You don't have to like it, and it's getting more scary by the minute, but trade promotion is an essential feature of modern retailing. Adam Leyland and James Ball report

The stakes have never been higher. There’s a gun against your head. If you do as you’re told you may be OK. If you don’t, it’s curtains. Welcome to Russian Roulette, grocery-style, 2009.

As a supplier, the relationship with buyers has always been a nervous one. You can spend millions of pounds without actually improving profitability, with no guarantee of supermarket compliance, and in the knowledge that the supermarket may simultaneously be offering featured space to rivals. The odds can seem unfair. What’s more, they are getting shorter.

In The Grocer’s fifth annual Trade Promotions Survey, carried out by market investment advisers Billetts, 70% of suppliers said either ‘more’ or ‘far more’ of their sales have come from promotions in the past year compared with the previous one. Based on findings from suppliers with a combined annual turnover of £16bn, the 2009 Trade Promotions Survey finds more than half worrying that too many of their sales now come from their promotional activity. Nonetheless a further 70% expect the share of sales made through promotions to increase still further in the year ahead.

It seems there’s an air of resignation about the responses to this year’s survey. Any brands that dare back away from the costly in-store deals quickly find competitors willing to take their place on the fixtures. Like it or lump it, suppliers can ill afford to pass over trade promotions.

“There’s no doubt the intensity of promotion is up year-and-year, and the figures suggest this is definitely set to continue,” says Billetts technical director Ian Fermor. “But this is a reflection of very tough times. Historically, there’s always been a view that if manufacturers could all agree to promote less, they’d all be better off. This has always been naive, and companies are coming to realise this. There’s growing acceptance of promotions.”

Indeed Fermor questions whether it’s the buyer or the consumer who’s holding the gun. “Consumers aren’t being ‘trained’ to buy goods on promotion,” he says. “If anything, the opposite is happening: consumers are training retailers and manufacturers in how they want to shop. Consumers respond disproportionately – almost four times as much – to promotions versus simple cuts in base price. People love a deal, especially in recession.”

This is mirrored in comments from manufacturers themselves, who acknowledge consumers are reviewing their spending habits, especially in discretionary categories. “We’d love to be able to reduce promotions,” says one supplier. “But it’s just not at all practical in the current environment.”

Despite the upheaval, the reasons for promoting remain the same as in previous surveys. Driving volume is the most important consideration, relationship with retailers comes second, driving consumer measures is third, while profit is a distant fourth. It’s often been observed that, after the margin impact of discounts, and with high fees for supermarket featured space and extra distribution costs, promotions are unprofitable (even loss-making) for suppliers.

And they report that 90% of the profits are now pocketed by the retailers, up from 78% five years ago.

“We put the investment into these deals, but it’s the retailers that consumer think are behind them, and they’re happy to keep up that image,” says one. But many believe they are still beneficial to business.

“The goals of an effective promotion campaign are often very different from profit,” says Stefan Barden, CEO of Northern Foods, maker of Fox’s biscuits and Goodfella’s pizzas. “Whether you’re looking to maximise factory utilisation, or protect or grow market share, promotions are often an effective mechanism. Brands on promotion are often only a matter of pennies more expensive than own label, which can tempt customers to trade up.”

These sentiments are supported by other respondents to the survey. One says promotions support the high volumes he needs to keep shelf space in store, while another says that supporting promotional offers helps in other negotiations with retailers. And while 73% of respondents feel it’s retailers who really win out from promotions, this was down on previous years: in 2004, 80% felt retailers benefited most.

“When you give retailers what they want, it definitely works as a positive,” one concedes. “Promotions are a must-do for retailers, and you’re either in or you’re out – there’s no middle ground.”

Suppliers are also more confident that retailers’ strategies on trade investment are sound, with 55% (up from 50% last year) agreeing retailer strategy was generally good. Morrisons was once again the best for execution, at 72%, the survey found, while Tesco’s promotional execution came in for increased criticism. Sainsbury's progress under Justin King was, meanwhile, confirmed, with an above average score of 65%, and one respondent noting that it was now “generally very good at promotional PoS, with well-structured end themes keeping deals simple” (see box).

Yet as the frequency increases and the level of discount deepens, it’s perhaps not surprising that suppliers are losing faith in their own strategy. Last year, 70% of suppliers felt they had a good promotional strategy in place, 73% thought they had a solid approvals process and 58% said they had learned from history. This year all three measures have fallen: 60% like their strategy, only 58% say their approval process is working and 55% say they have learnt effectively from past campaigns. Suppliers are now worried they’re spending their money in the wrong place, or not seeing results for the cash they invest. Suppliers in non-expandable categories, including many household goods, are particularly worried they are just hurting their bottom line.

