Promotions Failing To Ignite Sales For Retailers – IRI

A new study by IRI looking at the effectiveness of promotions shows that reality does not match expectation when it comes to sales. On average, a category will grow by only 0.13% when on promotion, much less industry estimates and below what is achieved by straight price cuts.

IRI conducted a study of over 85,000 promotions in UK supermarkets, convenience stores and health and beauty outlets to help answer the question ‘Do promotions really help retailers?’.  Of the 85,000 promotions analysed, over half had a negative category impact.

According to the study, multibuys are not working. While retailers are already moving away from deep discount multibuys (a fall of 40% over last year) towards clearer price cuts and ‘round pound’ deals, the study shows that multibuys have had little or no impact on sales at a category level (0.02%). This compares to price cuts that are delivering benefit to retailers (0.20%).

IRI said the outlook for Health & Beauty retailers is even worse, with both price cuts and multibuys shrinking category value on average, by -0.12% and -0.34% respectively. This is largely due to heavy discounting and low volume growth, which is being driven by large amounts of cross product switching within a category to cheaper alternatives.

“It seems that promotions are not necessarily driving sales growth as much as the industry expects. Unfortunately, the UK leads the world when it comes to promotional reliance, with over half of all goods sold on promotion (54.6% by volume) according to our Price & Promotion in Western Europe report published last year,” commented Thomas Hall, Analytics Programme Director, IRI and author of the study.

“We do know that promotions play a much bigger role in terms of driving footfall and increased basket size. There are also sizeable listing fees paid by manufacturers for promotions, display space and preferential listings, which help to offset some of the sales revenue losses. This always needs to be taken into account when looking at how promotions help retailers grow.”

The IRI study also shows that private label promotions perform significantly worse than brands, driving down overall category sales value by -0.35%. Without manufacturers funding these promotions, they are draining category value at an alarming rate.

However, IRI said the outlook is not all bad when it comes to promotions. Convenience stores are seeing the biggest benefits, with growth of over 2.5% in category turnover when promotions are used.

Even within the major multiples, IRI is seeing large differences in promotional performance. For example, multibuys can deliver +/- 0.3% category impact across different chains, and are more successful in premium chains, while price cuts are more successful in mass-market retailers.

At the category level, tissues, cheese, meal kits and frozen food promotions are the leading areas that deliver revenue growth for their respective categories within grocery retailers.

Within Health & Beauty, facial wipes and soaps drive good category growth when promoted. Nappies also have positive category value impact when promoted; much of this has been as a result of store switching. Along with alcohol and infant formula, nappies are a category that can drive shoppers to switch their shopping location to get a better deal.

Hall concluded: “It’s not all doom and gloom when it comes to promotions. Manufacturers do very well out of them, growing their sales by around 10%, on average, due to steal from their competitors. Many promotions and categories actually have a positive impact on revenue when they are executed in the right place at the right time, helping to grow a retailer’s business, and excite the shopper. The key is identifying promotions that genuinely drive sales and provide a win-win situation for retailer, manufacturer and shopper.”

NAM Implications:
  • Where at: Essentially, vital to examine your specific categories/brand performance, but it looks like any gain for retailers is via trade investment rather than margin on incremental sales
  • Where headed: Eventually, more enlightened retailers will realise that specific brands appear to be growing at expense of competitors, thus in breach of basic principles of category optimisation, rather than incrementally growing the category. Short term retailers will simply grab the money
  • How it affects you: Not good for building brand equity
  • Action: Best to revert to fundamentals, assessing each part of the marketing mix and emphasize any real advantage vs. alternatives available
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