Feature

Why brands need to go cold turkey on price promotions

The recession has led to an over-reliance on price promotions, creating a generation of shoppers who buy products only on discount, writes David Benady.

David Benady

September 16, 2011

How long?

4-6 minutes

Supermarket promotions have risen to an all-time high as the big chains scrabble to attract custom, but with millions of shoppers roaming from store to store seeking out the cheapest deals, brand loyalty is being shot to threads.

For some, the only remedy to this crisis in marketing is more marketing. The sole protection for brands is to absorb the dent in margins from promotions and keep investing to maintain product quality, awareness and innovation. Even as they build their brands, however, marketers are devaluing them by regularly knocking a third off the sale price.

The extent of the promotional frenzy is laid bare in recent research from Kantar Worldpanel. It reveals that an astounding 42% of grocery products were sold on promotion in the 52 weeks to the end of June 2011. This was an 8% increase on the proportion for the same period in 2007-08. For brand leaders, the figure is higher, with 54% of sales coming from promotions that take up to 32% off the full price. Brands are on a treadmill, offering ever-higher discounts to ensure their volume sales growth is greater than the previous year. Some brands, including Muller and Pepsi, seem to be on permanent price promotion.

Apart from lacerating the margins of big brands, promotions risk eroding the premium image attached to them, and undermining people's trust in their quality.

No alternative

The Co-operative Food's head of strategy, Helen Bridgett, who is responsible for price and promotions at the 3000-outlet grocery chain, defends short-term promotions, arguing that brands and retailers have no alternative.

'The 42% figure is higher than we have had in a long time, but we have to consider what the customer is going through,' she says. 'The difference between retail price inflation and wages is greater than it has been for years. The marketer's job is to understand customers and provide what they need. Like it or not, the economic conditions are tough, and price promotion is the way customers cope with that.'

She believes promotions are superior to having low everyday prices, a route pursued by Asda, which refuses to run Bogofs and similar discounts. Bridgett points out that the Walmart-owned chain has lost market share during the downturn. 'Customers like to feel in control and that they are making savvy decisions. They like promotions and love to feel they have got a bargain. It is part of the excitement of shopping, and helps drive sales.'

For its part, Asda dismisses the short-term promotions run by most supermarkets. It runs link promotions - offering three items for £10 - and Roll Back, where prices are reduced for six weeks for fresh food, and 12 weeks for ambient products.

Shock to some

The Kantar findings are a shock to some. Richard Hayhoe, director of marketing at wholesaler Palmer & Harvey, the UK's biggest supplier to Tesco and the distributor for the Mace convenience chain, says the 42% figure is 'worryingly high'.

'About 30% of groceries on promotion would be a healthy level,' he argues. 'This promotional culture is creating a nation of cherry-pickers that want a product that hits a price point, rather than worrying about the brand. The danger is that several brands will find people won't buy at the full retail sale price any more.'

Sales promotions agencies argue that rather than simply cutting price, promotions can add value and excitement to brand offers through creativity (see '10 high-profile promotions' below).

Amid the discount fray, though, new brands can benefit by getting people to try their products. Steve Cooper, marketing director of Feel Good Drinks, a start-up natural soft-drink brand launched by ex-Coca-Cola executives, says: 'Promotions are costly for a small business to fund. But they can be very effective for ranges like ours in bringing customers to the brand.'

One criticism of promotions is that they boost sales during the period of discount, only for those sales to fall away when the promotion ends. These swings add cost to the supply operation.

Cooper argues, however, that short-term discounts can work. 'We have been successful in using promotions to bring in mums and demonstrate you can afford a product that is healthier for children.

'There is a risk that if brands fund the promotional activity by cost engineering and taking quality out of their products, you lose the reason for people choosing your brand in the first place. We haven't gone down that route.'

Some deny that 'value engineering' is widespread. Bridgett says brands would face a backlash if they used inferior ingredients. However, the art of cost engineering is to find ways of reducing costs without the consumer noticing, through subtle 'salami slicing'.

Bogofs and 'Twofers'

A further downside to the culture of Bogofs and 'Twofers' (two for the price of one) is that the second product can end up in the bin. WRAP, the government's anti-waste body, is investigating how much food sold on promotion is thrown away.

The results will be published at the end of this year. A spokeswoman says: 'WRAP has been discussing with retailers how food is sold on promotion. Retailers have responded positively, with several undertaking trials of alternative promotional mechanics such as "buy one get one free later".'

Promotions do not have to destroy brand equity. Link promotions - where the offer includes a discount without attaching it to a particular brand - are becoming more widespread.

NPD is another way for brands to escape the downward spiral of price promotions. While products may be launched with introductory promotions to stimulate trial, they are more likely to achieve full-price sales in the medium term. This, of course, depends on the products bearing the seal of strong marketing and meeting consumer desires, underpinned by powerful insights.

The problem is that price promotions cut margins and starve brands of the cash needed to fund innovation and launch products, further adding to the downward spiral.

INSIDER'S VIEW PROCTER & GAMBLE

Geraldine Huse, Sales general manager, P&G UK & Ireland

Promotions are important at a time when people are seeking value. They are an effective way of delivering value to the shopper, creating interest in-store or online, driving footfall and motivating people to try a product, particularly an innovation that can drive long-term category value.

People like a deal and enjoy getting a discount, but there is a limit, and we have to be careful we don't go too far.

There is a risk that promotions can be negative.

It can affect store loyalty in the long term. If we train people to shop on deal, they expect everything to be on offer.

If they go into a store and the product they want is not on special offer, they will go elsewhere. It is an important balance to strike between driving trial and protecting brand strength. We are researching this to understand the right balance and we have not got all the answers yet.