the United States did this by offering training and consultancy when supplying power generators. "This has the double effect of giving a distinct competitive advantage and growing revenues."

Another way Mr Gregory sees companies using service to protect themselves in a deflationary environment is to concentrate constantly on customer satisfaction. This enables companies to compete on something other than price. Otherconditions that enable companies to be "deflation winners" include:

Exploiting a critical asset that is in short supply - for example, the shortage of skilled staff in many industries helps explain the success of consultancies, particularly in IT;

Developing intellectual property - for example, patent protection in the pharmaceutical industry has contributed to the strong performance of this sector;

Differentiating through product performance or design - for example, Gillette and Colgate have both been able to raise prices and gain market share through introducing products offering superior value;

Compensating price decline with volume growth - for example, Vodafone is off-setting falling prices with rapid gains in sales;

Outpacing falling prices with lower costs.

Mr Gregory said that for companies in the "loser" bracket, only "swift and far-reaching change offer a remedy". They should restructure capacity through a mixture of acquisitions, swaps, disposals and exits, reposition themselves as cost leaders through innovative business systems and shift to niches where prices are supported by unique value.