Absolutely not, says Dr. Kurt Jetta, founder & CEO of CPG analytics firm TABS Group, who says that what should be keeping the industry's biggest guns awake at night is the fact that they are pouring a serious amount of money into something they are not even measuring properly, and then wringing their hands at the lousy results, instead of fixing the problem.
“I know it seems unbelievable, but many CPG companies don’t have any kind of formal trade promotion analytics function at all.”
Some of them try to analyze profitability per event, but that’s actually quite rare
At the most basic level, he says, this means that many companies are not properly tracking and evaluating their trade spending, which means they are not learning from it.
“They have all this data, so you think they’d get smarter; it just bewilders me.”
He added: “When they look at promotions, they look at sales, and often not even what was sold in stores, but what they shipped into the retailer, whether it sold through or not.
“And the big question they ask is did I increase my market share? And this works backwards, too, so if a competitor does a big promotion and you lose market share, you freak out and say, ‘Oh my God! They’re taking business from me.’ No they’re not! It’s just that your share of total category sales went down because the promotion increased the total size of the pie.
"Some of them do try to analyze profitability per event, but that’s actually quite rare."
It’s not working, but they keep on doing it
As for the type of promotions to run, meanwhile, many of the biggest names in the trade are not making the best choices, he claimed.
“We see more and more companies doing these ‘buy one, get 50% off the second one’ deals, which is basically 25% off. But they seem to think they will fool the consumer into thinking they are getting a second one free.
“But the consumer isn’t fooled. If you look at the data, these deals don’t do as well as a BOGOF (buy one get one free); they don’t even do as well as a straight 25% discount [on a single product]. It’s not working, but they just keep on doing it.”
As for BOGOF deals, consumers 'get' them, but they are not right for every category, he noted: “50% off will outperform a BOGOF because consumers might not want a second box of your product that's just going to rot away in their cabinet; they feel like they are just wasting food.”
Some companies, meanwhile, are needlessly giving away margin, he said: “Take cough cold products, where you see a very low response to promotions. They are almost not worth promoting, whatever the price point.”
For new products, within say, the first six months, promotions will generate trial
But what about the lingering effects of promotions? Is it worth it if you lose money during the event itself, but you get your product into the hands of thousands of new consumers that otherwise wouldn't have tried it?
Said Dr. Jetta: “For new products, within say, the first six months, promotions will generate trial, although it’s not as dramatic an effect as many people think.
“But once your product has been on the shelf for six months, promotions generally won’t generate trial; the extra sales are typically coming from marginal users that are buying more. Not totally new users, and not the heaviest users either.”
Who is subsidizing the promotion?
The big problem facing many CPG manufacturers right now, he added, is that the economics of promotions have shifted as the retail market has consolidated and retailers have become more powerful.
“They used to share the subsidy, so they would say we’ll lower the price to the consumer by $2. You give me one dollar and I’ll pick up the other dollar and we’ll make it up on volume … we’ll both win.
“Now the manufacturer might be expected to pick up $1.50, or maybe the whole $2 if they are doing more digital couponing that requires a loyalty card. But this doesn’t work nearly as well as the traditional circulars, Sunday coupons and shelf tags, so whereas before you had maybe a doubling in sales from these deals, now your increase is maybe just 10%. They are also a way for the retailer to avoid 100% of the liability and the financial risk.”
He added: “The way to get smarter is to come up with a subsidy that works for manufacturers and retailers."
Because you’re (not) worth it?
Meanwhile, the notion that relentless promotions are destroying the equity of leading brands and that consumers are being “trained” to buy stuff on deal is an appealing narrative, but not one that is necessarily fact-based, he said.
Indeed, an alternative explanation for why consumers are no longer prepared to pay ‘full price’ for some big legacy food brands may simply be because they don’t value them as much anymore. And this is not because they are always on deal, but because shoppers have so many more appealing options to choose from than they did a few years ago in most categories.
If people are not prepared to pay 'full' price, maybe they are sending you a message:“This product doesn’t have value to a large percentage of consumers, but when you lower the price, then it’s worth it.”
Just ditching promotions isn’t the answer
The upshot of all this is that promotions can and do deliver incremental growth, but manufacturers have to stop writing off trade spending as a 'cost of doing business', and instead seize back the initiative, and come up with an evidence-based strategy that creates win-wins for all parties (manufacturers, retailers, consumers), he said.
“You see all these big companies saying they have pulled back on their promotional support and it hurt their sales, and it hasn’t increased their profits, but they don’t make the inference that hmm, maybe I can go back and do it smarter.”
Insanity? Doing the same thing over and over again and expecting different results
Many of these sentiments are echoed in ‘The Biggest P&L Line Item You’re Not Paying Enough Attention To‘, a new report from L.E.K. Consulting, which observes that “trade [spending] is often the second largest line item on the P&L and may account for 30% of gross sales or more in some categories”, but is not getting the boardroom attention it deserves.
Businesses with sub-optimal trade spend programs generally fall into one of a few camps, it says:
- Ivory tower advertisers: Businesses where brand managers control the P&L, and are more interested in advertising than the “less glamorous guerrilla warfare required to win consumers at the shelf”.
- Head in the sand: Old school CPG companies that “squeeze fractions of pennies out of ingredients, packaging and manufacturing overheads” but write off the millions they are pouring into the trade as the cost of doing business (“which can be translated as I don’t really understand it”).
- Creatures of habit: Companies that simply repeat the same strategy, however ineffective, because that’s how they've always done it.
- Diagnosed but lacking treatment: “Houston, we have a problem … but mission control isn't sure what to do about it. Some sales managers in Fortune 100 organizations run events simply to spend their budget so they will get it again next year – resulting in events that are marginally productive and meaningful.”
Click HERE to read L.E.K. Consulting's report.