Avoiding a promotions catastrophe

The world of price and promotions within UK retailers is at a tipping point, with a potential crisis looming.

Loyalty to brands and stores is at an all-time low because shoppers are deal-weary. They see little difference between the supermarkets, and the UK has the lowest number of consumers in Europe who choose a store based purely on the promotions inside.

The original purpose of promotions was to encourage first-time purchasers, increase buying frequency and promote new lines. The high level of deals today is just white noise to most shoppers.

Up until 2012, promotions were crucial to sustaining volumes, but this is no longer the case. According to the IRI European Pricing and Promotion Special Report 2013, the volume of goods on any promotion was up by 2.7% across Europe, yet volume sales dipped by 0.1%. The UK has traditionally had the highest level of trade promotions but the rate of growth is finally slowing.

Brands are getting tougher with the supermarkets and demanding a return on investment from the huge gate fees they pay to run promotions in-store. This ‘pay for performance’ approach will become more common as manufacturers attempt to recover some of the margin they have lost in recent years.

In the past, some supermarkets were less interested than the brands in the return a promotion generated because the gate fee covered the costs. However, today, more retailers are beginning to ask for advice about promotional optimisation.

The retailers need the top brands to fund in-store offers because they help to attract and retain footfall. Yet across Europe, manufacturers including Heineken and Procter & Gamble are reassessing their long-term trade promotion strategy, even if it means their sales might suffer in the short term.

Marketers have traditionally feared that one-off deep deals damage their brand equity but were less bothered about long-running promotions. Yet research shows that shallow long-term deals actually reset the shopper’s perception of what a product is worth and this can be hard to recover from. By contrast, a one-off deep deal is perceived as a real offer and can boost sales.

Consumers are sticking to strict budgets these days, even if that means they cannot buy their favourite brands every week. They want more consistent pricing so they know a product will not change price from one week to another.

Of course, there are promotions that still work effectively. These are clear and simple for shoppers to understand and have a real perceived value. They include the increasingly popular offers linked to fuel, which really do drive footfall, and round pound pricing, which helps shoppers to budget. In the UK, it is estimated that among the top retailers, 35% of purchases are now made on the round pound. There has also been an increase in ‘money off your next shop’ vouchers and extra reward points to encourage store loyalty. 

Despite the level of promotions, the cost of the weekly shop has risen in the UK and, not surprisingly, discounters such as Lidl and Aldi have seen big gains in value sales growth this year.

It means the supermarkets are under pressure to rediscover their USP and remind themselves why shoppers choose to visit them and not their rivals.

Shoppers know that Waitrose is about quality, range and choice, with fewer promotions, and Asda has had a clear Every Day Low Price message. Shoppers are less clear about the USP of Tesco, Morrisons or Sainsbury’s these days.

Online retailing is also changing the shopping dynam ics for brands. Marketers face a huge challenge because it is more obvious to consumers how much they are spending online and the effectiveness of promotions is difficult to assess.

There are different shopping patterns online. Many people leave non-essential purchases, such as alcohol or confectionery, to the end and will not buy them if they have gone over budget on other goods. In-store, they might have been tempted by a promotion as they enter.

Promotions can be less powerful online because the emotional response element that works in-store is absent, so generating impulse purchases is much harder. There is evidence that multi-buys work online because people know they will not have to carry the products home themselves.

Ultimately, food and non-food promotions are not working in the way that they used to. Manufacturers know that running more and more promotions is not a long-term strategy that will deliver margin returns for them or the retailers. The two sides must work more closely together to identify new paths for growth to avoid a promotions catastrophe.

Richard Moule is UK director of analytics and shopper knowledge at IRI. This article was taken from the June 2014 issue of Market Leader. Browse the archive here.