How you can break the harmful price-promotions habit

Canadians are addicted to deals and stocking up on sale items.

Combine the premise of two catchy reality shows–Hoarders and Extreme Couponing– and you’ve got a grocer’s nightmare. Most people aren’t that extreme, but consumers are growing more attached to promotions and stocking up when they see a good deal.

The percentage of grocery sales made from promotional deals jumped to 36% in 2014, from 27% in 2007, according to Nielsen Canada data. And 85% of Canadians stock up on products when they’re on sale.

The culprit: grocers. But it’s hard to avoid reacting to the rock-bottom prices that the entry of large U.S.-based discounters has brought. Although promotions attract shoppers, 67% of grocers don’t break even on those sales, hurting overall revenues and margins.

“Maybe we are shopping on discount, but at least half the reason is are giving us that opportunity,” says Guelph, Ont.-based grocery consultant Kevin Grier. “The reason is the only way they can compete on is price, at least on the consumer packaged goods.”

Overall, Grier estimates grocery sales went up less than 1% in 2014, while sales in other retail channels rose between 5% and 7%.

The industry’s lagging performance is part of a longer trend. According to Grier, grocery sales between 2010 and 2014 grew by 2.5%, compared to 4% in the previous 10-year period, and costs have outpaced prices over the past four years.

“Consumers have been trained to expect promotions, and this trend will continue in 2015,” says Carman Allison, VP of consumer insights at Nielsen.

The result: the gap between promoted prices and regular shelf prices is widening. Regular shelf prices in Canada increased approximately 4%, but overall prices only increased 2% during the 52 weeks ended Sept. 30, 2014.

That’s because promoted prices declined 1%, and aren’t keeping up with the general rate of CPG inflation.

“Continuing to aggressively discount and not keeping pace with general food inflation is not sustainable for future growth,” Allison says. Where does this leave grocers?

Allison says they can’t walk away from promotions. But he also believes they could be done more efficiently if retailers understood that consumers generally favour value over getting the lowest price.

“With this motivator in mind, we don’t have to hit the repeat button when promoting,” he says. “We can be more profitable by still offering a discount, but not going as low as previous promotions.”

“While it is true that shoppers demand promotions, it is imperative that the promotions put in front of shoppers will produce winning results for both the manufacturer and the retailer,” adds Kevin Oostdyk, VP, product management, revenue management and optimization at Nielsen.

To do so, companies need to ramp up their post-event analysis to better understand past performance and to predict future performance. They also need to better understand what drives consumer response. For example, was price more important than in-store merchandising? “Only once they understand these can they accurately predict how changes to promotional strategy will impact sales and profitability,” he says.

Grocers can also eke out further cost savings by improving their supply chains. The lack of an efficient supply chain was one of the biggest reasons Target failed in Canada.

READ: Picking up Private Label

“The supply chain is incredibly important,” says Ed Strapagiel, a Toronto retail consultant. “But improving it is a lot of work and time.” An easier alternative, he says, is to offer exclusive products that consumers can’t price compare because other stores simply don’t have them.

“In some ways, grocers have already been doing that through their own private label programs,” he says.

But grocery, Strapagiel says, is a slow- growth sector that’s very competitive. Despite Target’s exit, there’s still plenty of competition from Walmart, Costco and e-tailers.

READ: Promotion fatigue sets in

“A lot of the competition for the conventional supermarkets is coming out of the combo stores, and there’s a bit of a war going on between Walmart and Amazon, mostly in the , but it will spill over here,” he says.

In the meantime, grocers can capitalize on a couple of demographic trends to boost sales. One is to entice more men to shop for food; they’re less likely to use coupons, price shop or spend enough time in a store to notice all the promotions and offers.

“Male shoppers tend to be very task oriented: they get in, get what they need and then get out,” Allison says.

READ: Say good morning to sales

Another tactic is to pay close attention to the Prairies. Its population is growing faster than the rest of the country, it has a higher concentration of high- income households (26% earn more than $100,000) and the average household also spends 7% more on average on consumer packaged goods.

“This is fuelled by younger, larger households with kids that, naturally, consume more,” Allison says.

Overcoming an addiction to price promotions won’t be easy.

“The middle of the store is the battleground,” Grier says. “And whether you’re an upscale grocer or trying to do something different, Heinz ketchup is still Heinz ketchup. How do you differentiate the centre of your store? You’re fighting it out on price.”

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