IRI Consulting warns that US food and beverage manufacturers risk a significant impact on their profitability when they get sucked into unduly aggressive promotional cycles.
In the beverage aisle, a pricing war has raged for years between Coke and Pepsi – with the latter in particular speaking of its desire to build value in soda by more consistent pricing less geared to deep discounting around holidays such as July 4, which leads consumers to expect a bargain and creates tricky supply chain spikes.
Dr. Krishnakumar (KK) Davey and his colleague Emre Sucu, the latter is a partner at IRI Consulting, decline to discuss specific brands or this scenario, but the latter says the problem is a “common phenomenon” in many food and beverage categories.
“There’s a big impact on manufacturer profitability, because you’re selling a lot of your volume on deep discounts that consumers are trained to follow each year,” Sucu says.
“It has implications on your inventory planning, your supply chain due to huge spikes within the year. So it’s a pretty big issue for manufacturers, and it goes beyond the soda industry.”
Manufacturers must manage promotions
Clearly, Sucu adds, there are also implications for the manufacturer/retailer relationship, given that some of the latter base their entire business model on ‘everyday value’ pricing, which stretches suppliers anyway.
“That doesn’t mean manufacturers should abandon any sort of promotions during holiday periods, but they need to look for ways to manage promotions – running less deep promotions, having less frequent promotions to smooth out profitability,” Sucu says.
“They need to break the training among consumers to wait for certain periods of the year before buying,” he adds, noting that “several manufacturers” are looking at ways to accomplish this goal.
Clearly the extent and number of promotions remains a problem. In September 2012, the Associated Press reported that the US recession (and the need among retailers to cut prices to attract consumers) had bred a new breed of “deal junkies that won’t shop until they see ‘70%’ signs or yellow clearance stickers”.
Risk of ‘training’ the consumer, who doesn’t respect regular price
Davey warns that when manufacturers sell 50-60% of their units on promotion, they train consumers not to respect the ‘regular’ price.
“So that’s the dilemma, when you overdo it it’s an arms race – particularly if you have a duopoly or three players. I promote, you promote – and we just escalate the whole thing,” he says.
Moves by some retailers towards everyday value pricing strategies – precisely to smooth out supply chain surges and build profitability through fair, consistent pricing – didn’t necessarily held brands either, he adds.
This is because a rival store nearby might then promote a given product – be it a soda, a cereal or chocolate – he says, which could lead to the retailer with the more consistent pricing policy putting pressure on the brand.
Discussing price inflation more generally, Davey says that price inflation for consumers had been mainly flat in the year to date – with even a 2.5% price rise in alcoholic drinks lighter than last year.
Although beverage categories such as beer, coffee, tea and juice are particularly susceptible to price inflation, Davey says there is currently more price inflation in food, particularly in meat and dairy (milk is up around 7% year to date) but that this has a knock-on effect on beverage spend.
“Since there is inflation in other categories, the consumer’s basket is pressured. If I end up paying 10% more for coffee, milk or meat then I have slightly less money to spend on other beverages. Milk, for example, is close to 7% growth year to date,” Davey says.