Trade Promotions in Times of Corona
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Sales are going through the roof in many categories. Recent data reported on British grocery sales during the 4-week period around the start of the lockdown period, showed that supermarket sales went up by one fifth. Some categories even grew by more than half, e.g. beer / wine / spirits (67%) and frozen foods (84%). With sales going that strong, do suppliers need trade promotions? The short answer: not so much. With the self-quarantine period expected to last for weeks or months and restaurant and pub visits picking up only slowly after that, home consumption will remain strong for many more months.
If agreements already in place with the trade allow, suppliers in “hot” categories should consider de-escalating promotions. Where to start?
Promotions with high subsidisation levels
The biggest cost of promoting are the discounts ending up in the hands of loyal shoppers who otherwise would have paid full price. The most recent Accuris benchmark data on trade promotions shows that 37 pounds of every 100 pounds sold on promotion, is subsidisation. This is far greater than costs related to own product cannibalisation (£10) or stock piling (£2). While stock piling will obviously be far greater during the corona crisis, subsidisation can easily be avoided by opting for more selective promotion types. Single unit price cuts guarantee that all shoppers get the discount, including those who were not looking for a promotion. Large multibuys will motivate shoppers to buy more, in return for a discount, while light shoppers pay full price.
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Promotions for hero packs
Most brands have one or two products that are the core of their range. A key product that has higher sales and higher penetration than any other SKU. These are the hero packs, the products that do not require promotional support in times of strong overall sales. They can stand on their own feet. In a seller’s market, brand owners have the opportunity to promote other varieties, other sizes and packs. Shoppers will discover that there is more to a brand than the hero pack they usually buy. They may even develop a habit to buy multiple products of the same brand, thanks to promotions for a non-core product. Would it not be great if they continue to do so long after the corona period?
Promotions at online stores
There are two reasons to prioritise a reduction of promo activity at online stores. Firstly, online is predictably growing even faster than offline. In the same 4-week period in March, Ocado had the largest sales increase of the London-listed retailers and saw further market share gains in an already strong market - even in spite of their platform problems.
Secondly Accuris research indicates that shoppers for groceries are paying less attention online than offline. Identical promotions at retailers who have both channels are markedly less effective online than offline. The online shopper is more of a replenishment shopper, following a mental (or actual) shopping list, whereas offline shoppers are generally more open to impulse buying.
Learnings from 2008
Trade promotions are notorious for failing to create loyalty. Shoppers are encouraged to switch between brands and stores and will continue to do so even in Corona times. This switching behaviour is the main reason why brand leaders continue promoting. If they do not, they risk losing market share. However, we do expect an overall decline of promotional activity, not unlike what happened after the 2008 financial crisis. Then, as now, shoppers stopped visiting restaurants and increased their “at home” consumption. This unexpected bonus for grocery retailing led indeed to a decline of promotions. However, the following years there was a sharp increase, especially in the depth of discounts offered. That happened on the back of falling raw material costs, widening base margins for suppliers. Will history repeat itself? Certainly not in the exact same way; Brexit removed a big chuck of the profit margins of many suppliers. Still, with oil prices on a 20-year low, we could see a strong motivation for suppliers and retailers to increase promotions once we are well past the current crisis.
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