Fixing grocery’s addiction to discounts

Posted by David Buckingham, CEO

I’ve been hooked on a story I read in early April for weeks now. Mark Ritson of Marketing Week, a man in possession of a keenly sharp mind for marketing strategy, broke down the unexpected news of a sudden decline in the rate of promotions in British supermarkets, which he titled The era of price promotions is over. While Mark focuses on the explanations for this abrupt shift, I think the question of ‘what now’ for grocers and marketers deserves to be explored in greater detail. And although it may be easier said than done, the fix isn’t beyond the reach of any one retailer.

Is the era of price promotions really over?

To recap the basis of Mark’s piece, the two leading grocery market research firms, Nielsen and IRI, have reported a consistent rise in discounts as a percentage of total grocery sales throughout the 21st century in the UK. This totals somewhere between a third and half of all sales, depending on which company you ask. Today, Brits purchase a far larger share of their groceries on discount than their European neighbours.

But Nielsen claims that in the four weeks ending 25 March, only about a quarter of all spending at UK supermarkets was on products on some kind of promotion. Mark claims three possible reasons for this change:

1. Marketers getting smarter – The long and short of it is, marketers aren’t actually getting smarter. As dangerous for brand equity and net profit as promoted sales can be, British marketers didn’t just wake up in March and change their modus operandi.

2. Aldi and Lidl - These everyday low price giants, who are enjoying 6.8% and 4.9% UK market share and double-digit growth, respectively, directly impact the sales percentages of the market. They are also influencing how other retailers approach their own merchandising. Leaders create followers, and the trend is clear on this one. Low prices are beating out special deals.

3. Brexit – Mark credits Brexit as the strongest influence on the shift away from discounts. As consumers fret over rising prices due to a weaker pound, shoppers are hunting for the lowest price, opting for private label goods over a good deal on a high-end product.

Curing the discount addiction

While it is all well and good to understand why the market has pivoted so dramatically and so quickly, grocers and marketers need to know what to do now. And it starts with curing their addiction to relying on discounts to drive sales volumes. But just like coming off of any addiction, the process might be a painful, existential, incredibly rewarding experience.

Blanket discounting has a place if a retailer needs to shift excess or seasonal stock, no doubt about it, but it’s not a long-term or profitable strategy and can cripple a retailer’s bottom line. As Mark points out, “when you cut your prices by 10%, while you might increase sales volumes by 20%, you probably reduce your net profit by around 40%.”

Consumers in the UK have been conditioned to expect these discounts, which can devalue brand identity and erode consumer trust. Excessive reliance on discounting can mean that the consumer focuses only on price, and not the retailer’s differentiating factors such as quality or service. And if you actually do have windows in your stores and free bathrooms, not to mention great employee training programmes or organic private label ranges, you want your customers to see you through more than a purely financial lens.

It’s often stated that a very high proportion of purchase decisions are made at the point of purchase, or at the ‘first moment of truth’, as Procter & Gamble says. But if such a high number of products are supported at the shelf with heavy discounts, multibuys or additional merchandising, what does this mean for brand equity? And what about all the effort just to get the products onto the shelf in the first place?

Here’s the other thing about offers like ‘buy one get one free’ or ‘20% off’: everyone receives the same offer, whether they're a loyal customer, or one who shops just once or twice a year. In this scenario, there is no incentive to be cured of the addiction of bargain bin shopping. However, a more strategic, personalised and data-driven promotions programme might be exactly what the doctor ordered.

Engaging personally for ultimate loyalty

A huge opportunity exists for retailers to engage with consumers on a more personal level to encourage more authentic and profitable brand engagement. Instead of throwing blanket discounts on a product or category, marketers should focus on leveraging data on each consumer’s shopping history or shopping basket to deliver highly targeted offers to their highest value customers – at the till or via email.

Whether ‘high value’ customers are defined as the most loyal shoppers or those who are most responsible for reliably keeping a product moving off the shelves, grocers can protect their margins while making the experience more rewarding for each customer - while strategically protecting their margins across the board. Relevance and value are absolutely critical not only for securing greater loyalty and customer lifetime value, but also addressing the short- and long-term challenges of aggressively expanding competitors like Aldi and Lidl and an economy with more question marks than answers.

 

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