Grocers Pump Up Promotions
To get something, you sometimes have to give
something. That is the clear lesson that retailers have learned in the past
couple of years as many consumers demand some kind of deal to purchase products.
Grocers in the Jacksonville, Fla. market have
certainly gotten the message, having increased the amount of product sold
on promotion from 38.7 percent for the 52-weeks ending Oct. 4, 2008 to 43
percent for the same period this year, according to The Nielsen Company.
Consumers
in Chicago buy more product on promotion than any market, with 55.9 percent
of all items sold having some deal attached. That is up two percent from
the previous year.
Nationally, the percent of groceries sold on
promotion for the period ending Oct. 3 was 42.8 percent, up two points from
the year before.
Jim Hertel, a managing
partner at Willard Bishop, told the Jacksonville Business Journal, “All
things being equal, shoppers will always prefer saving money.”
The right
promotions can drive business but Mr. Hertel added, “The question retailers
need to ask themselves is, ‘Am I really accomplishing anything or am I
just giving money away?’"
Discussion
Questions: Are grocers making the best use of promotional programs today?
Are there too few or too many, and are they running the right types of promotions?
Will grocers continue to promote at current or higher levels once the
economy has rebounded?
There has to be a strong level of optimization when deploying a new promotion. “How much will it cost?” and “how much can I make?” are the 2 driving factors when tailoring any promotion. I find that small grocers and retailers are quick to slash prices or offer bogos or freebies but have no real objective or goal for the promotion. Do you want more customers? Or do you want each customer to buy more?
It surprises some of my clients when I actually sit down with pen, paper and calculator when developing a promotional strategy. Juicier promotions are good but there has to be a solid plan and expected result behind it.
“Regular price” is dead, a bullet in his head. May he rest in peace. Meanwhile his offspring, heavy daily promotions, are existing today without much rest or peace.
We are deep in an evolutionary cycle regarding promotions. Every month, retailers–pressured by the current economy, aggressive competition such as Wal-Mart, and a smaller retail pie–attempt to deliver stronger promotional offers to get more consumers to take more goods through their checkouts. This is the state of grocery evolution today, and as in all evolution, some of the least savvy participants will crumble from the costly weight of their chosen promotions.
When the economy perks up, retailers will try to reduce their promotional emphasis but that may not be practical. The dye is now cast. We have shot off our promotional guns too often and now consumers will continue to expect big promotional discounts that we have weened them on.
If there is a moral here, perhaps it is this: When Deep Discount Man, though all a rave, at best is only a monkey shaved.
Intelligent use of frequent shopper data is improving all the time. Kroger, for example, is onto some amazing stuff. But overall, there’s been more “investment in margin” of late because retailers are worried in this soft economy about losing share, especially to Walmart. In this economy, price cuts are at the top of the list of what customers want. Retailers like to give customers what they want. Often, all this leads to unwise promotions that aren’t well thought out. That’s a good part of what is driving the uptick in promotion. This will ease up, but not much, when the economy improves. Shoppers are pretty well trained now.
Are grocers making the best use of their promotional program? Well, probably not. What I see with most of our retail clients is that promotions are often done to boost sales, however, Gross Margin is often neglected. There is no second thought that, given the product features are more or less similar, customers–especially during these times–would like to save money. But retailers need to measure how effective these promotions really are. Often, promotional effectiveness is measured by the spike in sales during the promotion, which perhaps is not a very accurate way to measure effectiveness. Other factors–like gross margin, a switch in customer preferences even after promotions, the halo effect of promotions on other products, the cannibalization effect on others, and what it all does to the overall Gross Margin of the retailer–also need to be measured, which is often also neglected.
Most grocery retailers have terabytes of customer data collected through their loyalty cards and the time is now to put it to use. Simple analysis of customer and basket data could reveal lot of insights on what type, when, and on what kind of products the promotions should be offered to get maximum ROI. For example, based on the basket study, we had found out which customers are likely to respond to a promotion on Mexican ready-to-eat food and which pack size the promotion should be on to get maximum effectiveness. For one of our other clients, we had identified who the customers most likely to leave the retailer are. In a similar study for another retailer, it was found that customers who stopped buying milk at the store were the ones who were most likely to leave (in less than a month or so). Based on such insights, promotions could be designed.
