Mark Ritson: The era of price promotions is over

The dominance of price promotions in British retail is finally waning, but if you think it’s because marketers have grown a brain and a spine, think again.

One of the biggest and strangest reversals in recent marketing history is taking place, unnoticed by most, in the supermarket aisles of the UK. In these fantastical days of Trump, Brexit and ad fraud, this statement might strike you as somewhat odd. But trust me, what’s going on with price promotions right now is worthy of your significant attention. Well at least a column’s worth.

For the past decade, British supermarkets have been engaged in a spectacular amount of promotional activity. The two great barometers of grocery buying, Nielsen’s Homescan and IRI’s Infoscan, disagree on the proportion of supermarket purchases that are made while the product is being offered on some form of promotional offer. Nielsen estimated that over the last 10 years the figure rose to around a third of all purchases while IRI had the number reaching around half of all supermarket sales. But both firms agree that this figure has risen consistently throughout the 21st century in the UK and that British consumers buy far more promotional items than any of their European cousins.

READ MORE: Consumers gear up for more price rises as inflation hits near three-year high

But, according to Nielsen, all that changed last month. In the four weeks ending 25 March only about a quarter of all spending at UK supermarkets was on products that offered a temporary price cut (for example, 20% off) or a multibuy deal (such as ‘buy one, get one free’). That might sound a lot but it’s back to levels we last saw in 2006. What is going on?

Well nobody actually knows. But there are three possible explanations to consider.

First, and I should point out from the outset that I don’t buy this one for an instant, maybe marketers have become a bit smarter. Sales promotions are a notoriously stupid thing to do and, even with your supermarket ‘partners’ squeezing your extremities so tight it’s hard to even scream, are something that should be resisted wherever possible.

The UK is a wobbly, worried place for consumers right now and that feeling will see us through until the end of this decade.

Yes, they shift a lot of stock and also help provide short-term differentiation for your brand over the competition. But that short-term sales bump comes with a much greater hangover as even the smallest cut in price causes financial disaster to bottom line profitability. Most marketers never get this point but when you cut your prices by 10%, while you might increase sales volumes by 20%, you probably reduce your net profit by around 40%.

Perhaps worse, the longer-term effects of forward buying while the brand is on special offer and the gradual commodifying impact of the promotion on brand equity lead to a subsequent dearth in demand that can only be resolved with… you guessed it…another sales promotion.

The influence of Aldi and Lidl

Maybe brand managers across the country have evolved bigger brains and stronger spines and pushed back against sales promotions – at least the price-based ones – in favour of smarter and less damaging promotional fare. A more likely explanation is that we are now seeing the ultimate results of the Einfluss (or influence, in English) from Aldi and Lidl’s growing success in the UK.

It’s perhaps no coincidence that on the same day we learned about the sudden downturn in promotional sales we also learned that the two German giants had taken another record share of UK grocery shopping. With Aldi enjoying 6.8% and Lidl 4.9%, according to Kantar Worldpanel data, both retailers are are achieving double-digit growth in the UK once again and are becoming ever more influential on the British high street.

That growing influence is crucial because the greater these two discount retailers penetrate a country the lower the proportion of promotional activity you are likely to see. That’s partly because the growing proportion of sales at Aldi and Lidl are drawn almost exclusively from their policy of everyday low pricing and not from sales promotions. But it’s also a reflection of their impact on other retailers, which gradually reframe their own tactics and private label approach to respond to the changing competitive threat and the expectations of consumers clearly enamoured with Aldi and Lidl’s no-nonsense, we-don’t-even-have-a-toilet-or-any-fucking-windows approach to merchandising.

The last, and probably most persuasive explanation is Brexit. Again. With sterling taking a major hit versus other currencies the cost of producing many of the products in the British supermarket has risen and so have prices. Those higher prices and uncertainty about the British economy have sent many British shoppers on a flight to value. Sales of private labels are up around 5% on pre-Brexit levels, and low prices – rather than special offers – appear to be the order of the day across grocery aisles.

