A dramatic increase in retailers’ promotional activity in the past five years shows no sign of abating and could bring down processors if sustained, according to information services provider IRI.
IRI said data it had compiled showed the overall proportion of packaged grocery items, excluding fresh produce, bought annually on promotion had risen from 34% in 2002 to 43% in 2007. In some areas, such as lemonade, frozen pizza, juice and squash, soup and instant coffee, that proportion was greater than 50%. Cola drinks clocked up the highest percentage figure, with 77% purchased on promotion in 2007.
“For some individual brands, 70-80% of sales in a year may be on deal,” said Tim Neales, health & beauty insights editor for IRI, but speaking for food categories as well. “Some products are on promotion for 26, 27 weeks of the year. It could happen in all categories potentially. That begs the question for the consumer: why should you ever pay full price for these products?”
Manufacturers were being forced to fund a substantial amount of price cutting activity and pay for the additional sales material needed for promotions. But with rising materials costs, the promotional trend looked like it could reach a point where it would become unsustainable for some, said Jeremy McNamara, IRI regional md for Northern Europe.
Neales said: “Because of competition in the marketplace, the price of products is going down month-on-month. If industry had nothing else in its armoury, everyone’s business would be going down in a similar way.”
However, at the moment, processors and retailers were offsetting the damage by catering for an increasing appetite for premium-priced products and maintaining intensive new product development focused on core consumer trends. “It’s a delicate balance, ensuring low-level price inflation,” said Neales. McNamara added: “If something happens to disrupt things, that balance could go out of step and that would be bad.”
Possible consequences could be sudden steep price inflation or a sharp drop in promotional activity, said Neales. Firms could go under because they were unable to adapt quickly enough. “Things will change because they have to change,” said Neales. “It may mean some people will lose their shirts, it may mean some retailers will not be here in five years. But it’s only unsustainable if you can’t adapt fast enough.” Generating long-term loyalty to core brands could help manufacturers weather potential storms, he said.
McNamara added that a more finely tuned approach to price promoting, which was achievable through the use of new technology, was needed in the current climate to minimise damage. “A more scientific approach is required for pricing. We’re seeing an increase in the level of complexity and a higher level of understanding and visibility because of the availability of data. We need to move away from a gut-feel, knee-jerk promotional response.”
IRI’s comments followed the release of a white paper by the KPMG/SPSL Retail Think Tank. The paper claimed sales, promotions and discounting could erode retailer brands and the in-store experience. If discounting programmes continued on their present path, the situation ran the risk of becoming untenable for retailers in the longer term, according to the think tank.