Promo junkies become hooked on a quick fix

Sales promotions have long been employed to drive volume, support product launches or smooth out seasonal sales spikes, but marketers need to beware that if used too often they can damage a brand.

Christine Cross, chief retail and consumer adviser at pwc, says any discount above 25% “puts a brand in dangerous territory”. It is unsurprising, then, that the latest sales promotion figures are concerning analysts and marketers.

In the grocery sector, promotions now make up 34% of overall sales, according to Kantar Worldpanel. Some sectors, notably beer, cheese and blocked chocolate, rely on promotions for up to 65% of their sales.

Once the whole chain becomes accustomed to operating on the basis of price cuts, this can, and has, become an unsustainable norm.

Indeed, when retailer Spar released a “buoyant” sales update last quarter, its head of marketing support Adam Margolin confirmed that sales promotions are “a vital part of everything we do”.

Spar’s sales of promoted items rose by more than 28% year on year, and Margolin explains that the retail chain is in a catch-22 situation.

“Brands can keep promoting to keep customers, or reduce promotion and risk losing customers,” he says. “The real winner in all this is the customer.”

And consumers are certainly taking advantage of price cuts. Of the 34% of sales that Kantar attributes to promotions, half are price cuts.

During much of last year it was rare to find a sales promotion that was not price driven. And it is not just challenger brands that are responsible for this trend; leaders in certain categories are succumbing to the vicious circle. Walkers Sensations crisps used a cut-price promotion to launch the premium sub-brand in 2002, and the price has remained static, prompting parent company PepsiCo to launch Red Sky crisps in 2009 to fill the premium positioning.

There is also a danger that non-food promotions could fall into the same trap, which Cross at pwc warns could leave brands “mortgaging future sales”. For example, items such as toothpaste or toilet roll on buy-one-get-one-free offers won’t encourage more use as consumers will simply stock up when the product is on offer to tide them over until it is next on offer again.

Perpetuating such a cycle of discounting means shoppers will increasingly make purely functional decisions, overlooking all the values the brand has spent time and money creating and communicating.

Clothing retailers, too, are at risk if they rely on discount offers to get people through the doors. Simon Wolfson, chief executive of high street fashion retailer Next, suggests that clothes prices could rise 8% next year in line with overall costs. Add in the VAT increase, stubbornly high inflation, along with the public spending cuts and it’s a cocktail that will only intensify the headache.

Dairy Crest customer marketing controller Tim Dummer sees it both ways. Damage has been done as promotions have been relied on as a result of tough trading conditions, but he recognises there is a real need to change. “We offer discounts as a reward to loyal customers and to encourage them to buy our brands when they’re hard-pressed for money,” he says. “When consumers can afford to pay more, we need to re-engage with them on the benefits of the category, the product quality and to show that the current levels are not sustainable.”

Definition debate
Part of the issue may be in the way the term sales promotion is defined. Marketers regularly view sales promotion as a straight discount tool rather than a loyalty tool, while analysts often refer to it as any initiative to promote an increase in sales. But the Institute of Promotional Marketing - which changed its name from the Institute of Sales Promotion in May - says sales promotions provide short-term uplifts, but can be hugely damaging to brand values in the longer term. Clive Mishon, chairman of the IPM, said at the time of the rebrand that: “Changing our name from the Institute of Sales Promotion underlines the fact that promotions are about more than sales.”

Rather than being defined by discounts, promotional marketing, on the other hand, changes behaviour and can have a much longer term and more strategic focus. For example, government departments now use promotional marketing to encourage people to reduce their consumption of alcohol and saturated fats, or cut back on the number of cigarettes they smoke.

Is it possible, then, to wean consumers, brands and retailers off price-based promotions? Such an aim will not be achieved quickly and with Christmas - when the focus on price reaches its peak - just around the corner, it is unlikely there will be any considerable shift away from this trend in the near future.

Retailers could do worse than to look at how the banks have changed their promotional strategies in the wake of the financial crisis and declining trust in the sector. Their focus has now shifted from an acquisition strategy to one of deepening relationships with existing customers. Banks are also providing existing customers with the best rates and look to provide them with the service levels that will keep them tied in for years to come.
If high street banks can change their ways, so too can other retailers. Ian Humphris, joint managing director of through-the-line specialist Life Agency, argues: “In a retailer-driven landscape, clients have to take back control of their brands and provide more reasons for consumers to buy them.”

Mosaic Marketing & Promotions has been observing activity over the past year through its “Promo Watch” blog. Director Adam Miller says there has been a “visible decline” in price-led activity this year. Brands are now going beyond a simple price promotion to embrace the full gamut of the socially connected world. He cites the Doritos: King of Ads crowdsourcing website and Carlsberg Team Talk viral video, which show that “it’s about more than just slapping up a Facebook fan page”.

The expansion of online activity has certainly increased the options for promotions. High street fashion retailer Uniqlo now offers discounts in return for customers using Twitter to publicise the chain. Meanwhile, the “One pack, one vaccine” promotion run by Pampers in conjunction with charity Unicef builds on the Procter & Gamble-owned brand’s social responsibility strategy and overcomes the shopper’s price barrier at the shelf.

Redemption schemes could also be key in weaning consumers off price cuts. However, the easier the redemption conditions, the higher the take-up is likely to be, highlighting a need for fixed fee promotion groups and promotions risk management consultants. If only Hoover had used one - its infamous free flights promotion of the Nineties, which resulted in severely budget busting and brand destroying redemption rates, continues to be a stark warning of the risks involved in sales promotions.

There is still plenty of price promotion occurring in supermarkets, but this is now being coupled with messaging about quality, provenance and choice. Even Asda’s new chief executive Andy Clarke has said the supermarket will be driving as hard on quality as on price.

This shift has come at a time when consumer attitudes about price are beginning to change. According to the latest 2010 Global Monitor research from The Futures Company, the priority that consumers placed on price during the recession has weakened slightly during the past year. Some 53% of consumers agree that price is more important to them than brand names, down from 57% in 2009. The study also offers good news for brands with 39% of consumers agreeing with the statement that “it’s best to buy famous brands because you can rely on their quality”, up from 34% last year.

The Futures Company’s executive chairman J Walker Smith says the changes may be small, but are notable, and signal “the start of a long-awaited reversal in attitudes”. But it remains to be seen whether this report marks the beginning of a much-needed reversal in price-based sales promotions.