A guide to significantly increase promotion effectiveness

FMCG SUMMIT 2014 25th of November, 2014

Srecko Debelak, Senior Director at A.T. Kearney

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Context

■ Products sold through promotions very often represent a large share of retailers’ overall sales – reaching up to 30 percent or more. As a result, promotion products play an important role in determining both the economic success and competitive positioning of retailer.

■ In many cases, however, the effectiveness of promotions is not always entirely clear. Some retailers just try to follow the general market trend toward offering more and more promotions. Promotions are, in fact, frequently driven by suppliers trying to push sales of their products. Often, these measures do not result in adequate financial gains for the retailer. Only a few retailers have succeeded in leveraging the potential of promotions to serve as a source of differentiation and innovation.

■ Developed by A.T. Kearney during projects with retailers representing various retail formats and categories, the 10 steps to create value with promotions demonstrate how to improve retailers` sales and margins, and how to increase customer loyalty. Drawing from focused analyses and tailor-made strategies, the approach outlined in this presentation shows retailers how to select and negotiate the most effective promotions as well as how to enable the organization to implement this as a recurring process. Recent projects around the world have achieved category sales increases of up to 10 percent and net margin improvements ranging from 1 to 8 percent.

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A.T. Kearney go to market framework for retailers

Formats/

Channels

Category

Management

Pricing

Promotions

Marketing/Communication

Go to Market Strategy

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Promotions very often represent a large share of retailers’ sales – however, in many cases the success is not entirely clear

Retailer

Country Spain Belgium Sweden UK Austria Holland

Promo share8

<10%1 ~15%2 na ~20%3 ~28%4 ~20%6

Market share trend

+1%-point (2008-2010)7

+2%-point (2008-2010)7

+1%-point (2008-2010)7

+1,5%-point (2008-2010)1

+1%-point (2009-2010)4

-4%-point (2008-2010)7

Strategic direction

promotions 1

• Focus on

EDLP

• Hardly any

promotions

• Increase

effectiveness

& efficiency of

promotions

• Optimize

number of

promotions

• Combination

of price waves

and

promotions

• Effectiveness

& efficiency

program for

promotions

implemented

• Strong promo

focus

• Combination

of promo &

lasting price

cuts

• Strengthening

of loyalty

program

• Aggressive

promo

strategy vs.

discounter

• Increase in

market share

driven by

private label

and store

layout

strategy5

• Strong

increase in

promo share

at competitors

• AH follows

market trend

starting from

average

promo share

level

Selected examples

1. A.T. Kearney research; 2. Estimate based on selected categories; 3. Irish Food Board, Estimate; 4. GfK, LZ; 5. Spar annual report; 6. GfK;

7. Planet Retail; 8. Without Loyalty Card Program

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10 Steps to Create Value with Promotions

Insight

Create transparency in promotion effectiveness

Generate customer insights on multiple levels

Understand the competition`s promotions

1

3

2

Strategy

Define a comprehensive promotion strategy

Diversify and articulate promotion roles

Define promotion types

4

6

5

Tactics

Select the most effective promotions

Negotiate with suppliers to optimize results

Control the sustained success of promotions

7

9

8

Enabling

Achieve continuous improvement 10

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Create transparency in promotion effectiveness 1

Margin loss on ordinary sales

Net-net effect

Marketing cost

Supplier promotion funding

Cannibalization effect

Effect from additional traffic and basket size

Net effect

Margin contribution from additional sales

Total product margin

Elements of promotion effectiveness Retailer`s margin per week for a selected product

0

Promotions dilute the margins of products that typically already have small margins

Calendar weeks

Weeks of promotion

Weeks of promotion

Client example

Source: A.T. Kearney

Elements of promotion effectiveness and impact on product margin

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Generate customer insights on multiple levels 2

Insights on individual customers (derived from customer data)

Client example

Source: A.T. Kearney

Customer insights in different levels

Yes 25%

40%

65%

Main

10%

10%

20%

40%

100%

60%

Occa- sional

15%

10%

5%

Poten- tial

No

General customer insights (derived from customer survey)

Insights on customer segments (derived from customer data)

Promotion pack

Standard pack

14%

16%

70%

Deep-dive analysis of individual customer (e.g., from cross-shopping) Share of total product customers

