Episode #0078 - We discuss supermarket promotions

In this episode of Pricing College - we discuss how supermarket promotions work - and what suppliers need to know. Is your brand benefitting or being impacted by a promotion from the supermarket? How do promotions impact volume and sales and of course profit?   In today's episode, we want to talk about supermarkets. They are probably one of the most powerful actors and agents in the commercial environment. That a lot of companies, a lot of pricers will be dealing with on a regular basis. They are almost the epitome of tough procurement. They are very aggressive in many regards, as regards promotions. Promotions to their customers on the shelves. I suppose today we want to talk about, how these promotions work? What appraiser should know about these? And, if you're working for a company supplying a supermarket, what should you think about these?   Traditionally price promotions, how did it how does it all work? It's actually a little bit more complex than most people think. A lot of people think that it's the supermarket driving promotions. But often it's the supplier that's trying to promote their goods to drive volume. A price point that they make money out, right? Essentially, that's what they're trying to do but they want exposure. So rather than spending on advertising, they spend on promotions. In the theoretical ideal world, they're supposed to work with the supermarket to suggest which category, which products should be best promoted based on data.  Or, evidence on consumer preference, demand, drivers and also supply dynamics. Whether it's in stock or not. When it can arrive and which would be the best, a win-win situation ie both the supplier margins and also the supermarket retailer's margins go up. But also that the customer gets what they want, the ideal world. But sometimes things don't work out that way. There's sometimes a little bit of miscommunication. Sometimes not enough data to give either the supplier or the retailer exactly what they want at the right time. Things can get a bit slow in terms of data. Sometimes people can miss out on this value chain what the end consumer actually wants. Another issue would be that the retailer traditionally would also help fund the promotion. It wouldn't be all one way from the supplier they would help promote and fund set it up. But now, over the past few years, big supermarkets know the power in the market. Most of the distribution is through them. They've literally not funded much. They more advise suppliers when they should promote. And the supplier has to fully fund nearly 100% of the promotion through to the trade, trade spends and trade investment. You can imagine if you don't have insights into the market as a supplier. If you haven't got the data all set up, you've got to deal with quite aggressive as procurement savvy retailer who's pretty much telling you to promote 100%.  You're probably pretty much going blind. So, it can be a very difficult discussion. A very difficult job for pricing people in promotions and working with retailers at the moment.   I often see and we covered this in a previous episode I think about chocolate. Like, I often see when you go into the supermarket there'll be promotions that often don't make a huge amount of sense.  I can't imagine that they benefit the supplier. A classic would be like soft drinks, I was even in the supermarket the other day. They were like a very famous brand of soft drinks, which most people know. It's common. It's been around for a very long point in time and it was half price. I'm thinking to myself, Is someone going to go out? I'll try that soft drink that I've tried 5000 times in the past and might enjoy that at this lower price point. I really don't think so. I really don't think it's going to get a new market or increase sales or benefit the supplier in any way shape or form. I can see how it would benefit the supermarket. But the actual supplier, I don't think for a minute of their choosing that strategy. The other aspect you will see is when as non-perishable goods and you'll see a big discount on them or goods that are longer life aspects. You can put a big discount on those and all it will do is move the spend from over the next six months to move it to today. Let's take a toilet roll. If there is a discount people will go to Costco and buy more of it. All you're doing is making the sale today at a lower price than you are down the line. So, for some of these promotions you're thinking, who did their benefit? Is it cui bono? It's they were saying who benefits in Latin. In many cases, is it the person producing marketing and selling their product? Or is it the person just retailing it? Like in many regards, supermarkets are retail is dying almost all across the world with deliveries etc. And supermarkets are one of those few sectors left where they have that real market power based on locality. You need that local presence and they're one of the few people who have that. And they have taken procurement and that aspect of their business to the nth degree.   People often think it's the supermarket setting the promotional discounts, but it's not it's the supplier's revenue management pricing team that sets these discount levels. Yes, and they do sometimes seem quite unbelievable. Especially over the last few months, you think, wow, you've seen up to maybe 60% to 70% off baseline recommended retail price. And you think, is that advantaging the supplier? Does the customer really go to make them buy more of that product? And, are they promoting the right product? I'd say people are making losing money across the board in this value chain discussion with promotions. It's just not working well. I think there need to be absolutely more data-driven insights on price point optimisation than there is occurring at the moment. Because then when you understand which price point delivers the greatest demand and you know your elasticities. Then you're able to pick the right price point that benefits both you as a supplier and the retailer. And also give people what they want not just promote a brand. Just any brand. It has to be a brand that you want visibility for a reason. You want the consumers to buy, they want to buy it and they're enticed. It's just that final straw they go, "oh and it's a good price". The good price doesn't have to be you know, 30% or 40% off. You could have got a 12% like the same sort of and this is elasticity modelling. So you need to know, what's elastic inelastic products by SKU level? And also by the pack, the pack price architecture needs to be redesigned. And used a huge amount of data that need to flow through these models at the moment and it needs to be real-time. Because at the moment, it's just not enough. Not enough for everything across the board. As a result, we're seeing quite large promotional levels and differences in promotional levels that are not benefiting anyone. Because essentially, even Coles, Woolies Supermarkets don't want to be stocking stuff that people aren't gonna buy. Even if it's promoted. It makes them look bad, too. They want to give people what they want. There are also ongoing and experiencing some pressure at the moment. Because new entrants online e-commerce people are going directly to find what they want. If it's not in the supermarket, they'll make this special effort of going online to find it somewhere else. Yes, it might require a bit more time and it would have been easier to buy all the goods in the supermarket. As Aidan says, it's a one-stop-shop. However, if your one-stop-shop doesn't give you what you want, people go elsewhere. It's the natural way of being. There needs to be consistency, there need to be better working relationships between suppliers right through to the value change. So, the category management, financials of the business, financials of customers and consumer preferences are streamlined worked out. And we're providing an agile pricing response and we're providing the people and consumers with what they want, great products. Products they want a price point that they're willing to pay. So yeah, there's a lot of work that needs to be done.