June, 2012

Research Perspective and Comments & Analysis

Evaluating And Planning Promotions In An Increasingly Complex Retail Environment

By Kelli Beckel, Senior Marketing Manager, Nielsen Perishables Group

Promotional strategies and effectiveness have evolved over the past few years, leading to a need to better understand the new promotional landscape and plan future promotions accordingly. 

Retail price promotions are often one of the largest marketing expenses incurred by suppliers. It is not uncommon for retailers to request temporary product discounts or the allocation of promotional reserve funds to support reduced shelf-prices for the promotional event. The result is that retail promotions often carry a significant cost in marketing funds for suppliers and, potentially, lost margin dollars for supermarkets. 

With improved measurement and tracking, many retailers are increasingly open to promotional input from suppliers who bring promotional evaluation and planning expertise to the discussion, addressing key questions such as:

• How important are promotions to overall category performance?
• What drives “successful” promotions (i.e. discount level, frequency, promotion vehicle)?
• What are the best performing promotional strategies?
• How do promotions impact overall retailer performance relative to the competitive market?

The good news for the industry is that more tools and strategies than ever are available to answer these questions.

As the economy has improved, many consumers report they are becoming less price-focused, depending on the category and products offered. This means promotions are essential to draw in consumers to certain categories, while other categories often are purchased regardless of discount. For example, cherries are highly seasonal and responsive to supermarket promotions. Nearly two-thirds of cherry volume is sold while on promotion — the highest among the Top 10 produce categories — and the average volume lift on promotion exceeds 200 percent. However, despite the fact that cherry promotions drive a significant portion of sales, they don’t necessarily require a deep price discount to be successful. 

Promotional volume and discounts are only two pieces of the puzzle for understanding and planning effective promotions in an evolving produce department. Promotional timing and type, as well as circular ad size, frequency and location, all must be factored into the equation. The orange category exemplifies how to leverage the complete process. 

When examining orange promotions at a national level, promotional volume was down during 2011, while sales dollars, price and ad presence were all up. Retailers offered an average price discount of 23 percent while on promotion, with an average lift of 88 percent.

Nationally, oranges were discounted between 20 and 30 percent during 2011, which generated an average of 61 percent dollar lift over expected sales. However, the analysis found that volume lift is remarkably consistent at discounts up to 40 percent. However, lift jumps significantly starting at a 41 percent discount.  Interestingly, smaller discounts (10 percent or less) drive strong volume lift, but also provide a strong lift in dollars, usually an important goal for retailers.

Zooming in on top- and bottom-performing retailers provides insight into specific promotional strategies that drive success. In an analysis of the promotional strategies of top and bottom citrus retailers in 2011, it was found that top retailers discount between everyday and promotional pricing matched the national average (23 to 24 percent), while bottom-performing retailers implemented higher promotional prices. Additionally, top citrus retailers were less reliant on price reductions alone, and instead offered multiple citrus variety options to attract customers.  Meantime, bottom-performing citrus retailers focused 80 percent of citrus ads on oranges, rather than including multiple varieties. 

Ad location was the greatest disparity between top and bottom citrus retailers. Top-performing retailers used more feature ads,  and typically promoted oranges on the back page or the circular. Bottom-performing retailers used mostly sub-feature ads and chose middle pages the most. When it comes to ad type, top retailers utilized price multiple (e.g. 2-for-$1) ads over two-and-a-half times more than bottom retailers. 

Considering the national and top/bottom retailer analysis for citrus uncovers the following insights relating to promotional performance, pricing and ad strategies:

• Don’t let oranges dominate the ad planner. Aggressive orange promotions reduced total citrus performance, and ads with multiple citrus varieties were more prominent in top citrus retailers. Additionally, slightly more back-page ads may be better than a few larger front-page features. When orange ads are used, price multiple events are important to mix into the ad planner.
• Smaller discounts favor greater dollar lift for oranges. Discounts lower than 40 percent produce similar volume results, and lower volume lifts produce stronger overall results.

