Across European markets, promotions vary wildly, again with often poor results despite high levels on promotion

Across European markets, promotions vary wildly, again with often poor results despite high levels on promotion

Are promotions leading to increased sales in Europe's major grocery markets? IRI's Jacques Dupré analyses how discounts are affecting sales, finding a mixed picture, and warns manufacturers of the dangers of sustained high levels of promotion.

During recessionary times, it's generally easier to forecast how shoppers will respond to price changes and promotions but it seems across Europe, as most markets recover, behaviour is getting more unpredictable than ever.

In France, we have seen shoppers have taken the opportunity of lower prices on national brands to select more premium products, while in the UK, shoppers have taken the opportunity to lower the overall price of their weekly shopping basket.

This is evident from IRI’s latest report on the state of FMCG pricing and promotional activity across Europe, due to be published this month. In this report, half of the countries – UK, Spain and Greece – are reporting a decrease in food sales by value, while in France, Germany and Italy they have actually increased. We are seeing a similar pattern in non-food too, which is the main change versus a year ago – although here the market risers are France, Spain and Germany and fallers are Greece and Italy, as well as the UK.

Taken as a whole however, across Europe, sales of food are up, both in terms of sales value and sales volume. However, increases are minimal. The value of food sales rose by 0.5% to EUR276.3bn, while sales by volume rose by 0.2%.

As the population of Europe slowly increases, you would expect grocery sales to follow. However, changes are small suggesting the European consumer is being careful not to overspend, to reduce waste and to look for a bargain where they can.

Value sales are slightly recovering despite low FMCG inflation. And, despite the fact the economy is back in growth in most countries, volume sales remain flat. Our figures show prices across Europe for food saw only a 0.3% rise, while non-food products saw little change – up just 0.1% on volume price.

We continue to see the impact of the price wars in the region, particularly in the UK, France and Spain, causing food prices to fall. Unfortunately, this is not translating into improved sales. Instead, sales still seem to correlate to areas where promotions are, showing that shoppers continue to be influenced by offers.

Are promotions paying off? The report also shows across the different countries promotions vary wildly, again with often poor results despite high levels on promotion. This is particularly evident in the UK, which leads Europe when it comes to promotional reliance with more than half of all goods sold on promotion (54.6% by volume). In Germany, the figure is a quarter that of the UK with only 13.2% volume of goods on sale on promotion.

However, the level of promotional activity has to be examined in the context of sales to understand the true impact. The fact that in Germany, with only 13.2% of the volume of goods on promotion, sales still increased by 3.4% rise in value terms and by 2.3% in volume terms, shows for some markets promotions can be more effective when they are used as they should be – as an incentive to persuade the customer to make an unusual purchase.

However, despite more than half of all goods in the UK being on promotion, both the volume and value of sales fell, down 1.5% and 1.6% respectively, partly as a consequence of fierce price competition, sparked by the growth of hard discounters winning market share against grocery retailers.

If the UK continues to rely on promotional activity in 2015, as it did in 2014, then we could see a worrying pattern of behaviour emerging from which manufacturers could find it hard to recover, with the danger of such high levels of promotion becoming further ingrained into the psyche of shoppers.

This would make the challenge of bringing customers back to buying at normal prices very difficult indeed. Manufacturers would need to work hard and be smart to succeed in re-educating consumers about having a more sustainable balance between promotion and standard prices. Other markets must take note.

The question remains then about what manufacturers should do. They cannot continue to promote and promote to unsustainable levels. Plus, we can see that often promotional activity is not really having any impact on sales volumes.

But manufacturers cannot de-escalate their promotional activity without an immediate impact on their market share. In fact, they have two alternatives; either de-escalate promotions, which is what manufacturers with brands with a monopoly or with a very strong presence are doing in several countries, accepting the risk they will lose revenue, but knowing that they are minimised.

The second option is to use promotions as a lever to win market share, but with a strong impact on the performance of the brand. And retailers need promotions to drive shoppers, who increasingly select their retailer based on promotional activity displayed in leaflets and other materials. This is the main retailer challenge – finding the right balance between promotions and base price, and with promotions finding the right balance according to each category.

Managing price rises and changes to promotional activity in such an inconsistent market could be a risky strategy for manufacturers. To have a hope of being successful requires both brand strength and market support. But it also requires them to be able to accurately predict and analyse how the market will respond to these changes.