Street talk: Beware of over-reliance on promotions
With UK supermarket chain Sainsbury's becoming the latest retailer to embark upon a price-matching campaign, the importance of getting a good deal for cash strapped consumers cannot be underestimated.
Our own research and knowledge on shopper behaviour around the world indicates that this is a trend that is likely to continue, even if the threat of a double dip recession wasn't looming dangerously on the horizon. Shoppers are more sensitised to price promotions at the moment – in fact almost twice as much as they were pre-recession. They are planning their shopping trips more, price checking online before they shop in-store and shopping across more channels.
However, an over-reliance on price promotions is a dangerous game for retailers and brands to play. Getting it right can reap the rewards of increased sales volumes but getting it wrong can negatively impact profits and, worse, erode brand loyalty and therefore long-term sales.
Our own research shows that over the past three years, FMCG brands have increased their use of in-store promotions to unprecedented levels. In the UK for example, promotions have climbed to an average of 53% of all FMCG product sold. This compares to 44% in the USA, 32% in Greece, 27% in Italy and 19% in Germany, France and The Netherlands.
Sales uplifts achieved as a result of promotion don't always increase short-term sales volumes or profits. In the UK, over the past three years for example, base sales have dropped by almost 5% for many categories that are heavily using promotions. And since half of these customers would have bought their favourite brands anyway, a lot of the money spent on discounting simply goes to make a product cheaper for someone who would have bought it at full price.
An over-use of price-based promotions also challenges the economics of the industry by potentially eroding the profits in some categories to such low levels that spend on innovation is curtailed and all products in that category become commodotised.
So what's the answer for brands intent on winning the hearts, minds and purse of today's savvy shopper? I think it's fair to say that continuing down the price-led promotional strategy is not a sensible long-term strategy for most brands. Consumers are buying on perceived value, not just the cheapest price, so communicating the value that they are gaining from a particular brand is paramount.
Price-based promotions do have their place, but it's no longer effective to plan these strategies in isolation. Brands need to be able to compare and contrast different types of promotions to understand which ones are most effective in adding incremental value instead of eroding it. The activities and price points of competing brands and even adjacent categories must be taken into consideration. Analysis of so many different variables requires superior analytics support and modelling activities to ensure that manufacturers aren't whittling away their investments in branding.
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