Impact of promotions on target customer Category index vs. average promotion effectiveness

Customer groups

Customer type

90

110

120

100

80

Skin care

Frozen food

Ready to eat

Meat Paper Fruits

Sw

itch

es s

tore

beca

use

of p

rom

otion

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Potential increase of promotion activity

Understand the competition's promotions 3

-1,0

0,5

-1,5

2,0

1,5

-0,5 1,5 -1,5 -2,5

-0,5

-2,0 -1,0 2,5 0,5 1,0 0,0

0,0

1,0

Office supplier

Body care

Cheese

Ab

ove

-/b

elo

w-a

ve

rag

e s

hare

of

sa

les

(in

p.p

.)

Frozen foods

Childrens` products

Above-/below-average share of promotions (in p.p.)

Ham/sausage

Detergents

Dairy

Bread

Fresh poultry

Snacks

Ready meals

Confectioneries

Beverages

Coffee

42% Ready meals

Confectionaries 49%

Beverages

75% Snacks

81%

Probability of main competitor to follow increase in promotion activity

Client example

Source: A.T. Kearney

Above-/below-average share vs. competition and scenario analysis

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Define a comprehensive promotion strategy 4

Exclusive pricing

HiLo

EDLP

Aggressive pricing

Moderately

promotional/

category

specific

Strategy

As-Is

Lower Higher

Lower

Higher

Relative promotion intensity

Relative

price

level

Dimension Promotion strategy

Objectives • Support low-price image

• Improve image and profitability with

promotions

• Sustain sales

Promotion intensity

• Reduce promotion intensity by cutting number of promotions by 15% and promotion share by 8%-10%

Assortment focus

• Premium and organic products

• High-volume products with high price elasticity to generate traffic

Discount • Reduce average discounts, eliminate 35%-45% discounts

• Focus on < 35% accompanied with some 50% “traffic” promotions

Communi-cation

• Continue primary communication using leaflets

• Shift TV ads toward image promotions

• Strengthen new media communication

Price-promotion strategy model

Client example

Source: A.T. Kearney

Dimensions of promotion strategy

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Diversify and articulate promotion roles 5

Source: A.T. Kearney

Characteristics and relative importance of promotion roles Client example

Strategy

45%

35%

20%

As-is

78%

17%

5%

Image

Profitability

Traffic

Promotion

role Characteristic

Image

• Value-oriented products,

e.g., environmentally

friendly, high quality,

newly launched

• Limited discounts

• Supplier-driven products

Profitability

• High-margin products

• Visible store placement

• Supplier promotion

funding

Traffic

• High-volume products

with strong price-

elasticity

• Discounts to be

cheapest in market

• Supplier promotion

funding

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Define promotion types 6

Targeted promotions

“My offers”

• My deals

• My cash rebates

• My lucky draw

Mass promotions

„General offers"

• In-store display

• Temporary price reduction

• Price-pack deals

• Rebates/supplier refunds

• Contests/games

Loyalty card push

Mobile app push

Social network push

Public ads

Direct mailing

Electronic newsletters

Variety and weighting of promotion types

Type Primary location As-is Strategy

0% 15%

100% 85%

In/near store Away from store

Client example

Source: A.T. Kearney

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Select the most effective promotions

Optimize

1%

Keep/extend

68%

Optimize

18%

Eliminate

13%

Keep/extend

Optimize

Eliminate

+

-

- +

Tactics based on promotion revenue and margin

B A

B C

A

B

C

X

X X

X

Ma

rgin

eff

ec

t

Revenue effect

Lever Action

• Keep or extend promotions with highly positive revenue and margin effects – e.g., repeat or create similar promotion

• Optimize discount level of promotions – i.e., between 30% and 45% to improve margin effect

• Optimize type of promotion to increase revenue effect

• Avoid promotions with highly negative margin effect

• Avoid promotions with negative sales and margin effect

• Consider performance of previous promotions for planning

xx% Share of promotions

7

Client example

Source: A.T. Kearney

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Negotiate with suppliers to optimize results

Negotiation of promotions with suppliers

Optimized promotion plan

Promotion selection

(step 7)

Promotion roles and

types

(steps 5 & 6)

Promotion strategy

(step 4)

