FMCG brands move away from promotions in ‘complete change of direction’

FMCG brands in the UK are increasingly shunning price promotions in favour of focusing on brand building through advertising, IRI data has suggested.

The study, which looks into the use of promotions by FMCG manufacturers and retailers across Europe, highlights a drop in the proportion of volume sales of FMCG products that were sold on promotion in the UK in the latest year.

The UK sells more FMCG products on promotion than anywhere else in Europe, with 49.8% of all food products and 58.6% of all non-food products sold on promotion. In the latest year, according to IRI, this has declined by 2.6 share points to an overall average of 51.5%. Across Europe, the proportion of all grocery volume sold on promotion is also down by 0.7 points in the last year to 28.1% of all sales.

Tim Eales, strategic insight director at IRI UK and author of the study, says this stands out as the “biggest” change it has seen and marks “a complete change in direction”.

The report also shows the number of brands using multi-buy promotions dropped from 15% to 12% of all products sold, driven by Sainsbury’s decision to stop running them in its stores this year. Multi-buys are most popular with non-alcoholic drinks brands and personal care brands, where 24.8% and 16.5% are sold with a multi-buy promotion respectively.

IRI believes this decline in promotional intensity is a sign that manufacturers are evaluating whether the high cost of promotions gives them adequate returns in the form of increased sales and profit.

The UK has always sold so much of its products on promotions, but we’ve heard rumblings in the market where businesses are saying that it’s getting far too expensive and that it’s impacting how they’re spending money in other ways.

Tim Eales, IRI UK

While promotions can cause a temporary uplift in volume sales, they do not drive category value sales growth.

“What we found is that, as a general rule, there was almost no change in the amount of money at a category level when these promotions are running. Brands were benefiting for a short period of time, as volume sales were moving between brands, but there was very little overall value gain,” he explains.

Moving to other ways of advertising

As brands move away from price promotions, IRI expects more brands will follow by redirecting their marketing spend from consumer promotion to activities that communicate brand benefits such as advertising, as well as new product development.

“I think [focusing on advertising] is good in the long run as it will enhance a brand’s position in the market. Part of that position is very much established by price,” Eales says.

But IRI insists it is not all doom and gloom when it comes to promotions, as they can have a positive impact on revenue when they are executed in the right place at the right time.

“Brands need to work it out carefully and do it at the right time rather than just taking a blanket approach in order to shift volume. Really try and choose promotions that work for you, use them more sparingly and try to get back to what they originally intended to achieve; building loyalty,” he comments.

IRI’s study echoes what has recently been said in the wider industry, with Unilever, Mondelez and P&G all putting price promotions under the loop.

P&G’s chief financial officer Jon Moeller has argued that growing the business by significantly increasing promotion spending would be “a pyrrhic victory”.

“When you talk about increasing trial and sampling at point of market entry and point of market change with noticeably superior products, that moves markets over time. And being able to price behind superior innovation also moves markets over time. What doesn’t move markets is leading the march down on promotion spending,” he said, speaking on an investor call earlier this year.

While Moeller admitted there are many cases where investing in price promotion is an effective use of P&G’s funds, it is also looking to redirect its spend to other elements of the marketing mix.

“[We want to] focus back again on how we can drive market growth in our categories and how we can drive shopping trips and basket size for our retail partners. And it’s really [about] working together in a joint context to identify where those opportunities are,” he explained.

Mondelez is planning to do the same. CEO Irene Rosenfeld recently said the company is shifting its spend by investing behind its “power brands” and putting a bigger emphasis on advertising rather than consumer promotion. Meanwhile, Unilever’s head of investor relations Andrew Stephen admitted the company is taking a closer look at its spending after the UK saw a “revised spate” of price promotions.