These types of insights allow for fact-based promotional plans that articulate the most effective timing, ad frequency, depth of discount and precise pricing recommendations. Once this information is known, the recommendations can be implemented into retailer plans, and later evaluated and refined for further success. 


Easier Said Than Done

Promotional strategies driven by real data? Deciding what to do not based on what your Uncle Louie or first boss told you 30 years ago but based on actual outcomes? This is not your father’s produce industry anymore, and this contribution by Kelli Beckel of the Nielsen Perishables Group is an important piece.

It is important because hidden in the data routinely captured is the key to promotional success. Yet, “hidden” may well be the operative word.

The Nielsen Perishables Group is doing the Lord’s work by urging people to look at the data, try and understand it and then act in accordance with what they find. There is little question that intelligent vendors will try to position themselves as the masters of this data. Still optimally using this data is easier said than done.

Part of the problem is that what actually works isn’t all that matters. Wal-Mart and others have been drifting away from the EDLP, or Everyday Low Price, concept not because it has been established that building a reputation for consistently low prices is not optimal, but because it denies retailers flexibility. If a retailer needs a sales boost next week, then a low price promotion may be just the trick. This is despite the fact that many a manufacturer and many a retailer have been ruined because they trained their customers to wait for the sale to buy.

Another issue is that promotional success is defined differently depending on where one sits in the supply chain and even one’s position within a company.  A grape vendor may see a promotion as successful if it boosts sales of grapes at an appropriate price. The category manager at retail for grapes might go along. Yet the produce VP won’t be so happy if the increase in grape sales comes at the expense of stone fruit sales.

And, if anyone is really on the ball, there are overall store ramifications that need to be assessed. A particular salad greens promotion might, at a glance, seem less successful than a particular snack fruit promotion, yet if the promotion leads consumers to buy tomatoes, peppers, onions, mushrooms, apples, berries, etc., to place in the salad that are not on sale at reduced margins, that might be a bigger win for produce than the supposedly more successful promotion. If the salad promotion leads consumers to buy protein, such as eggs, meat and seafood, to put on the salad, it may be a much more effective overall store promotion than the supposedly winning snack fruit sale.

Another key issue in evaluating promotions is time. In the very short term a promotion of, say, garlic, might be a success, but if the promotion only leads to consumers stocking up and kills garlic sales for the next month, it may not be a success at all.

Great data is important, but data produced in the normal course of business can’t test propositions that are normally not done. So, for example, typically many variables are tested at once: A deep discount on the product often comes along with larger more prominent positioning in the department and an advertising investment both in-store and out-of-store. Because so many variables change at once, the data can’t typically tell us which components of this promotion actually led to increased sales and to what degree each component contributed. This holds open the possibility that much of the lift in sales comes from components of the promotion other than price. Realize, of course, that the lift doesn’t have to be as large without a price reduction to maintain equal dollar sales and to gain enhanced dollar profitability.

One place data can be very useful, but that requires a deep dive to truly understand its ramifications, is the role that a promotion has on overall store profitability by examining the nature of the clientele it attracts to the shopping venue. See, all customers are not created equal, and not even a dollar of sales is equal among all customers. In days of yore we had no data so we defined our best customers as our biggest, but that is almost certainly not the case. A family with 10 children may buy an awful lot of stuff, but they may be under budgetary stress and so “cherry pick” the ads, use double and triple coupon offers and shop in multiple venues to get the best deals.

In the end, that very large customer may not produce much profit for the store at all. In contrast, a bachelor, who zooms in a few times a week to pick up a high margin prepared food item for dinner and on the weekend buys a nice wine, expensive fish and pricey balsamic vinegar to make a dinner to impress for his date, that guy, who never looks at the price, may be much more profitable than a price-conscious consumer who buys much higher volume.

This holds major implications for what makes a successful promotion. It means that certain stores at least might be more successful promoting specialty product, maybe more with usage ideas and implications of status enhancement. After all, if the key goal is to attract the customer who will buy high margin items, is a deep discount promotion the tool most likely to attract that customer?

The data is there to look at these subjects, but scarcely anyone ever does.