“Chase the discount, lose the brand” – is this the new consumer mantra?

28 October 2014

Mark Chalfen

Mark Chalfen

Former SAP S/4HANA Global Lead

Over the past few years brand loyalty within FMCG has been waning. I’m not saying it doesn’t exist however, a subtle change has occurred during the average consumer shopping experience. The average size of the basket has reduced and if it wasn’t before, cost is certainly king now.

With the adoption of price comparison websites and the world of discount codes, consumers are on the lookout for ‘perceived’ bargains. Whilst there has always been an underlying drive for value, the average consumer is savvier in terms of price points and other options. There’s a movement to ‘price first, brand second’, which impacts both Retailers and FMCG companies alike.

Retailers

Price comparison sites now provide consumers the ability to source the products they want for the cheapest price at the closest location. If we take the purchase of washing powder as an example, consumers will go to a supermarket or similar retail outlet and have the choice of how to consume washing powder. This could be a box of powder, or via a gel or a tablet. There will be a variety of fragrances and strengths with and without softener and these will be repeated by a number of brands. So if a consumer likes washing tablets with a certain fragrance they have the option to purchase from a number of brands. With brand loyalty diminishing, the lowest price point will win more consumers than it will lose.

Retailers will need to ensure that their product is cheaper than rival local stores. There is the potential of over purchasing (buying more than required) in order to maximise the benefit of the discount. Retailers and, to some extent, Suppliers see the over purchase as the ideal situation.

Suppliers

Suppliers need to be aware of their competition (other brands producing similar products) in order to make their price point competitive. The variable between the recommended retail price and the discounted price can be seen as a driver for opportunity. A minor discount will not be that appealing compared to heavier discounts from rival brands and therefore the volume consumed will reduce. Providing a significant discount will lead to higher volumes of product being purchased by consumers however the margin achieved will be less.

The retail industry in the UK has been pretty stagnate for the last few years, and any growth in consumer spending patterns has been limited. With a squeezed market, targeting market share is vital for suppliers. Stealing/gaining market share from competitors enables not only growth, but also means that your competitors are reducing.

How can you come out trumps?

As with everything in life there are winners and losers. The success of Retailers, such as supermarkets, is to some degree is based on their market share. Over the past few years, ‘value supermarkets’ have stolen market share from their more established rivals. By having lower prices (or perceived lower prices), consumers have migrated to the value chains to reduce the average cost of their shopping basket.

Price wars are well documented however, Brand A will not want to heavily promote via discount or volume based offers if their competitor is doing so in the same stores. The appeal of their offer will not be as compelling and the heavy price point reduction will not drive the volume increase the supplier is after. Therefore the Retailer needs to vary the offers that are allowed in store, vary the shelves in order to entice the consumer with variety whilst keeping the supplier happy with the volumes they crave. Promotions can also become stale. If every time you go the supermarket the same product by the same brand is discounted the novelty factor of the discount is lost and the consumer will expect to purchase at this price in the future.

What is the jackpot prize?

Emma Simpson from the BBC wrote a great post The hidden world of supplying a supermarket. As you can see, over £5 billion is given from suppliers to the big four supermarkets to promote and discount their products. This is an immense sum of money and is used to drive the profitability of the supermarkets. Without the payments from the suppliers for these discounts, the price of goods within supermarkets would need to make up the short fall meaning the price of products would increase for the consumer.

Suppliers benefit from the ability to maintain and potentially grow market share. In order to grow market share and volume you need to be able to produce higher volumes of products. In turns this provides pressure on the ability to predict the outcome of a promotion. If the average sales volume is 1000 units per store per week, the average would be expected to grow during a promotion. If the expected outcome was for the volume to be 8000 units per store per week then manufacturing would need to be aligned to cope with the increase in demand. If the actual outcome of the promotion was just 6000 units per store and the products were sold in 500 stores then 1 million units would have been over produced. In a perishable product market such as bread that would mean writing off 1 million units as the shelf life of a product would have expired.

Retailers and suppliers need to work together to ensure these future sales forecasts are successful. Certain promotions offered by suppliers to retailers will be scaled. The higher the volume of sales, the higher the rebate or payment back to the retailer from the supplier. If the retailer does not hit the higher scaling value the retailer will lose out on the value of payment it will receive from the supplier which will impact margin and net profitability.

Taking control

It’s clear that Suppliers need to take the lead in the exchange. They will be most exposed if the expected sales volumes don’t materialise. The volume of data to be considered to accurately predict the future is pretty scary. You need to look at prior year sales history of your products and your rival products. You need to be aware of new product and other marketing campaigns. You need the ability to react quickly to market conditions and promotions being performed by your competitors. You need to be aligned to your production unit to ensure you can both satisfy demand but also not over produce.

For Retailers, a different set of questions need answering. The type and duration of promotion that they purchase is vital. Obtaining the correct value for the promotion is also important. Being able to track actual sales volume against the plan and reacting quickly to either cope with the additional volume or add a further promotion to meet the sales volumes the supplier is expecting to achieve.

Summary

The rules for promotional activity are changing. If you play the game well the rewards can be enormous. If you get it wrong it will seriously impact your profit margins and potentially the success of your organisation. Investing in Trade Promotion Planning just got serious are you ready to control the game?

 

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About the author

Mark Chalfen

Former SAP S/4HANA Global Lead

Mark tells it straight - as an ex-boxer, what else would you expect?  Both his knowledge and experience of SAP products allow him to cut to the chase dispelling myths and hearsay.

As a result of working closely with various SAP Finance Product Management teams on product development, Mark understands these products inside out. This depth of understanding has led to him become a ‘thought leader’ in his field; after all, it is not often SAP consultants have helped shape and develop the very product they are selling.

Having such a strong relationship with SAP alongside being an SAP Mentor and Moderator means that Mark has an extensive network within SAP. For clients, this relationship proves to be a huge advantage and leads to configuration issues being resolved rapidly.

Mark has worked on short proof of concepts through to year-long multi-million pound global roll-outs. However, no matter how large or small the project, the true value Mark brings to his work is in the guidance he provides to senior stakeholders. In essence, he assists them to implement more effective processes and drive better behaviours within their finance teams.

Helping organisations transform their business with SAP S/4HANA is Mark’s current focus. The benefits of S/4HANA are numerous, including the simplification of tasks, embedded analytics and improved user engagement. Whilst the eventual move from SAP Business Suite into S/4HANA is inevitable, the journey to it is not always clear. Mark’s ability to understand an organisation’s needs coupled with his deep understanding of S/4HANA provides clarity and eases their transition.

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