Australian consumers spend billions of dollars annually across food, drug and mass-market stores. Of this, a whopping 40 percent is spent on products while on promotion. With an increasing number of marketing initiatives driven by price, we need to ask ourselves whether this type of consumer spending is resulting in mutual growth for both retailers and manufacturers. Furthermore, are price promotions really a sustainable method of growing categories in the long term?
The answer is sometimes, but a lot less than one might expect. Nielsen research shows that less than 12 percent of overall consumer spending is truly incremental, meaning that a large amount of promotional money is wasted when consumers would have probably bought the product anyway, or they have switched to a subsidised offering for the period of the promotion.
Most frightening is that less than 7 percent of sales are on promotions which are mutually beneficial for retailers and manufacturers – not a statistic that anyone wants to hear!
The reality is that the current economic environment is placing increasing pressure on FMCG players. Along with economic volatility in global markets, we’re facing an increasingly competitive landscape and consumers are becoming more frugal. All these factors are leading to profits being squeezed and growth impeded. So now, more than ever, you can’t afford for your promotional budget to be effectively ‘flushed down the drain’ and money to be wasted.
Understanding promotional behaviour
Consumers exhibit one of four main behaviours when exposed to trade promotions in-store. Not all are profitable or beneficial for the sellers.
- Lucky buy: the consumer’s usual brand is on special and they buy exactly what they had already planned to buy, but they get a subsidised purchase price and the margins are eroded for retailers and manufacturers
- The switch: the consumer switches to the promoted brand only for that particular purchase during that one trip – driving manufacturer growth but not necessarily retailer or category growth, especially in the long-term
- Look elsewhere: the consumer picks up the promoted brand in place of another purchase at another store – potentially a win for the retailer but probably not for the manufacturer.
- Incremental purchase: the ideal situation where the consumer will add the promoted brand to their basket, therefore expanding the consumption of a particular category and providing returns for both the retailer and manufacturer.
So while a product may look like it has driven incremental growth during a promotion, we need to determine its true incrementality for the manufacturer and retailer in order to decide whether it is worth repeating a similar promotion in the future.
Through innovative modelling methods, we are now exploring purchase behaviour at a deeper level and can determine the true incremental effectiveness of trade promotions across different categories.
What defines a mutual win?
After analysing promotions across a wide range of countries and spanning 30 different categories, Nielsen’s Promotional Impact Framework shows that promotions are mutually beneficial for the retailer and manufacturer just 30 percent of the time – definitely not good enough in my book!
In the end, the key to driving improved promotional efficiency is to reduce subsidisation across the board. Research shows that categories that fit into the ‘highly subsidised when on promotion’ group but drive little overall category expansion include segments such as milk, beer and nappies, as they have a difficult time driving a win/win for either retailers or manufacturers.
Overall, the key message for manufacturers looking to drive greater effectiveness is to strive for mutually beneficial promotions – because these are going to provide you with long-term growth as well as a stronger relationship with your partners. It is imperative that all parties strive to achieve this balance in the promotional sphere in order to enable sustainable growth in an extremely tough retail environment.