Some even question whether the relationship is worsening. “The effect of promotions is actually adverse on our relationship, as it conditions costly expectations,” says one supplier. “Some retailers are becoming increasingly demanding and requesting much deeper and more frequent promotions. Given the inequalities in our relationship, this can cause significant challenges, as well as practical problems.”

But the biggest concern by far was that consumers are starting to purchase products only when they are promoted, meaning promotional activity begins to offer few long-term benefits to manufacturers. “It’s training consumers to only buy products on promotion, which makes our business unsustainable.”

This has long been a complaint of suppliers, but Colin Harper, managing director of compliance experts Storecheck, detects a real shift in consumer buying habits. “Consumers are no longer using promotions to trial new products; they are buying simply because the product is on promotion.”

The courage to walk away
With so much noise in store, and so much pressure from buyers, it's critical that suppliers keep their wits about them, says Fermor. "It's all about forming a realistic strategy. We're not going to see the intensity of promotion fall back, so it's really about learning to work around it. Manufacturers need to establish exactly what they want from their promotions, and just what they're delivering. If you don't review your activity, you have no way to know if it works. Then the key is to have the courage to walk away from what doesn't work. Too many companies are repeating their mistakes.

"However many promotions there are, at the moment there are still a lot of companies desperate to get in," says Fermor. "If you're foolish enough to walk away, your rivals will gladly fill the space. You stop promoting at your peril."n

The Grocer 2009 Trade Promotions Survey was compiled and produced by Billetts, the market investment advisers, based on responses from 61 suppliers representing total sales of £16bn. For a copy of the full report, please contact Ian Fermor on 020 7650 9600 or email
Big brands take up all the space
With promotions among the big four up an average of 40% year-on-year (Nestlé recently had four times as many promotions as the same period a year ago), space is at a premium. And small brands are struggling to get on the fixtures at all.

"The big brands are often choking under the weight of promotions they've got running," says Billetts technical director Ian Fermor. "But the smaller players would give their right arms for those slots ."

Small brand owners say they are concerned about their ability to keep volumes up without access to featured space slots. "It's a real problem," admits Colin Harper, managing director of Storecheck. He fears it could hamper innovation, as a promotional campaign in a high-traffic store area is crucial for bringing new products to the attention of consumers. "Buyers aren't trialling as much, they just buy what's being promoted."

Small brands need to be savvy, he adds. "The best ones are looking for other ways to promote: for example, with on-pack coupons and via web-based deals. The advantage is you attract full price customers and pay no fixed fees."

How the big four fare on promo execution
With more promotions and erratic shopper behaviour, it's not surprising execution fell from last year's record high. But few could have expected the falloff at Tesco.

It slipped out of the top three for the first time in this survey's five-year history (see above), despite being "well organised and methodical". "Availability and stock control have become a problem at Tesco," one supplier remarks. "It's a large estate and it varies dramatically," says another. "PoS compliance is good, but it falls down if it tries to do anything out of cycle."

This year's worst performer was Iceland. "Very basic signage" worried suppliers, who said the number of deals per period made it hard to see clearly what was on offer.

In the top spot again, Morrisons was praised for discipline and "excellent implementation", but its score fell slightly, perhaps because "numerous deals per end can mean SKUs are lost" and there is a "tendency to run competing promotions at the same time".

The biggest improvement came from The Co-op and Somerfield and, eerily given their merger, even their scores were identical. Somerfield was praised for "keeping things simple" and a tendency "not to run competing promotions [that] gave a clearer message to the shopper". But "shelf PoS can get lost". And while suppliers noted "improvements" at The Co-op, "corporate level seems to have little control over stores".

Sainsbury's execution is "increasingly strong, with its new signage encouraging. But some stores let down the overall impression of much-improved compliance," says one supplier. Another adds: "Price promotions are usually well executed but extra-fill packs or promotion packs lose sales in the transition due to logistics issues."

At Waitrose suppliers note "a well implemented calendar supporting increased focus on price and activity", and "good barker compliance, structured mechanic guidelines and GE themes" but some complain its approach is "restrictive".

Asda remains the lowest-ranking of the big four, but its score was the only one to improve. Suppliers say "compliance is erratic," "guidelines are not always clear," and there's "a lack of PoS, particularly if an offer is across more than one variant".