True, cash crunched retailers do not have huge budgets to spend on an analytics application. However, they could embark on smaller projects, resulting in faster ROI, or try out service options.
The president of a well respected retailer gave me this advice. “Work as hard as you can to keep your price point as high as you can. It is easy to slide down, but very tough to climb back up.”
With the tough economy and pressure from Walmart, retailers have had to continue to drive sales through heavy discounting week after week. The shopper has benefited in the short run, but I am concerned about what this means long term, since it can’t be sustained forever. Retailers need to find ways to sell more products at EDP through unique programs that don’t just offer TPRs.
One way to do this is for retailers to focus on unique merchandising programs that help them build loyalty for their Private Label brands. When the economy improves, I believe shoppers will continue to watch their spending. As Jim Hertel said “…shoppers will always prefer saving money.” Private Label is a way for them to save money and is a real differentiator for each retailer.
As a disclaimer, I am currently working on a unique merchandising program that helps drive retailers’ Private Label brands.
Doron is exactly right–there has to be a strategy behind promotional activity. If all you are doing is giving away margin to drive volume, then you’ve got a tough row to hoe. Price is only a great differentiator if you can actually differentiate your operation on cost. ALDI, Walmart, and dollar stores have this down, but a traditional grocer almost certainly can’t compete with those channels on price alone.
So, what strategy should drive a traditional grocery store’s promotional activity? I would argue that the focus must be on the individual customers: use the loyalty data that most grocers collect to differentiate your shoppers and promote to different groups differently.
Price-insensitive high-spenders should receive promotions that make them feel recognized, rewarded, and valued. If they are buying products week-in and week-out, a TPR doesn’t change their behavior and doesn’t make them feel special, it just gives away margin. Instead, a customized savings certificate on specific products that clearly reflects their preferences will be more appreciated, even if it saves them less money.
At the other end of the spectrum, the “bottom-feeders” who only shop deals, switch brands frequently, and never buy from the higher-margin departments are often a net loss for a retailer. Unless you believe you can change their behavior (and make them profitable), why encourage these shoppers to visit your store at all? If only these shoppers took their business elsewhere, you could see real dollar profits *increase* even if total sales went down.
Of course, there are many classes of shoppers in between, and in each case the relationship with the shopper could be improved and margin could be protected by crafting promotional strategies around the particular traits of that shopper group. Ultimately, I think the winning grocers will move away from blindly running TPRs and store-wide promotions, and will put more effort into targeted, shopper-specific promotions. This means more work but by enlisting brands as partners in the process (and by using technologies to make that cooperation easy), chains can make the shift without being overwhelmed. I’m excited to see this new model of promotion become a reality.
The key is rigorous measurement and acting on those findings. Where companies run into trouble is when they jump on the bandwagon and say “we have to do something RIGHT NOW because [fill in the blank: competitor X is acting/comps are down/consumer confidence hit a new low/etc]. In my experience across retailers, when a retailer offers a promotion because they are anxious–instead of because they’ve tested it and have proven it will work–the promotion fails far more than half the time. And because retailers tend to act bigger when they are most anxious, the failures can be spectacular, meaningfully impacting quarterly reported earnings.
As a small, independent supermarket owner, I still believe in the old saying “If you don’t promote, nothing happens.” Aldi and Walmart have tons of support but the rest of us have to do our homework, and bring out the big guns every week.
The answer is in perishables, as I’ve stated before, and you don’t have to sell ground chuck at cost to bring people in. All of the supercenters and discount formats are allowing us to make a profit around our perimeter, so that’s where I put much of my promotion dollars. There are many highs and lows in the market, and I play them to my advantage. Prime ribs bought now can be sold at Thanksgiving for much less than the competitors. There are many more examples of great deals to be had, so dig in and give your customers really great deals that not only beat the market, but also still put good profit dollars onto your bottom line.
Anybody can give Miracle Whip away but a strong meat & deli ad can carry your store to future success.