Promotions in the Retail Industry_Consumer

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Promotions in the Retail IndustryStudy elaborated by Simon-Kucher & Partnersin collaboration with Sartia (Extract)

Philip Daus, Tim BrzoskaMadrid/Bonn March 2011

Executive summary

Simon-Kucher & Partners 2011, Competence Center Consumer Goods & Retail, Philip Daus - 1 -

Every year the Spanish retail sector invests more than 4,700 million euros in promotions. Price promotions are used by 80% of the companies.

Promotional discount levels used are very high: 69% of companies use discounts of 20% or more, and on average 25% of all products are on promotion.

Only a minority of companies focus on profitability as a primary goal of the promotion, approximately 3 out of 4 promotions have a negative ROI. The excessive focus on revenues and volume (the obsession with market share) results in a vicious circle of price decreases, which reduce margins across the whole industry.

According to respondents, to improve the management of promotions, you have to concentrate particularly on defining objectives and on monitoring the effects of promotions; 45% of companies do not set specific targets for sales, and only 2% use essential KPIs, for example, for measuring postponement of purchase and storage.

In our experience, there is also considerable potential for improving the definition of discount levels. Only 1 out of 10 managers correctly consider the effect of the discounts on profits! Likewise, only 1 out of 10 companies measure promotional elasticities, price thresholds and substitution effects. Without considering these topics, it is impossible to predict and measure the effect that the promotion will have on revenues and profits.

Discount of 50%."New price 4.90." Price promotions

Free T-shirt with the purchase of the product." Gifts

Points or credits to be exchanged by products or prizes." Loyalty program

Buy 3 units and get one extra unit for free." Volume discounts

Buy products A, B and C together with a discount of 20%." Bundling

Buy 3 products, instead of 3.00 pay 2.50." Multibuy

Extra 50gr for free." Packaging offers

Raffles"Free transport" Others

Price promotions are used most often


All the participant companies have used some type of promotion during the year. Price promotions are the most popular, used by 80% of participants.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221

Types of promotions used by companies

Do price promotions achieve the desired effect?

For almost half of promotions there are no clearly defined objectives


A total of 45% of the companies dont set clear objectives for promotions. The increase of revenue and volumes are the most important priorities, unlike profitability, which for them is less relevant.


Do they set objectives? Objectives relative relevance

2,9

3,1

3,2

3,6

3,6

3,8

3,8

4,0

4,2

Maximize profitability

Improve price image

Brand value increase

Stock rotation increase

Increase customer loyalty

Traffic increase in shops

Attract new customers

Volume increase

Turnover increase

The main goal of promotions should be overall profitability, while focusing excessively on revenue and market share can lead to dangerous price wars!

Only in superficially

Yes, for each

promotion

No, never

Several criteria help to choose the right product (2)

Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus - 4 -

but only 15% of companies said that they are measuring elasticities and only 5% of them measure the effects on other products (cross-price elasticities).


Before setting the price or discount of a product it is necessary to quantify the effect on the volume of this product, other products in its category and global sales.

?

The discounts are round and very high


By analyzing the frequency of each level of discount, it is outstanding that almost all companies always apply round discounts and the level is usually very high.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Otros: 5%

Nivel de descuento

To select the right level of discounts it is necessary to analyze elasticities and price thresholds.

Companies apply almost exclusively round discounts.

69% of the promotions are made with a discount of 20% or higher.

The discount of 20% is more common: Is it a psychological threshold?

Distribution of discounts in price promotions

23.4% of all promotions are made with a discount of

20%.

Non-application of Value Pricing to define the promotional discount


In practice, only few companies measure elasticities and thresholds, so it is impossible to predict the effect the discount will have on volume.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Otros: 5%

Considering costs and prices of competitors is not enough. Companies cant optimize their promotional management without measuring promotional elasticities.

Aspects considered in the setting of the discount level

Value pricing

Cost-plus margin

Habit and intuition

Competitors

Managers underestimate or ignore the negative impact on profit


Alarming: 9 of 10 managers underestimate or ignore the necessary increment in volume to compensate for a price reduction!

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 * Pregunta realizada con datos de la empresa de cada participante!

Highly underestimated

Estimations of the impact of the price promotion

Slight overestimation

Strong overestimation

Slight underestimate

Correct estimationSetting discount levels of promo-tions based on intuition is extre-mely dangerous!!!

How much should the volume increase in order to compensate for a 20% price reduction?

8%

2%

3%

3%

44%

39%Do not know

Few indicators are measured to monitor the promotional impact


According to the survey, retailers measure mainly the rotation, but in most cases no other sophisticated indicators are used to measure and control the promotional success.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Others 4%, * Usted .

Monitored indicators

1

2

3

?Revenues

Product sales

Total cost of promotion

Additional in-store traffic

Category impact

Product profits

Impact on brand image

Postponement of purchase and storage

Total costs of promotion: Share-out between manufacturer and distributor


According to the survey, retailers assume most of the costs of promotion. It also seems that medium-sized retailers negotiate better promotional conditions than big companies.


Retailers Revenues

in millions

Promotional costs share-out

Average: 65%

1

Monitoring:

??% costs

Medium retailers assume lower costs than big retailers.

Study Promotions in the Retail Industry: Technical file


The survey was conducted through an online questionnaire sent to 4,500 Managers of the Retail and Consumer Goods industry, receiving 221 valid answers.


3.9% for a confidence level of 95% (infinite population)

Sampling error

Sample size

Questionnaire sent to n = 4,500

221 valid answersMethod-ology

Online questionnaire with 20 questions

Mailing to Sartia and Simon-Kucher & Partners contacts

Proce-dure

Universe

Managers and Pricing Managers of Retail and Consumer Goods Industries

? Field work from February until March 2011Duration

Company size and positions of respondents


A total of 53% of the respondents work in companies with over 100 million in revenue, and 80% of them have high positions in their companies.

Size by revenue (M)

General Manager

Manager

Commercial

Marketing

Sales

Purchases

Finance

Pricing Manager

Product Manager

Others

Positions*

80%

Simon-Kucher & Partners tips for promotional management


1. Set a target for each promotion. Business profitability should always be the main target of promotional activities.

2. Select the type of promotion and promotional product depending on strategic targets. Thoroughly analyze whether price promotions are the most appropriate, as they are usually less profitable, or if any other sort of promotions would achieve targets better.

3. Quantify both the total cost and the effect of promotion on revenues before implementing any promotion.

4. To quantify the total impact on revenues, always measure promotional elasticity, price thresholds, and most important, cross elasticity. Moreover, measure dynamic effects of promotions such as postponement of purchase and storage before promotion.

5. Use multiple methodologies and sources to analyze the effects of past promotions, i.e. historical data or customer surveys. Perform consistent qualitative and quantitative evaluations of each promotion to ensure a positive ROI and boost the impact of promotions.

Promotions in the Retail Industry_Consumer

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