Why Promotion May End Up a Bad Deal for Packaged Goods
BATAVIA, Ohio (AdAge.com) -- Even as social-deal programs such as Groupon spread like wildfire, a funny thing is happening in the broader marketing world: Promotion has stopped providing much sales lift.
SymphonyIRI Group reports that even though the percentage of packaged goods sold on price promotion increased markedly for the second consecutive year, the average volume lift per promotion fell. A person familiar with Costco's monthly coupon books -- among the most generous in the industry -- reports those, too, stopped providing as much lift last year. (Costco declined to comment.) More broadly, while U.S. coupon redemption reached record levels overall last year, according to Valassis Communications, the pace of redemption fell 15% from the first half to the second half, from $2 billion to $1.7 billion.
Perhaps the most glaring example of all where price promotion failed last year was at uber-retailer Walmart, when it resorted to largely self-funded deep "rollbacks" in the U.S. last spring. After that failed to move the sales needle for a quarter, executives who signed off on the plan either moved to new jobs or left the company. Walmart U.S. under CEO Bill Simon reaffirmed a commitment to the everyday-low-pricing strategy of founder Sam Walton.
All this comes amid a backdrop of consumers being bombarded with deals like never before. In 70% of package-goods categories last year, at least 30% of merchandise was sold with some kind of promotional support, according to SymphonyIRI; that's up from 60% of categories four years ago. In all, two-thirds of categories saw increased promotional support last year. But average volume lift per merchandising event declined across more than half -- 57% -- of CPG categories last year, according to the research firm.
"We do believe there's a level of promotion fatigue out there," said Susan Viamari, the report's author. "Promotion has been very high in the industry over the past couple of years, even though we did see a moderation in the growth. CPG manufacturers need to evaluate everyday pricing strategies."
The other issue is that consumers remain tightfisted and economically distressed, and promotion isn't changing that, Ms. Viamari said. "Because more than a third of consumers are having trouble buying groceries, that option of stocking up just because something is on special is not a very easy option." More marketers need to tailor their shopper marketing to an individual level, she added, rather than use tactics such as temporary price reductions.
Realistically, packaged goods and mass retailers don't operate in a vacuum, so they may be hurt, too, by growing prevalence of nontraditional digital deals. A growing drumbeat of promotional offers now hitting email inboxes, including a rising tide of unsolicited electronic coupon offers in addition to those that consumers volunteer to receive, will almost inevitably desensitize many consumers to price-reduction messages, said Gregg Ambach, managing partner of the Cincinnati office of Analytic Partners, which conducts marketing-mix modeling for a number of package-goods marketers, almost all of which have seen declining lift from price promotion in the past year.
The declining effectiveness of price promotion already has marketers re-thinking their commitment to it, he said.
"We're seeing somewhat of a deceleration of temporary price reduction or discounting," Procter & Gamble Co. Chairman-CEO Bob McDonald said of industry tactics during the company's earnings conference call Jan. 27.
Stepped-up promotion hasn't fueled stepped-up consumer spending for P&G or others in the U.S. P&G's organic sales growth came in below Wall Street expectations last quarter at 3%, largely because consumer spending across its categories came in lower than expected, Chief Financial Officer Jon Moeller said. Even as consumers spent more on Christmas, they appeared to be spending less on staples such as soap and laundry detergent in December, when category sales began falling below expectations. Consumer spending in P&G categories appears to be bouncing back this month, the company executives said, even as price promotion appears to have abated.
Not even increased currency of deal messages from consumer to consumer in December across a wide variety of social media appeared to help volume lift. A study by Infegy's Social Radar found on average that 5.3% of social-media mentions of 14 CPG and apparel brands last year referred to deals, discounts or coupons -- and that percentage spiked to 7% to 11% by late in the year, almost double what it had been a year earlier. But all that chatter did not translate into sales gains for most companies.
So what are the implications for digital deal propositions as Google Offers prepares to join a fray already led by Groupon and Amazon's Living Social and trailed by dozens of lesser players? It's probably too soon to say, but out of more than 51 million people worldwide who've signed up for Groupon, the company reports only 32 million Groupons actually purchased so far.
Of 150 businesses that tried Groupon between June 2009 and August 2010, 66% found it profitable, according to a survey by Rice University, while 32% found the experience unprofitable. (Of restaurant owners, 42% found Groupon unprofitable, with many reporting customers who used Groupons spent no more than the face value, didn't leave tips and never came back.) And later users of Groupon were more likely to find it unprofitable than earlier ones, said Utpal Dholakia, the Rice marketing professor who conducted the study.
That could be because newer users were in newer markets where the network was less developed, he said. But, he added, "My theory is that as time passes there's a little bit of jadedness about using Groupons, because then they become just like any other coupon."
But in other areas, he noted, numerous studies have indicated "the effects of promotions happen in the short term, and long term it has very little effect."