Promotion fails to pull its weigh

You would have thought that in groceries – one of the most highly researched, information- intensive industries – professional marketers would have some idea about whether promotions are good or bad and if so why, and to what extent. But judging by recent controversy, even with 30 to 40 years of experience and billions of pounds of promotions spending under its belt, they don’t.

Current debate is being prompted largely by Procter & Gamble’s continued assault on promotions – especially multibuys. Two- thirds of promotions actually lose money and many of the remaining ones only break even, claims P&G’s UK managing director Paul Polman: marketers are “investing vast amounts of money in an area that doesn’t enlarge our share, appeals to a minority of consumers, drives disloyalty and reduces market value”.

Indeed, if you don particularly critical spectacles you can see promotions as the tip of an iceberg of appalling, irresponsible waste. It starts with manufacturers setting market share and volume targets that do not reflect consumers’ real desire for their products. Next, they produce target-generated “forecasts”. Then they worry as unsold stock lies around in warehouses and on store shelves. Finally, they shift slow selling lines faster through promotional activity.

These steps insanely build up huge extra costs yet somehow they have become institutionalised into formal planning cycles with timings and budgets all neatly slotted in.

So why doesn’t the industry simply stop doing it? Firstly, because it’s not as simple as that. For some categories – impulse lines especially – promotions work much better than those where core demand is static (as P&G is the first to accept). Secondly, finding out whether the promotion works can be far more complicated than appears at first sight.

For example, some marketers argue that while sales volumes often rocket in the short term, they are followed by a post-promotional dip, as consumers use up promotion-induced stockpiles in their cupboards. But according to a new study by IRI InfoScan, post-promotional consumer purchasing dip is a myth that needs exploding. It doesn’t happen, they say, because not all buyers visit that store during the promotion or because they’re not tempted by that particular promotion. What does happen, however, is that there is a post-promotional order dip, because retailers routinely buy forward, taking extra stock at extra discounts to sell later at higher margins – which, of course, is an entirely different issue.

But post-promo dips aren’t even the half of it. Forget sales, what about profits? And how should profit effects be calculated? Should only the direct cost of the offer be included in the calculation? Or should it include administration costs such as sales and brand managers’ time? And what about related supply chain costs (such as the extra cost of manufacturing, distributing and storing special promotional items)? The truth is that many manufacturers haven’t a clue about these costs because they haven’t got the activity-based costing systems needed to discover them.

Even if they could, they would still have a further hurdle to clear: teasing out the relation between sales and/or profits effects and longer-term effects on consumer psychology. If P&G is correct, even profitable promotions may cause long-term damage if they train consumers to buy deals and not brands. Profits won this year might have to be spent three or four times next year in a struggle to rekindle brand loyalty. Yet, say promotion enthusiasts, promotions generate the excitement and interest that helps keep brands, categories and shops fresh.

There’s a third reason for the issue’s incredible intractability: it strikes at the heart of the industry’s endemic power games.

There are at least five of them, including manufacturer versus manufacturer (for market share, retail space and favour); retailer versus manufacturer – “This multibuy may do nothing for your profits but it sure does get people flocking into my store” or “This promo may do wonders for your market share but it does nothing for my total category performance”; retailer versus retailer – “How will this promotion attract customers from his store to mine?”; manufacturer versus consumer (where manufacturers use promotions deliberately to cloud the price/value judgement); and finally, retailer versus consumer – “If I scream about low prices on 100 items, can I persuade shoppers that, overall, my prices are cheaper than they really are?”.

There is a positive side to this mess, however. For a start, it is prompting many companies to be far more rigorous in evaluating exactly what different types of promotion do in different circumstances. It’s also prompting them to be far more rigorous in setting objectives in the first place. In recent European ECR projects, retailers were asked to specify the purpose of each promotion: was it to build traffic, transactions and sales, or to respond to competitive activity, to build image, etc? Many were embarrassed to discover they simply couldn’t answer.

The resulting reappraisals can produce some startling results. For example, in its new concept store in Harlem, Amsterdam, Dutch retailer Albert Heijn rations promotions to special areas within the store, such as gondola ends. If a manufacturer insists on having a national promotion which doesn’t fit its programme, the stock is literally removed from the main store’s shelves and placed elsewhere – in a special cheap and cheerful “discount street”.

Another example is that in the light of its category management and ECR work across Europe, at least one blue-chip brand manufacturer has accepted the need to align objectives more closely with those of retail customers. As a result, all previous assumptions about what promotions are for and how to judge their success are up for review.

Intriguingly, the debate is also prompting some marketers to question their age-old distinction between communication channels and distribution channels. If you accept that stores are a very powerful medium in their own right, then point of sale could be as much about brand messages as influencing transactions.

Finally, some leading edge companies are exploring consumer pull, as opposed to producer push, business stratagems. If these work, the unnecessary aspects of promotional activity will end forever – and the marketing model itself will have been revolutionised.