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South Africa is the second-most price sensitive country in the world
sfrican american couple grocery shopping
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South Africa is the second-most price sensitive country in the world

30% of total FMCG volume was sold at a discounted price in 2018

South Africa is home to a nation of promotion obsessed shoppers. This insight stems from a Nielsen analysis on The Price of Promoting, which shows that 75% of South Africans claimed to know the prices of grocery items they regularly buy and notice changes in price, versus 69% in 2018, and their spending habits confirm that South Africa is the second-most price sensitive country in the world.

Despite ongoing, relatively low inflation rates (4.4% in Q2, 2019) and improving consumer confidence; fixed expenses like the spiraling price of petrol, taxes, and utilities have placed a massive strain on essential living costs. Consumers, in their desire to ease their financial strain, are cutting back on their discretionary spending, which in turn has taken a toll on their grocery baskets.

Unfortunately, this ‘money’s too tight to mention’ scenario has also seen South African shoppers prone to severe cases of Promo FOMO. The danger with this is that for manufacturers and retailers alike promotions can be a double-edged sword. They bring consumers into the store and result in temporary lifts in brand sales but the long-term impact of promotions is more severe and can lead to loss of brand and store equity.

A deluge of discounts

The intensity of promotions within the local retail market becomes apparent when one considers that in 2018, 30% of the total volume of FMCG products in South Africa was sold at a discounted price, up from 27% in 2017.

In addition, the average frequency of promotions also increased by 3% to 19% of the weeks on promotion. A significant relationship is unfolding, where more frequent promotions are leading to higher consumer sensitivity to regular prices. In effect, consumers are being trained to buy on promotion, and are becoming more resistant to buying at regular prices, which in the long run will squeeze margins and profitability of retailers and manufacturers.

Twenty two percent of South Africans state that they change stores based on the best promotions on offer (up from 16% in 2017). Similarly, more consumers (34%) claim to actively search for discounts in-store even if they don’t change stores, up from 31% a year ago. The percentage of consumers who are willing to try new products has also increased. Whereas 22% of consumers only bought products at a discount if they already like the brand in 2017, that percentage is down to 16% in 2018, meaning consumers are more willing to try a new unknown brand because they are on promotion.

Obsession with promotions in South Africa

PROMOTION EFFICIENCY

But do promotions actually work? Based on Nielsen’s global benchmarks, a promotion is said to break-even if its ‘efficiency’ is 50% or greater. ‘Efficiency’ is a measure used to gauge the success of a promotion, to understand if a promotion generated an incremental lift in spend or only subsidized existing volumes at the lower price, as consumers would have bought the product anyway.  It is the proportion that incremental sales make up of the promoted sales that would not have happened without the promotion. The balance of promoted sales is subsidised sales, sales that would have happened regardless of the promotion.

promotional efficiency

Out of the 200 items analysed in South Africa, only 33% surpassed the 50% efficiency threshold, which means that a massive 67% of promotions are not incremental to sales and are unlikely to break-even.

WHAT DO SUCCESSFUL PROMOTIONS DO DIFFERENTLY

Considering the price consciousness of consumers and their hunger for promotions, how does one make price promotions work? Where 67% of items on promotion were found to be inefficient, 33% of items managed to meet the required efficiency levels for success. The million Rand question is: how do these items surpass the efficiency benchmark?

The answer is twofold. You need to assess both quantity and quality of promotion. Quality or depth of promotion refers to the value of the promotion or price reduction, and quantity or frequency refers to how often a promotion is run. The Nielsen studies found that the most successful promotions provided deeper discounts rather than more frequent, but smaller discounts. The net effect of less frequent, but deeper discounts could well mean the same level of investment as more frequent, smaller discounts, but will result in greater incremental returns for manufacturers and retailers.

ONE STRATEGY DOES NOT FIT ALL 

While balancing depth of promotions vis a vis frequency of promotions can deliver efficiencies up to a certain extent, not all items are equally responsive to promotions. Pricing strategies need to be tailored to ensure the right categories and products are positioned at the right price. Products need to be treated individually, as consumers display different sensitivities to everyday price increases and promotions on different items.

This has created a complex environment for manufacturers and retailers and underlines the need to understand South Africans’ preoccupation with promotions, to help create efficient promotion plans using effective pricing strategies that benefit consumers, manufacturers and retailers.

Methodology

The Nielsen Price & Promotion analysis compared everyday and promotional pricing trends and their impact on sales between the period 2017 & 2018. Regression modeling was conducted on weekly, store level, SKU (store keeping unit) level data to calculate elasticity and sensitivity of items to pricing changes.