The promotional party - is it over, asks Shore Capital

Experience has told me that binges end in big hangovers. The UK grocery market, after having a drink with promotions, has gone to a party and arguably embarked on a sustained binge over the past year or so… and you could say that drinking itself sober isn’t working.

The build-up of promotions was totally understandable, reflecting an amalgam of powerful processes. With structurally rising commodity prices since 2006 corresponding with one of the most difficult recessions the developed world has ever experienced, promotions proved to be the ‘least worst’ mechanism for the supply trade and retailers to support gross margins and stimulate volumes from a cash-short consumer.

Additionally, we also found that leading international brand manufacturers saw promotions as a tactical tool to make stepped adjustments in market positions too, seeing off some of the challenge from private label, secondary and tertiary brands. In a recession we therefore saw brand leaders make leaps and bounds in share.

“Price matching may be nullifying the potency of promotions”

Soon, however, the alcohol started to have effect and, to mix metaphors, the ‘tail began to wag the dog’. In the face of sustained inflation and falling volumes, promotions became the dominant marketing tool.

So, with the combination of aspirin and Alka-Seltzer proving ineffective, could the UK have peaked in terms of promotional activity with a fall to follow?

Well, without going overboard, we sense change is afoot. Firstly, there does appear to be a degree of promotional fatigue creeping in among consumers and elements of the retail trade. Secondly, price matching may be nullifying some of the potency of promotions. Thirdly, and most importantly, economic recovery, in the UK at least, may be leading to a little trading up and, possibly, a return to underlying volume growth.

With input price inflation easing on the back of stable oil prices and a fulsome northern hemisphere harvest, a more confident consumer may return to what were more traditional shopping patterns. We will watch with interest to see if our assertion has better legs than a drunken promotion junkie.

Dr Clive Black is head of research at Shore Capital Stockbrokers