Promotions in the Retail Industry

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Bonn office

Haydnstr. 36, 53115 Bonn

Tel. +49 228 9843-0, Fax +49 228 9843-380 E-Mail: tim.brzoska@simon-kucher.com www.simon-kucher.com

Promotions in the Retail Industry

Study elaborated by Simon-Kucher & Partners

in collaboration with Sartia (Extract)

Philip Daus, Tim Brzoska Madrid/Bonn March 2011

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Executive summary

-Every year the Spanish retail sector invests more than 4,700 million euros in promotions. Price

promotions are used by 80% of the companies.

Promotional discount levels used are very high: 69% of companies use discounts of 20% or

more, and on average 25% of all products are on promotion.

Only a minority of companies focus on profitability as a primary goal of the promotion,

approximately 3 out of 4 promotions have a negative ROI. The excessive focus on revenues and volume (the obsession with market share) results in a vicious circle of price decreases, which

reduce margins across the whole industry.

According to respondents, to improve the management of promotions, you have to concentrate particularly on defining objectives and on monitoring the effects of promotions; 45% of

companies do not set specific targets for sales, and only 2% use essential KPIs, for example, for measuring postponement of purchase and storage.

In our experience, there is also considerable potential for improving the definition of discount

levels. Only 1 out of 10 managers correctly consider the effect of the discounts on profits! Likewise,

only 1 out of 10 companies measure promotional elasticities, price thresholds and substitution effects. Without considering these topics, it is impossible to predict and measure the effect that the promotion will have on revenues and profits.

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«Discount of 50%."

«New price €4.90." Price promotions «Free T-shirt with the purchase of

the product." Gifts «Points or credits to be

exchanged by products or prizes." Loyalty program «Buy 3 units and get one extra

unit for free." Volume discounts «Buy products A, B and C

together with a discount of 20%." Bundling «Buy 3 products, instead of €3.00

pay €2.50." Multibuy

«Extra 50gr for free." Packaging offers

«Raffles"

«Free transport" Others

Price promotions are used most often

-All the participant companies have used some type of promotion during the year. Price promotions are the most popular, used by 80% of participants.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221

Types of promotions used by companies

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For almost half of promotions there are no clearly defined objectives

-A total of 45% of the companies don’t set clear objectives for promotions. The increase of revenue and volumes are the most important priorities, unlike profitability, which for them is less relevant.

Do they set objectives? Objectives’ relative relevance

2,9 3,1 3,2 3,6 3,6 3,8 3,8 4,0 4,2 Maximize profitability Improve price image Brand value increase Stock rotation increase Increase customer loyalty Traffic increase in shops Attract new customers Volume increase Turnover increase

The main goal of promotions should be overall profitability, while focusing excessively on revenue and market share can lead to dangerous price wars!

Only in superficially Yes, for each promotion No, never

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Several criteria help to choose the right product (2)

-… but only 15% of companies said that they are measuring elasticities and only 5% of them measure the effects on other products (cross-price elasticities).

Before setting the price or discount of a product it is necessary to quantify the effect on the volume of this product, other products in its category and global sales.

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The discounts are round and very high

-By analyzing the frequency of each level of discount, it is outstanding that almost all companies always apply round discounts and the level is usually very high.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Otros: 5%

Nivel de descuento

To select the right level of discounts it is necessary to analyze elasticities and price thresholds.

Companies apply almost exclusively round discounts.

69% of the promotions are made with a discount of 20% or higher.

The discount of 20% is more common: Is it a psychological threshold?

Distribution of discounts in price promotions

23.4% of all promotions are made with a discount of

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Non-application of Value Pricing to define the promotional discount

-In practice, only few companies measure elasticities and thresholds, so it is impossible to predict the effect the discount will have on volume.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Otros: 5%

Considering costs and prices of competitors is not enough. Companies can’t optimize their promotional management without measuring promotional elasticities.

Aspects considered in the setting of the discount level

Value pricing Cost-plus margin

Habit and intuition

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Managers underestimate or ignore the negative impact on profit

-Alarming: 9 of 10 managers underestimate or ignore the necessary increment in volume to compensate for a price reduction!

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 * ¡Pregunta realizada con datos de la empresa de cada participante!

Highly underestimated

Estimations of the impact of the price promotion

Slight overestimation Strong overestimation Slight underestimate

Correct estimation

Setting discount

levels of

promo-tions based on

intuition is

extre-mely dangerous!!!

How much should the volume increase in order to compensate for a 20% price reduction? 8% 2% 3% 3% 44% 39%

Do not know

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Few indicators are measured to monitor the promotional impact

-According to the survey, retailers measure mainly the rotation, but in most cases no other sophisticated indicators are used to measure and control the promotional success.

Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Others 4%, * «Usted ….»

Monitored indicators 1 2 3

?

Revenues Product sales

Total cost of promotion

Additional in-store traffic

Category impact

Product profits

Impact on brand image

Postponement of purchase and storage

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Total costs of promotion: Share-out between manufacturer and distributor

-According to the survey, retailers assume most of the costs of promotion. It also seems that medium-sized retailers negotiate better promotional conditions than big companies.

Retailer’s Revenues in millions €

Promotional costs share-out

Average: 65%

1

Monitoring:

?

% costs Medium retailers assume lower costs

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Study «Promotions in the Retail Industry»: Technical file

-The survey was conducted through an online questionnaire sent to 4,500 Managers of the Retail and Consumer Goods industry, receiving 221 valid answers.

3.9% for a confidence level of 95% (infinite population) Sampling error Sample size Questionnaire sent to n = 4,500 221 valid answers Method-ology Online questionnaire with 20 questions Mailing to Sartia and Simon-Kucher & Partners contacts Proce-dure € Universe Managers and Pricing Managers of Retail and Consumer Goods Industries

?

Field work from

February until March 2011

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Company size and positions of respondents

-A total of 53% of the respondents work in companies with over €100 million in revenue, and 80% of them have high positions in their companies.

Size by revenue (M€) General Manager Manager Commercial Marketing Sales Purchases Finance Pricing Manager Product Manager Others Positions* 80%

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Simon-Kucher & Partners tips for promotional management

-1. Set a target for each promotion. Business profitability should always be the main target of promotional activities.

2. Select the type of promotion and promotional product depending on strategic targets.

Thoroughly analyze whether price promotions are the most appropriate, as they are usually less profitable, or if any other sort of promotions would achieve targets better.

3. Quantify both the total cost and the effect of promotion on revenues before implementing any

promotion.

4. To quantify the total impact on revenues, always measure promotional elasticity, price

thresholds, and most important, cross elasticity. Moreover, measure dynamic effects of

promotions such as postponement of purchase and storage before promotion.

5. Use multiple methodologies and sources to analyze the effects of past promotions, i.e.

historical data or customer surveys. Perform consistent qualitative and quantitative