Why Unilever and P&G are pulling back from discounting

Reliance on promotions is slowly falling as FMCG brands put a bigger emphasis on effectively communicating brand benefits to justify a premium over competitors.


The amount of marketing spend FMCG brands such as Unilever, Mondelez and Procter & Gamble (P&G) put into promotions has come under the microscope as they start to question if the balance has tipped too far in discounting’s favour.

P&G’s chief financial officer Jon Moeller has argued that growing the business by significantly increasing promotion spending would be “a pyrrhic victory”.

“When you talk about increasing trial and sampling at point of market entry and point of market change with noticeably superior products, that moves markets over time. And being able to price behind superior innovation also moves markets over time. What doesn’t move markets is leading the march down on promotion spending,” he said, speaking on an investor call.

While Moeller admitted there are many cases where investing in price promotion is an effective use of P&G’s funds, it is also looking to redirect its spend to other elements of the marketing mix.

“[We want to] focus back again on how we can drive market growth in our categories and how we can drive shopping trips and basket size for our retail partners. And it’s really [about] working together in a joint context to identify where those opportunities are,” he explained.

Mondelez is planning to do the same. CEO Irene Rosenfeld recently said the company is shifting its spend by investing behind its “power brands” and putting a bigger emphasis on advertising rather than consumer promotion. Meanwhile, Unilever’s head of investor relations Andrew Stephen admitted the company is taking a closer look at its spending after the UK saw a “revised spate” of price promotions.

The data seems to back this up. Nielsen Homescan figures for all store formats for the 52 weeks ending 8 October 2016 show that “spend on offer” for FMCG brands was 40%, down from 42% in 2015 and 44% in 2014. But the UK consumer still buys almost twice as much on offer as the rest of Europe.

The challenge of promotions is that while they drive short-term sales, they eat into profit margins. They also hit consumers’ price perceptions.

“Brands follow each other when it comes to in-store promotional spending and it’s essentially a cycle of ebb and flow. Judging from where we are at the moment, brands are seemingly suggesting that they might have gone too far,” says Rob Sellers, managing director at GreyShopper London.

“If shoppers will only buy your product when on promotion, then there isn’t that belief in your brand to pay more for it. They might as well go for a cheaper alternative.”

Rob Sellers, managing director, GreyShopper London

While part of the issue comes from retailers’ desire to pull in customers using promotions, FMCG brands are also at fault. They have let promotions go too far, relying on them for a sales boost rather than trusting that their product, pricing and positioning will be enough to convince consumers to buy.

“You could argue that brands’ marketing communications simply aren’t strong enough to deliver that ‘moment of truth’, where consumers decide to buy your product instead of others’. It’s on the brand owners to deliver that message of their product’s superiority properly,” Sellers says.

Ultimately, brands need to balance brand activity and sales activity. When brands rely too heavily on price-led sales promotions, there is little space to focus on personality and differentiate from competitors.

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