We see this all the time in retail. Every five years someone new comes into the business, usually a chief financial officer, who has a look at the books and says, “that’s it, we’re done with promotions – look how much margin we’re losing”.
It’s somewhat understandable. Selling something for less than its regular price must mean that the retailer is lowering its margins, which seemingly hurts the bottom line particularly when retail is constantly facing economic headwinds. To wit, no sooner had we come back from the pandemic that inflation saw a sharp uptick and interest rates rose in an attempt to make people spend less, not more.
And promotions are complicated to administer. There are a lot of complex backend machinations involved, and often there are volume-driven rebates to claim from suppliers and vendors. It also becomes harder to track finances when the cost of rice, for example, regularly goes up and down like a yo-yo.
But predictably the call against promotions does a complete 180 after a few years, and all of a sudden you’re seeing rice again on sale because of one inescapable factor: the human condition.
Basic instinct: The best remedy against external threats
In short, people love a promo. A promo drives footfall, increases sales, and the turnover of products makes up for the minor shortfall experienced in dropping the price for an item. It’s a simple, linear metric: promotions drive volume, volume drives top line and market share, and topline increases share of wallet.
There’s a reason that end-of-aisle display is often the most active part of any aisle. Known in the industry as ‘Action Alley’, retailers prompt shoppers to make impulse purchases by positioning displays along this main thoroughfare. Also known as ‘the racetrack’, it offers the customer a bargain and, importantly, the products fly off the shelves. That’s what retailers ultimately want.
Bricks-and-mortar stores also face the threat of online shopping, with fewer overheads, alerts being sent to phones for items they have on their watchlist or even promotions they’re willing to do. Faced with that, if retailers eschew the promotions route, they’re left with one key benefit over their online adversaries: the ability to look and touch and feel.
But for a discount and easy returns, does the average customer care as much about physically handling a product as they once did?
Price: The last battlefront
A global survey revealed around 51 per cent of consumers believe the major drawback of online shopping is not being able to touch and feel a product; that’s a razor-thin margin that brick-and-mortar stores are relying on as a differentiator.
That same research found that 89 per cent of more than 30,000 consumers surveyed globally that the most common factor to shop at a physical store is the price; more than location, stock availability, loyalty programs, environment or a plethora of alternate factors. It’s the top reason people still come to stores.
Retailers need to sell on price, plain and simple. And that’s why these anti-promotion calls every five years or so never stick: inevitably, the promo juice is proven to be worth the squeeze.
Complexity: Not the migraine it once was
Now, complexity has the perception of being a major migraine for retailers when they rule against further promotions, regardless of whether it’s an FMCG giant, a convenience store, a whitegoods-selling behemoth or a mum-and-dad store down the road that’s been there 30 years.
To properly manage promotions and the more complex margin impacts at scale you’d need to increase headcount and undertake checks of each and every supplier agreement, deal agreement, payment and more, just to ensure no good deals are lost into the ether.
This, particularly the manual process around ensuring compliance in managing promotions, can lead to financial leakage – a phenomenon in which rebates aren’t claimed (or are misclaimed) from vendors which ensures the profits from promos are reduced even further. At a certain scale, these undercharges, or unclaimed rebates can snowball, and the financial leakage can have a significant downside impact on EBIT.
Even then, the substantial benefits of promotions far outweigh the negatives and the risks. After all, promotions have been around since the dawn of retail and far longer than computers and the internet; heck, they pre-date the fax and the rotary phone. They work; they’re just complex.
But this migraine of complexity has, over time, slowly changed from a headache to more of a nuisance, to something that is more easily palmed off to technology or specialist suppliers.
Analysing thousands of agreements and rebates can now be done leveraging specialists and artificial intelligence solutions, which can go back through all the available data – whether it’s in an email, on file, in the cloud, wherever – and identify any missed rebates or agreements not met and advise the AP team of finances requiring payment. Thus, the most painful part of promotions is being handled in the background.
Furthermore, specialists can help streamline these processes to help avoid any missed revenue in the future while identifying gaps in contract compliance and advising the best ways to address them. This reduces the need for additional headcount and allows the retailer to continue doing what it does best: selling at volume.
Avoid the backflip: Why promos tend to stick
Gone are the heady days of the early 1980s when then-Grace Brothers declared to much fanfare there would be only two sales per year. There is simply far too much competition from lower-cost competitors both here, abroad and online for promotions to be seasonal. Customers are now accustomed to lower prices and they want them now, hunting for them wherever they can find them. They’re attracted to the bright signs, the end-of-aisle displays, the down-down jingles and the concept that costs are fluid.
Ultimately, we humans are a fickle beast. We like promos and will hunt for them. Store loyalty is not as much of a thing as finding that deal, no matter where it is. My advice to those hearing the ‘no promo’ rhetoric would be to carefully consider any decision because at the end of the 3-5 year cycle, they’re just going to be right back where they started wondering how to drive up sales volumes again.
Tony Horn is the executive general manager of operations for Profectus Group.
Original article published on Retailbiz: