When manjit minhas checked out her soon-to-be competitors in the Alberta beer market three years ago, she saw expensive product, almost all of it coming from the virtual oligopoly owned by Labatt Breweries and Molson Inc.
The vice-president of Mountain Crest Brewing Co. in Calgary got into the beer business in 2001 because she thought the two national breweries were most vulnerable on price. At age 21, and attending the University of Calgary with many price-conscious friends, she was confident there was a market opportunity to be exploited. By charging about $1 a can — about half of what the major breweries were charging — Mountain Crest quickly carved out a niche among price-sensitive consumers, garnering about 10% of the Alberta beer market.
“We felt beer drinkers deserved a better product at a better price. We felt we could come in and shake up the market a bit,” Minhas says. In fact, Mountain Crest has aggressively expanded its low-price strategy beyond Alberta into Manitoba and is now launching an assault on the Ontario market.
But while adopting a low-price strategy can
put a company on the map, it is not a long-term solution, say the experts. Still, some mutual fund companies — pounded by criticisms that MERs are too high and that financial consumers are becoming price-sensitive — are hoping to replicate Minhas’ experience. This past November, Fidelity Investments Canada Ltd., for example, announced that MERs on equity, balanced, asset-allocation and high-yield funds would drop approximately 20 basis points, while fees on fixed-income and money market funds would fall by about 30 bps. It also unveiled an automatic conversion mechanism that, after seven years, switches deferred sales charge units over to the initial sales charge units that have higher trailer fees for advisors and lower MERs for investors.
The low-pricing strategy is classic supply and demand, says Rob Warren, director of the Asper Centre for Entrepreneurship at the University of Manitoba.
“If [price-cutters] are successful, they’ll increase their share of the market. They earn less per dollar, but they’ll have more dollars coming in than before. That should allow them to do more development and provide better service to their customers,” he says. Ideally, they can reel customers in on price, and cement the relationship with service and performance. “Then you want to look at raising fees so you have enough money coming in to cover expenses.”
Warren says bargain-basement pricing has to be matched with a corresponding low-cost structure. Furthermore, he says, price cuts have to be seen as sufficiently substantial by investors or consumers to have an impact.
“If the cuts are too small, it’s not worth my time and effort to switch over. If the differential is too high, customers will ask, ‘Am I getting value for my money now? If they can do it for this amount, what’s missing?’”
he says.
However, he notes, lowering prices usually only results in a temporary competitive advantage: “Competing on price is never a good long-term strategy because somebody else will always come along with slightly deeper pockets.”
Warren says there are a number of potential pitfalls for companies that lower their prices.
If there isn’t an increase in money coming in, there will be less money for research and development. “You may also end up cutting your ability to react to the market,” he says.
Other fund companies haven’t taken up Fidelity’s lead, says James Gauthier, investment funds analyst at Dundee Securities Corp. in Toronto. Companies such as AGF Funds Inc. have lowered fees on clone funds, but those are destined to be merged with the underlying funds after foreign-content restrictions in RRSPs are lifted as proposed in the recent federal budget, he says.
“It’s always nice to have lower fees, but this doesn’t put Fidelity into the position of being a cost leader. It went from being marginally above average to being marginally below average. This is somewhat immaterial in my mind,” he says.
Media harp on fees
“The media tend to harp on fees more than they probably should, and I think Fidelity is taking advantage of that situation. The fund complex, the manager and the approach are more important, but fees are always a consideration,” he says.
Fidelity declined the opportunity to comment on its strategy.
The recent experience of other fund companies may be instructive for today’s fee-cutters. Winnipeg-based Investors Group Inc. knocked 20 bps off equity and balanced fund MERs two years ago. John Wiltshire, senior vice president of products and financial planning, says the company at the same time increased levels of service to its clients and compensation to its
consultants.