We are constantly working to support our retailer and CPG partners during this challenging time. As a result, we have been monitoring events as they happen in the FMCG industry to develop responses and recommend solutions to our customers’ most urgent issues. In this post, I’ll share an example of the recommendations we are bringing to our clients. The topic focuses on promotions. Should retailers continue to run promotions and, if yes, where should they focus and how should they execute them? After running some analysis, we have an answer, but it may not be as obvious as you think.
Taking a global view of COVID-19 and restrictions on retail
What we’ve seen during the COVID-19 event is that, in some countries, governments have completely banned all promotions and discounts. The reasoning being to avoid issues like people rushing to stores and forcing more people in close proximity. Another key rationale was to discourage consumers from taking advantage of promotions to engage in the kind of stockpiling behavior that we’ve seen around the world. So, in several countries, retail promotions of specific items were completely banned.
However, in countries where there were no government restrictions, retailers have still struggled with the question of promotions. They question continuing promotions for many reasons: lack of staff to support them, lack of inventory availability and the agility to respond quickly enough to shifts in demand, to name a few. Retailers know that getting a promotion wrong – promoting the wrong product at the wrong time or not being able to meet customers’ expectations – can have serious repercussions in the best of times. But in this volatile environment, the question became: “We could run promotions, but is it worth it and can we execute and fulfill them effectively?”
Many retailers around the world decided the answer was “No.” Aldi, for example, in many countries, decided to suspend promotions. But was this the right strategy?
It all comes down to customer data
One of our primary goals is to help our clients be customer-centric. Therefore, to get to the bottom of the situation, we turned to data – specifically customer data. In this case, we examined the impact of COVID-19 on customer behavior and its impact across different customer profiles. We analyzed data gathered from hypermarkets that were still running promotions in March, 2020 and compared the results from this year with the same period last year.
The key insights we found are quite interesting. First, not surprisingly, promotions are currently not a traffic driver. Or, at least not as you would expect because traffic is still down, despite promotions. In fact, we’ve seen traffic drop by 20%, 30% and 40% depending on the retailer.
This creates a new norm: reduced traffic but much larger baskets. The increase in basket size on each visit results in an increase in the propensity to buy in-promotion items. An increase in basket size means that shoppers are much more likely to have included at least one promotional item in their purchase. Further, many promotions are still important and effective for certain customers.
Price-sensitive customers are especially affected
For shoppers who are price-driven, promotions are more important than ever and we’ve seen spending increase for promotional items among this demographic. The data tells us that there are actually more customers buying in-promotion items and buying more units than ever before. Another trend we noticed among price-sensitive consumers was somewhat surprising. We saw that they are willing to travel farther for a good deal, despite full lock-downs. We don’t see that at all for quality-driven customers, who are more likely to stay local. Quality-driven shoppers are not concerned about promotion, they care about convenience and proximity. And that’s something that retailers should consider when preparing promotions for the next few weeks.
Clearly, promotions remain key to price-driven shoppers and they will destination shop for them. Further, with a recession expected in the wake of COVID-19, we are going to see a significant upturn of price-sensitive consumers in the market. It’s very important for retailers to be able to effectively serve those customers today in order to ensure they remain loyal in the future.
So, based on that, what’s our recommendation?
First, we think it’s important for retailers to maintain some promotional activity. They shouldn’t completely stop promotions in this challenging time. The key is, they have to focus and not rely on doing the same types of promotions as before. Next, retailers must make sure that current promotions speak to price-driven shoppers especially, and limit promotional investment in quality-driven customers. Also important is rationalizing promotion investment on typically over-promoted categories and items prone to go out-of-stock quickly. Lastly, retailers must ensure that private label and “value” lines are available for those prices-sensitive shoppers, offering good value for money on everyday products.
The bottom line: Retailers should reduce overall promotional activity and focus the ones they run for maximum effectiveness
To sum up, we would advise retailers not suspend promotional activity, but reduce it and make it more efficient and focused on the customers who are impacted most. We can look directly at the types of promotions that retailers should be running to make sure that they satisfy their most price-sensitive customers and also help suppliers select their brands and products that will really please those shoppers.
Additionally, in anticipation of a recession which will increase the price-sensitive focus, we need to be prepared for the purchase power of customers to diminish in the near future. This means that now is the time to optimize promotions and pricing in general.
Discover more critical COVID-19 insights and recommendations on our COVID Insights Hub