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Price promotion during the downturn:

shrewd or crude?

A report of key findings from an IPA seminar

Price promotion during the downturn: shrewd or crude ? A report of key findings from an

Promoting the value of agencies

Contents

Foreword

3

About dunnhumby

6

Introduction

7

Managment summary

8

The analyses

9

  • 1. Customer expectations

9

  • 2. Shopping behaviour

11

  • 3. Retailer behaviour

13

  • 4. Brand owner behaviour

14

Category impact

15

  • 1. Soft drinks

15

  • 2. Beers, wines and spirits

17

  • 3. Household

19

  • 4. Snacks

21

  • 5. Health and beauty

23

The downside risk of promotions

25

  • 1. Impact on brand loyalty

25

  • 2. Case studies

26

Dairy

26

Household

27

Confectionery

29

Acknowledgements

30

Key contacts

30

Additional reading

30

Appendix

31

Tesco customer lifestyle segmentations

31

Tesco customer segmentation by loyalty and promotional propensity

33

Copyright © April 2009 IPA Designed by: Eleanor Rudolph

Foreword

The data reported in this paper reveal the explosive growth in price promotions at leading UK retailer Tesco over the last 12 months, as the downturn has gathered momentum. We can safely assume that what is happening in Tesco is happening in other retailers, not only because of the evidence of our own eyes, but also because other retailers have gone on record with their intention to ‘invest in price’.

Foreword The data reported in this paper reveal the explosive growth in price promotions at leading

Peter Field

The burden of that ‘investment’ is often placed largely on the brand owners who wish to remain stocked in their stores and are forced to pay the price. With sales depressed, the money can often only be found by reducing the advertising and marketing communications budgets behind the brands, thus exacerbating the already heavy burden that many brands are experiencing in trying to maintain their critically important share of voice (SOV) in relation to their share of market (SOM) – see Advertising in a Downturn, March 2008, IPA.

The data shows that not all product categories are equally affected by this general trend, suggesting that there is at least some variability in the level of willingness to price promote amongst brand owners. Some perhaps regard this as necessary, even shrewd, behaviour during a downturn, when consumers are looking to cut expenditure. Others may believe it to be a crude way to buy sales that is unavoidable in a downturn but may ultimately cost them dear.

The wisdom or otherwise of this current explosion of price promotion is not yet obvious, but the omens are not good. Data presented in the last IPA report examined the cumulatively catastrophic impact of price promotion (or ‘dealer incentives’) on the US automotive category. In particular, it was noted that incentives become progressively more expected by consumers and hence lose their effectiveness over time. Ultimately, the profitability of an entire category can become irrevocably damaged.

A recent paper in the Harvard Business Review for Clorox, a leading US bleach brand, examined the impact on revenue growth of a heavy dependence on price promotion and contrasted this with subsequent growth when an advertising-led brand-building strategy was adopted in Q3 2005.

Figure 1

Clorox brand expenditure on price promotion versus advertising

Advertising spend Promotional spend Source: Lodish & Mela, Harvard Business Review, Fall 008 Q2 2005 Q1
Advertising spend
Promotional spend
Source: Lodish & Mela, Harvard Business Review, Fall 008
Q2 2005
Q1 2005
Q4 2005
Q3 2005
Q2 2006
Q1 2006
Q4 2004
-30
-40
-20
-10
% change versus last year
40
20
30
10
0

The reason for the change in strategy is clear from the chart below: revenue continued to decline over the first 3 quarters despite increases in promotional expenditure. The profitability of the brand would probably have declined even more steeply.

Figure 2

Clorox revenues over time

Source: Lodish & Mela, Harvard Business Review, Fall 008 Q4 2005 Q3 2005 Q2 2005 Q1
Source: Lodish & Mela, Harvard Business Review, Fall 008
Q4 2005
Q3 2005
Q2 2005
Q1 2005
Q1 2006
Q2 2006
Q4 2004
Revenue % change versus last year
-8
-6
-4
-2
4
2
0

The immediate negative revenue impact of the new strategy in Q3 05 reveals another feature of brand building communications discussed in the last IPA report: that it is time-lagged. However, after this one very bad quarter when price promotions had been reduced, but the new strategy had yet to take full effect, growth resumed for the brand. Q3 05 must have tested the confidence of the brand team, but they have no doubt since been rewarded with improved profitability.

Persuasive though the Clorox case study is, it took place during a period of strong economic growth and doesn’t therefore answer the more specific question of whether price promotion activity can help brand owners during a downturn. This is where the dunnhumby analyses are of such value.

The immediate negative revenue impact of the new strategy in Q3 05 reveals another feature of

Peter Field, Marketing Consultant

Introduction

The impact of the credit crunch is being felt in all business sectors, including consumer staples. In recent months both Unilever and L’Oréal have resisted City pressure to forecast future growth and earnings, with the rationale that the markets were so unpredictable that such information was impossible to forecast.

Introduction The impact of the credit crunch is being felt in all business sectors, including consumer

Janet Hull

Against this background, questions are being asked about how companies and consumers are responding to recession.

Precedent suggests, for example, that in difficult times there is an overall trend for advertising budgets to go down and promotional budgets to go up, even if there are notable exceptions. The need for promotional activity is justified by perceived trends in consumer behaviour; a general urge to save money in harsh economic times.

What is less well understood is whether manufacturers are just giving in to retailer pressure when they increase their spend on in-store promotional activity, or whether this shift in marketing activity makes commercial sense and is intentional. Does in-store activity deliver value to the brand owner? To the consumer? To the retailer? To the shareholder? And, if so, how?

In order to address these, and related issues, the IPA approached Lawrence Janes, Head of Media Solutions and Development at dunnhumby, Tesco’s Clubcard database partner, for help. Being the largest supermarket retailer with over 14 million Clubcard holders, its customer database is the biggest available in the UK and it enables us to examine quarterly performance right up until December 2008 – i.e. when the UK had been moving into recession.

The IPA invited dunnhumby to analyse the Tesco Clubcard database and the market research amongst cardholders in order to discern the impact of price promotions in relation to advertising on patterns of consumer behaviour and pricing.