READ MORE: How marketers should deal with post-Brexit price rises

That was certainly the opinion of Mike Watkins, who runs retailer and business insight for Nielsen in the UK. “To be more price-competitive, supermarkets have turned temporary price reductions into permanent cuts, so there’s less promotional activity as many prices are cheaper all-year round,” he explained. “There’s also been a shift away from multibuy to simpler price cuts, which is in tune with shopper needs to make it easier to manage their basket spend,” he added.

Whatever the reason, this looks likely to be a trend that will continue for the foreseeable future. Aldi and Lidl will only strengthen their grip on the British high street as we head to 2020. Whatever the long-term economic outcome of Brexit for the UK, the short-term implications for the next few years are already obvious. The UK is a wobbly, worried place for consumers right now and that feeling will see us through until the end of this decade when the twenties (yes, pinch yourself, the twenties) begins.

After almost two decades of domination the age of price promotions appears to be in retreat.

Professor Mark Ritson will be teaching the next class on the Marketing Week Mini MBA in Marketing from April 2017. To find out how it could make you a more confident, more effective and more inspired marketer, and to book your place, click here.

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Comments
  • Brian George 5 Apr 2017 at 9:31 am

    Price promotions have long been a, too widely used, mechanic that does nothing for ongoing brand loyalty, but lots for short term and probably unprofitable sales blips! Of course the Discounters are blamed and yes post-Brexit food prices have risen and will continue to do so. Equally much is being made of a 5% swing towards theoretically cheaper, although not necessarily as good own-label. However the real issue lies in the continued building of long-term brand equity, not knee-jerk price promotional activity as a defence against the supermarkets continuing attempt at branding every product they sell. Consumers and the market need diversity, quality & value, not commodity, uniformity & discounts.

  • Pete Austin 5 Apr 2017 at 9:41 am

    Maybe it’s the Rain in Spain?

    Fresh foods have been in somewhat short supply recently, due to bad weather in Spain and Italy, so one would expect less need for reduced price offers in related sectors. http://www.telegraph.co.uk/business/2017/02/03/causing-2017-vegetable-shortage-does-mean-consumers/

  • Zbiggy Ucinek 5 Apr 2017 at 10:07 am

    Mark, Being almost as opinionated as you and therefore say when I think your talking crap, but also man enough to praise. Back to your best re this article.

    Couldn’t agree more, price promotions, unless getting rid of old and unmoving stock, are the preserve of useless marketers. Incapable of building a proper brand and therefore real long term sustainable earnings based on loyal consumers. Price promotions encourage fickle consumers, namely short term “gain” that results in long term loss.

  • Shanghai61 10 Apr 2017 at 2:52 am

    I’m surprised there’s no mention of the relentless pressure from the supermarket chains, who all want to appear to be ‘cheap’. They demand promotions, or else …

    The impact of this ‘blackmail’, sucking money from ATL brand budgets, is to weaken brands. Couple that with the very different strategy of the German chains – ‘fake brands at real prices’, to which the conventional retailers have no immediate answer – and it’s a perfect storm for the poor bloody FMCG marketer.

    • Mark Ritson 10 Apr 2017 at 12:37 pm

      except there is less sales promotion going on, not more….

  • Carey Wong 10 Apr 2017 at 2:20 pm

    Hi Mark, thanks for sharing this observation. As nice as it would be, to think that CPG companies are now making smarter TPM decisions in the UK, I believe that this is more of a retail pricing strategy phenomenon, than a CPG trade marketing phenomenon. I’m sure that CPG companies have not suddenly reduced their trade spend. With the price increases in the UK due to Brexit and falling Pound Sterling, UK retailers are now taking their trade funds and using them for Walmart-style Every-Day-Low-Price (EDLP) pricing, rather than the traditional Temporary Price Reduction (TPR) pricing strategy. This means that they don’t have to raise their prices as much, but it means that they now have less funds for TPR’s.

  • Robert 11 Apr 2017 at 4:26 pm

    Definitely too early to call time on this debate. Growth of discounters will definitely have long term impacts.
    Also glad to see the article highlights difference between revenue and profit and that the increase in sales has to be much higher than your discounts percentage to payback. However do not write off the impact of needing to continually build purchase and retain your portfolio buyers who will switch to other brands when they are promoting back to your favorite book by mr sharpe!

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