The UK FMCG sector spends in access of £10bn a year on trade promotional activity this spend has increased rapidly over the past 5 years and is forecast to continue growing. A large proportion of this ‘trade investment’ fails to break-even. This inefficiency is becoming a significant burden for suppliers and future profit growth expectations are now under real threat.
There is a real lack of insight within the supplier (brand owner) community as to what impact promotional activity is having on profitability for all parties (supplier and retailer). We help our clients by providing the insight they need to make better decisions through Promotional Effectiveness.
Five ways to improve Promotional Effectiveness
1. Understand what promotions do for your business.
Money off, buy one, get one free and even buy one, get two free are all increasingly important for brands that do business with the UK’s biggest retailers.
In the eight years since we started tracking promotional effectiveness in conjunction with The Grocer, we’ve seen the number of brands reporting that more than 40% of their sales are generated by promotions rise from 16% to 68%.
Brands need to understand how these promotions drive profit and/or volume and how could they be optimised to do even better.
We have worked with a major FMCG supplier for the last six or seven years and by slowly and incrementally improving promotion performance over this time have delivered major improvements. Each promotion – and they run around 300-400 each year – is now £20,000 more profitable than it was before we started. A clear sign of Promotional Effectiveness in action.
2. Do you want volume or profit?
How will promotional effectiveness work for you? Promotions can do one of two things for a business; boost profits or drive volume. The problem is that many brands have don’t clear objectives to drive both.
Businesses need to be clear about which is the most important and develop a clear strategy around this goal.
Our work for one client – who initially requested a focus solely on profit – generated a plan that meant a 50% drop in volume (but significantly more profit). This was too radical a change but the process made it clear that the brand needed to resolve the contradictions between these two market goals.
3. ‘Right size’ a brand.
Brands should know what level of sales will maximise their profits. Very few brands do this but a key element to understanding what makes a good promotion is knowing how big you really should be.
Push sales volumes beyond that and you are essentially subsidising the supermarkets. Buying large volumes through promotional activity may well be appropriate in certain circumstances but the practice should be continually challenged.
4. Plan effectively and be prepared to walk away.
The first stage to building an effective plan is to prioritise the promotions that deliver profit. The rest of the plan can then be constructed around these key pillars.
You will obviously have to manage timings to avoid competing promotions but the key to the process is to identify the most profitable account, get that right then move onto the next best account.
Be clear about which accounts matter most to the profitability of the business and it will become easier to walk away from deals that do not advance your core KPIs.
A brand that plans is in a better position to walk away but a great plan can also benefit retailers too. We’ve just devised account plans for one FMCG brand that benefit both supplier and the retailer.
5. Measure and learn.
Few organisations would disagree that measuring promotional effectiveness and learning from experience is best practice. However, most still do not have effective processes in place to make this happen.
This should be a full time role in most large organisations as collecting the data and the stories behind the promotion is crucial to being able to do better next time.
UK suppliers spend £10bn on trade promotions each year but only 20% of that is truly accountable this is where promotional effectiveness can help.