The supermarkets are struggling to kick their addiction to trade promotions. Yet manufacturers are increasingly losing patience with expensive deals that fail to bring the volume and profit rewards they used to. A margin war is brewing between the retailers and the brand owners.
P&G boss Irwin Lee recently slammed the industry’s reliance on price promotions, claiming that having so many products on deal was damaging innovation as well as margins. P&G, and other companies including Heineken, are now re-assessing their long-term trade promotion strategy, even if it means their sales might suffer in the short-term.
“In reality, trade promotions are not as effective as they once were”
The supermarkets, on the other hand, continue to crave deals such as in-store displays and price cuts because in theory, they drive footfall, raise brand awareness and give sales a short-term boost - and, of course, the suppliers foot the bill.
In reality, trade promotions are not as effective at sustaining volumes as they once were. According to the IRI European Pricing and Promotion Special Report 2013, the volume of food and non-food goods on promotion was up 2.7% across Europe but volume sales fell 0.1%. The UK, which has traditionally had the highest level of trade promotions, showed a decrease in promotional intensity.
Nevertheless, in personal care and household in particular, there has been a very high level of promotion in an attempt to boost and retain sales. As with other non-food categories, these deals have not always worked because cash-strapped consumers see these items as non-essentials.
Consumers are deal-weary and see little difference between the supermarkets when it comes to promotions, with loyalty at an all-time low. The UK has the lowest number of consumers in Europe who choose a store based purely on promotions.
Brand owners have a huge battle to wean the supermarkets off popular deal mechanics. They must convince retail bosses that some of the millions spent on promotions could be better spent to improve ROI for everyone.
The promotions that work are clear and simple for shoppers to understand and have a real perceived value. A one-off deep deal is thought of as a real offer and can actually boost sales. In contrast, shallow long-term deals are damaging because they reset the shopper’s perception of what a product is worth.
Round-pound pricing also works because it helps shoppers to budget. In the UK, it is estimated that among the top retailers, 35% of purchases are now made on the round pound. Promotions that encourage loyalty include ‘money off your next shop’ vouchers and extra reward points, while offers linked to fuel are increasingly popular because they drive footfall.
If promotions are not working as effectively as they used to, then the supermarkets must work harder to improve the retail experience to really engage and attract shoppers time and again.
One thing is for sure, the world of promotions within the UK is at a tipping point with a potential crisis looming as P&G’s message hits home.
Richard Moule is UK director of analytics and shopper knowledge at IRI