Customer insights and competitive promotions

(steps 2 & 3)

Negotiation of promotions with suppliers

• Rebates

• Marketing funds

• Supply chain conditions

• Other commercial arrangements

• Keep/extend promotion

• Optimize promotion

• Eliminate promotion

• Historical

performance of

promotion

• Customer

preferences

• Competition`s

promotion

patterns

• Weighting of

promotion roles

• Variety and

weighting of

promotion types

• Objectives

• Promotion intensity

• Assortment focus

• Discount %

• Communication

Promotion effectiveness

(step 1)

8

Source: A.T. Kearney

A.T. Kearney framework

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Control the sustained success of promotions 9

Promotion dashboard

550475

325

250

+21%

Current year,

forecast

575

Current year,

planned

Last

year,

actual

Actual

Estimate

Promotion sales (€ mil.)

14.512.5

14.5

+2.5%

Current year,

forecast

15.0 0.5

Current year,

planned

Last year,

actual

Actual

Estimate

22.019.3

21.0

+2.9%

Current year,

forecast

22.2 1.2

Current year,

planned

Last year,

actual

Actual

Estimate

Promotion share (%) Promotion profitability (%)

68 60 60

25 202022

Current year,

forecast

100

Current year,

planned

100 15

Last year,

actual

100

10

Traffic

Profitability

Image

Promotion role (%)

98 85 90

Current year,

forecast

100

10

Current year,

planned

100

15

Last year,

actual

100 2

Mass

Target

59 40 43

232522

20

Current year,

forecast

100

13

16 5

Current year,

planned

100

10

5

Last year,

actual

100

4

9 6

<10%

10-19%

20-29%

30-39%

>40%

Promotion type (%) Discount distribution (%)

Client example

Source: A.T. Kearney

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Achieve continuous improvement 10

Stage of excellence in promotion management

Area Stage 1 “Basic” … Stage 4 “Excellent”

Organi-zation

• Individual category manager responsible for promotions

• Decisions on promotions driven by personal experience of category managers and suppliers

• … • Separate marketing functions steering promotions

• Category manager acts within promotion strategy and is able to analyze details of promotion performance to optimize effectiveness

Process • Individual timing for promotion planning

• Limited coordination between categories

• … • Annual promotion-planning process defined

• Feedback loop to adjust promotion strategy and guidelines

IT/Tools • Limited transparency on promotion performance

• Separate systems for planning, controlling and reporting

•…

• Integrated IT solution combining planning, controlling and reporting with single front-end

• Performance-Parameters adjustable to adapt goals

Ranking

- +

Client as-is Competitor

1 2 3 4

Client example

Source: A.T. Kearney

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We have supported leading retailers on promotion topics in multiple categories

US movie- and game-rental retailer

Client situation

• Large movie- and game-rental company with 2,200 stores

• Lack of insight into customer purchasing behavior led to broad-based and reactive promotions

Project approach

• Developed predictive models for: (1) attrition, (2) promotion response and (3) product cross-sell models on the basis of customer sales data and psychographic information

• Designed new promotion program on the basis of predictive model

Western European grocery retailer

Client situation

• Leading European grocery retailer with large share of private-label promotions

• Market position suffering from entry of hard discounters

• Promotion effectiveness largely unknown

Project approach

• Created full transparency on customer preferences and promotion performance

• Developed price-promotion strategy to strengthen market positioning

• Drew promotion plan selecting the most effective promotions

Northern European grocery retailer

Client situation

• Large grocery retailer supplying about 1,000 stores

• Lack of insight into promotion profitability and lack of alignment between promotion and merchandizing strategies

Project approach

• Conducted internal analysis (past performance, promotion levers, processes, strategy, etc.)

• Conducted benchmarking (assortment, price, intensity, channels, etc.)

• Conducted customer survey

• Developed promotion strategy

• Identified quick wins

• Improved margin by 8% of sales

• Increased sales by 10%

• Reduced customer attrition by 12%

• Improved margin by 1% of sales

• Aligned pricing with promotions

• Implemented controlling dashboard and new planning process

• Improved margin by 2% of sales

• Optimized promotion strategy and mix

• Improved planning process

Project focus

Results

Source: A.T. Kearney

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and Africa

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