RetailWire Discussion: Supermarkets Get the Best of Promotional Offers

By Bernice Hurst, Managing Partner, Fine Food Network

The UK's Daily Telegraph has reported that, following analysis of more than 15,000 supermarket promotions across 30 different categories over the past five years, researchers Billetts concluded that almost 90 percent of the profit on anything sold during money-off promotions is kept by the retailers.

Billets, part of marketing analytics company Thomson Intermedia, claims that suppliers end up with only 14 percent of the profits from the sales as they pay to have money-off offers in the hopes that increased sales will contribute to their top line.

Fast-moving consumer goods (FMCG) suppliers reportedly offer some £8 billion ($16 billion) each year in the U.K. on trade promotions. The Billetts research looked at invoice pricing, funding levels and other volumetric data. As a result, they believe "suppliers often enter into negotiations with retailers with no clear plan and therefore let the retailers set the agenda," according to the Telegraph. "Other common mistakes made by suppliers include giving away too much information at the start of negotiations, and poor negotiating skills."

Just days after the report was trailed, The Telegraph also reported that supermarkets are increasing food prices for customers at a faster rate than their costs are rising for the first time since the economic downturn took hold.

Although Britain's four main supermarkets have announced a series of "inflation-busting" discounts recently, critics describe many of them as marketing ploys, of limited benefit to most consumers.

While trade body British Retail Consortium claims retailers have absorbed more increases than they pass on, an Asda spokesman told just-food, "People should give credit to food manufacturers and retailers for keeping inflation down. There is a huge body of evidence to suggest retailers are cushioning consumers."

Economists, however, said that it was difficult to make exact comparisons between the factory figures and the consumer figures. And the government's consumer watchdog has suggested that supermarkets cut prices on all products, not just a selected range.

Discussion question: Are you surprised by the study showing that British retailers gain a much bigger benefit from special discount offers than vendors? Is the situation similar in the U.S.?

Comments:

Do we have a language barrier issue here? Every company keeps 100% of the profits they make from every sale. The profit may be diluted or enhanced from the norm during special promotions, but there's no profit sharing going on. Are we missing something else from the report?

Regarding the negotiating skills of UK manufacturers, we all know that UK retailers have a very strong position. I'm not sure that US analysts get it, and am surprised that Billets doesn't appear to understand. Neither position translates in the US. Trading partner relationships are built from different foundations here.

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Dan Raftery, President, Raftery Resource Network Inc.

Few retailer vendors in the U.S. would be shocked to learn that retailers make the lion's share of money on consumer promotions generated at retail. As a veteran consultant business development VP on the vendor side of the business, I encourage branded suppliers to patronize retail driven promotions for any number of reasons (different topic for another day) however I do share the following concerns:

1. Smaller innovative entrepreneurial brands find it difficult to make a profit doing business with major retailers because of the costs involved in supporting retailer promotions, as well as other retailer charges, which often are many.

2. Excessive promotional charges by retailers to supplier ultimately impact the cost and retail prices to consumers which sometimes offset the consumer offers given by retailers and suppliers.

3. Nearly all retailer promotions are price-driven. Not all types of brands are price sensitive and sometimes it's not necessary to erode price expectations with unnecessary scan downs and discounts, yet many retailers put pressure on all suppliers, regardless of types, to participate in scan downs and price reductions.

Some retailers make more profits on the "buy" side then they do on the "sell side." It would be great to see this trend reversed in the future. However, as I said in the onset, I am bullish on retailer promotions with my companies and supplier-employers because the partnership and participation is paramount to both sides of the table.

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates

I'm not surprised by this and I'm not sure it is a 'finding'. Retailers are in the business to sell vendor's products at a profit. Vendors who are surprised by this 'finding' do not really understand their customer or how they do business. Promos originate from the retailer. Execution is up to the retailer, so effectiveness is driven by the retailer. I'm not sure why it would be wrong for retailers to keep most or all of the profits.

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Doron Levy, President, TheMortgageMachine.ca

Retailers look at it as the vendors responsibility to promote their products and should bear the entire cost burden. Many are even unwilling to lower their normal margin in order to co-fund a promotion as they feel it is entirely up to the manufacturers and distributors. And some even give you the impression that they are doing the manufacturer a "favor" by allowing them to promote their products in their stores. One that they should be expected to pay heavily for, I might add.

Back to the question from England, does the retailer making most of the profit on promotions surprise me? You are kidding, right?

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Art Williams, Retail Marketing Consultant/Analyst, Independent

The only shocking thing about this report is that anyone would be shocked. But ignorance of the basic economics of the industry is apparently quite widespread, although that by no means includes all the players.

In the US, there are a trillion dollars moving from the brands to the retailers every year. This accounts for why retailers have no need to really understand the shoppers in their stores. It is understandable that brands would have brand/category myopic views of shoppers. The net result is what I call "The Store as a Black Box."

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Adjunct Senior Fellow, Ehrenberg-Bass Institute

Am I the only one confused by one party taking 90% of the profits and the other taking 14%? It sounds like maybe the retailer has a 4% profit gouging bill back to get up to their 90%. Once again, the supermarket retailer is the only one winning when it comes to negotiations.

Dan Desmarais, President, Cantactix Solutions Inc.

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