Increasing pressure on UK retailers to be more transparent in their pricing has seen promotional activity drop to its lowest level for around a decade.

For the retailers and suppliers involved in managing the fallout of these reduced levels of promotions, the challenges are great. For consumers who have become used to taking advantage of the numerous multibuys, BOGOFs and other special offers in store during their regular shop, the fact that there’s been a significant reduction in the number of items on offer in store might come as a bit of shock.

Pricing transparency

When it comes to promotions, the most recent change we have seen in the industry is the direction encouraged by the Office of Fair Trading (OFT), now the CMA Board, back in 2012 when it set out its guidelines around the idea of pricing transparency. It raised concerns about prices being artificially inflated to make later discounts look more attractive, and stated that products should not be on promotion for longer than they are off promotion. This actually led to concerns by some retailers at the time that it would increase incidents of ‘yo-yo pricing’ rather than make it more transparent.

We’ve also seen pressures coming from other quarters, including increased competition from the main discounters Aldi and Lidl, who have made it their mission to create a much more simplified approach to pricing than the major multiples, offering a limited range but at attractive low prices. As a result, they have rapidly grown market share in the UK, forcing the supermarkets to rethink their strategy on everyday low prices, rather than simply relying on discounts and special offers to get shoppers through the doors.

According to a study by IRI on Price and Promotion, launched in August 2017, we have seen a 25% reduction in the number of items on offer since November 2012 (when the OFT guidelines were announced) – with the proportion of items on promotion as a percentage of all items stocked falling from 37% to 29%. The effect, it seems, is more pronounced in food categories.

Already in 2017, trade promotion levels have been lower than they have for almost 10 years, while deal depth has been falling since early 2016 and so far this year is a full on percentage point lower at 26.6% than a year ago. If the rest of 2017 continues as it started, this will mean that shoppers will have lost £3.7bn worth of offers.

This represents an 18% reduction in the overall benefit that promotional offers have previously provided, but has been offset to some extent by everyday (off-promotion) prices having been held lower than they would have been, or even going down in some cases. For retailers and manufacturers, we are already seeing them pulling back from trade promotions, preferring to put emphasis on communicating the brand benefits rather than on consumer promotion.

There is now increased competition for promotional slots and for off shelf displays in stores, so in this climate of greater price transparency, it’s clear that they need to know which categories are performing well and which aren’t, which deserve the highest levels of promotional support, and, most important, what effect different promotional strategies are having on different products.

The challenge of promotions is not an easy one. It’s generally accepted that promoting products can drive short-term sales, but also eat into profit margins. Once the cost of discounts, displays and in-store marketing materials are taken into consideration, the positive effects reduce or even cease altogether.

However, there are of course other benefits over and above driving short-term sales, including driving trial and penetration for both the retailer and brand, generating footfall for retailers, maintaining premium value positioning, and also augmenting the benefits of advertising, where this can be proven.

So when prioritising promotional choices, retailers must look for categories where the effects from the products promoted also result in a volume benefit for the category as a whole, delivering a win-win for both retailer and supplier.

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