Are promotions getting out of control in a grocery market that is growing more competitive by the day? Most people would think they probably are. And new research carried out by Billetts Marketing Sciences and The Grocer suggests that the answer, from a suppliers' perspective at least, is an emphatic 'Yes'. Billetts questioned manufacturers of all sizes, representing £11bn of sales, and a staggering one-third of them felt promotions accounted for 41% or more of their sales volume (while 9% reckoned they did 60% of volume on promotion). Not surprisingly, 63% of suppliers feel they are spending too much, and they worry this is a one-way trend, with two-thirds of respondents agreeing they are doing more than this time last year and almost half of them expecting to do more promotions in the coming year.
Scary stuff. And it is definitely getting worse. When we quizzed suppliers last year on this issue, we found that 25% of volume on average was sold on promotion. Today, it is 33%. David Bridges, CEO of Billetts Marketing Sciences, says: "We are seeing more and more companies that are struggling on the promotional front and losing money hand over fist. If you don't have a disciplined approach, and there are companies out there that don't, then you will be haemorrhaging cash."
The research confirms that suppliers don't see promotions as an effective tool for driving profit (just 23% felt they did) and more saw them as a way of driving volume only. Sure, promotions are a great way of maintaining relationships with customers who suppliers felt benefited most from such activity. But 73% of respondents felt that retailers were driving promotional strategies that made no sense for their categories. And therein lies the problem. Suppliers know they are being asked to run promotions that don't work, but clearly don't want to pull back from all such activity. Meanwhile, the cost of running promotions is rocketing and returns are falling thanks to higher fixed fees (which 81% of suppliers feel do not deliver any benefit) and an insistence on margin maintenance.
So how do suppliers ensure they do not end up out of pocket? It's a tough situation, admits Bridges, but
it can be addressed.
For starters, he explains that while it is easy to blame retailers for the current state of affairs, the truth is that many suppliers still do not have their sales, marketing, finance and supply chain functions aligned around a single commercial strategy. The result is chaos - particularly in categories where companies are chasing volume and market share. Bridges says: "We delivered an optimised promotional plan to a company recently where we showed how they could deliver £1m extra profit although their volumes would be 15% below plan. But they said 'Bugger the profit. We can't afford to show a 15% volume drop.' They had to buy that volume."
Yet Bridges insists those that take a different approach do see an upside from weeding out the activity that does not work for the retailer, the shopper or the supplier.
It's not easy, as this means suppliers have to challenge everything they are doing, from the mechanic and depth of discount being offered (ie: is that bogof really necessary?) to whether they should meekly agree to fixed funding on promotions without incentives to encourage retailer discipline. "You will never be in a situation where you can win all the battles with the big retailers," adds Bridges, "but you can win 20% around the side - the promotions that are not on message or those that lose money - and the benefits are huge".
Success requires clear promotional strategies to be in place - but just 16% of this year's respondents gave themselves top marks in this area, while 28% feel they do not have a good strategy in place. Developing a better strategy sounds like a difficult and painful process, but Billetts reckons it can be done in a matter of weeks and should be delivering results within three months.
As last year, the researchers also looked at the four key stages of the promotion lifecycle - approval, forecasting, execution, learning - and asked suppliers to rate themselves on a scale of one to six (where six was exceptionally good).
When it came to approval, the average score was 4.5 compared with 4.1 last year - with many respondents feeling they are more disciplined in this area. On forecasting, suppliers rated themselves about the same as last year with an average score of 3.4. Here, they blamed many problems on retailers for confirming activity too late, delaying implementation or cancelling at the last minute.
When it came to execution, the average score was the same as last year at 3.4 with very few manufacturers awarding themselves the highest marks. Bridges says this result is worrying, particularly when the research also shows that suppliers' marks for retailer compliance are generally lower than last year (with Sainsbury being the exception).
On learning from promotions, the average score of 3.7 was higher than last year's 3.4 - a sign that more companies have introduced formal post-event reviews. Bridges says learning from experience and holding people accountable for their decisions is vital and adds: "People are saying we have improved when it comes to analysis. They may still make duff decisions, but at least they now know and can move forwards."
So what does this year's research tell us? "The good news is that approval disciplines are improving and manufacturers are putting in place better learning processes to ensure they benefit from each promotion they do," says Bridges. "The bad news is that too much volume is sold on promotion and this is an escalating trend. Suppliers feel their ability to drive profit is declining while their promotional strategies are challenged by limited retailer thinking. In addition, promotional forecasting and delivery are hostage to retailer execution and that is declining with fixed funding no guarantee of results."
It all appears rather gloomy. But if suppliers are prepared to tackle this issue, they can take control and won't end up out of pocket too much.