Rod Street, executive vice president of consulting at grocery analytics and consulting firm SymphonyIRI, urges retailers to examine their pricing and promotional strategies to protect margins in the face of an ongoing consumer recession
The recession across Europe has lasted longer than many retailers and manufacturers expected. Consumers have adapted to these tough times by changing what they buy and the way they buy.
Price has clearly become a key factor, but value is even more important.
In their pursuit of the best deal, consumers are trading down through lines, to cheaper own-label products and even to a different category of product.
They are also looking more closely at the value they gain from promotions, weighing up each offer in context against the overall price and driving volumes where they find an especially attractive offer.
With increased use of promotions by brands keen to maintain declining volumes, many shoppers have come to expect promotions as the norm. More than 56% of all grocery products sold in the UK are sold at a discount to the everyday price, compared with an average of 26% across Europe.
The level of promotion is lowest in Germany at 11.6%. This compares with 17.9% in France, 18.5% in Spain, 21.5% in The Netherlands and 29.7% in Italy.
Despite the growth in promotions, packaged groceries continue to experience price increases above inflation levels. Upstream cost pressures continue to work their way through the supply chain.
As the recession persists, suppliers and retailers are under immense pressure to raise prices and reclaim lost margins, squeezed volumes and continued raw material price pressure.
Across the seven European countries surveyed by SymphonyIRI for the special report Pricing and Promotion in Europe – Adapting to Tough Times that Last, food prices rose by 3.2% and non-food by 2%.
Food prices in the UK have risen particularly steeply, by 5.1%, far ahead of the European average, reflecting the relative depreciation of sterling over the last few years.
Despite an easing in raw material prices since the peak in early 2011, food price growth may well start to feel pressure in the face of the latest series of poor harvests. These have started to drive the UN’s FAO Food price Index up again (by 6% last month).
SymphonyIRI research shows a decline in sales volumes in a number of countries in Europe over the last year. Although food sales volumes were up an average of 1% across Europe, non-food volumes actually fell (by 0.3%) and the average figures masks the trends in specific countries and categories.
For example, the volume of frozen food purchased by consumers across Europe declined by 0.1% and total sales volumes are down in the UK (by 0.3%), The Netherlands (by 0.1%) and Greece (by 2.1%).
In most cases, recessionary pressures are greater for non-food categories. Even with an average rise in food prices of 3.2% to further squeeze household budgets, people are cutting back but they still need to eat. However, this squeeze has left food sales at a virtual standstill in the UK and Netherlands.
With consumers searching for better value and more control, retailers and brands must find a way to use promotions and pricing more effectively so that sales volumes do not erode with price rises and margins do not erode with promotional growth.
The continued use of aggressive price-based promotions often simply undermines margins for companies and the value of entire categories.
Manufacturers need to be smart to make headway. Some are re-engineering products and using carefully shaved pack sizes to minimise the impact of volume price increases.
Making a shopper’s favourite product smaller or cheaper can keep prices down and make products more affordable during the downturn. However, it risks upsetting regular customers if it fails to offer the right value.
Other brands are ratcheting up their goals for innovation both within and across categories with the aim of pulling shoppers into their portfolios.
Even with these sorts of initiatives, a rigorous and commercial approach to pricing and promotion is vital to underpin profit and revenue for retailers and suppliers alike.
Too often, in-store promotional activity is being driven by a simplistic push for line-level volume. This fails to appreciate a range of key profit drivers: operational costs, margins, cannibalisation and the percentage of added revenue that is contributing to category value rather than merely substituting sales of other product.
Pricing and promotional activity needs to consider shopper response and focus on net profit. The realisation of better returns – on the 25 billion euros or more that are spent on promotions each year by grocery brands and retailers across Europe – is vital when volume and revenue growth is so tough to find.
This needs to feed a search for better alternatives to the current race to offer the deepest deals. Some categories may benefit from an everyday low price and limited promotion, another infrequent but significant event.
Some may perform well with on-shelf promotions. Others may need to leverage valuable display space that commands a premium from suppliers.
Whatever applies for the brands in-store also applies for the retailers’ own-label ranges.
Where should they be positioned in the price tiers? How heavily should they be promoted? Should they be promoted at the same time as leading brands or at other times?
Own-label volumes are increasing in most European countries and for many shoppers the increasing range and quality, keen pricing and broad distribution sharpens their attractiveness.
Retailers need to make sure these increasingly valuable assets deliver the optimum returns through effective pricing and promotion.
This demands the kind of granular insight that might have previously only been accessed from leading branded suppliers. It also demands a very clear focus on net returns rather than a simple chase for share.