Price promotion

during the downturn:

shrewd or crude?
A report of key findings
from an IPA seminar

Promoting the value of agencies

Contents
Foreword 3

About dunnhumby 6

Introduction 7

Managment summary 8

The analyses 9
1. Customer expectations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. Shopping behaviour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. Retailer behaviour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4. Brand owner behaviour. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Category impact 15
1. Soft drinks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2. Beers, wines and spirits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3. Household. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

4. Snacks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5. Health and beauty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The downside risk of promotions 25

1. Impact on brand loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2. Case studies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Dairy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Household. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Confectionery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Acknowledgements 30
Key contacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Additional reading 30

Appendix 31
Tesco customer lifestyle segmentations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Tesco customer segmentation by loyalty and promotional propensity. . . . . . . . . . . . . . . . . . . . . . 33

Copyright © April 2009 IPA • Designed by: Eleanor Rudolph


Foreword
The data reported in this paper reveal the explosive growth in
price promotions at leading UK retailer Tesco over the last 12
months, as the downturn has gathered momentum. We can
safely assume that what is happening in Tesco is happening
in other retailers, not only because of the evidence of our own
eyes, but also because other retailers have gone on record
Peter Field
with their intention to ‘invest in price’.

The burden of that ‘investment’ is often placed largely on the brand owners who
wish to remain stocked in their stores and are forced to pay the price. With sales
depressed, the money can often only be found by reducing the advertising and
marketing communications budgets behind the brands, thus exacerbating the already
heavy burden that many brands are experiencing in trying to maintain their critically
important share of voice (SOV) in relation to their share of market (SOM) –
see Advertising in a Downturn, March 2008, IPA.

The data shows that not all product categories are equally affected by this general trend,
suggesting that there is at least some variability in the level of willingness to price
promote amongst brand owners. Some perhaps regard this as necessary, even shrewd,
behaviour during a downturn, when consumers are looking to cut expenditure. Others
may believe it to be a crude way to buy sales that is unavoidable in a downturn but may
ultimately cost them dear.

The wisdom or otherwise of this current explosion of price promotion is not yet obvious,
but the omens are not good. Data presented in the last IPA report examined the
cumulatively catastrophic impact of price promotion (or ‘dealer incentives’) on the US
automotive category. In particular, it was noted that incentives become progressively
more expected by consumers and hence lose their effectiveness over time. Ultimately,
the profitability of an entire category can become irrevocably damaged.

A recent paper in the Harvard Business Review for Clorox, a leading US bleach brand,
examined the impact on revenue growth of a heavy dependence on price promotion
and contrasted this with subsequent growth when an advertising-led brand-building
strategy was adopted in Q3 2005.


Figure 1
Clorox brand expenditure on price promotion versus advertising

40
Advertising spend
30
% change versus last year

Promotional spend
20
10
0
-10
-20
-30
-40
Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006

Source: Lodish & Mela, Harvard Business Review, Fall 2008

The reason for the change in strategy is clear from the chart below: revenue continued
to decline over the first 3 quarters despite increases in promotional expenditure. The
profitability of the brand would probably have declined even more steeply.

Figure 2
Clorox revenues over time

4
Revenue % change versus last year

-2

-4

-6

-8
Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006

Source: Lodish & Mela, Harvard Business Review, Fall 2008


The immediate negative revenue impact of the new strategy in Q3 05 reveals another
feature of brand building communications discussed in the last IPA report: that it is
time-lagged. However, after this one very bad quarter when price promotions had been
reduced, but the new strategy had yet to take full effect, growth resumed for the brand.
Q3 05 must have tested the confidence of the brand team, but they have no doubt since
been rewarded with improved profitability.

Persuasive though the Clorox case study is, it took place during a period of strong
economic growth and doesn’t therefore answer the more specific question of whether
price promotion activity can help brand owners during a downturn. This is where the
dunnhumby analyses are of such value.

Peter Field, Marketing Consultant


Introduction
The impact of the credit crunch is being felt in all business
sectors, including consumer staples. In recent months both
Unilever and L’Oréal have resisted City pressure to forecast
future growth and earnings, with the rationale that the
markets were so unpredictable that such information was
impossible to forecast. Janet Hull

Against this background, questions are being asked about how companies and
consumers are responding to recession.

Precedent suggests, for example, that in difficult times there is an overall trend for
advertising budgets to go down and promotional budgets to go up, even if there are
notable exceptions. The need for promotional activity is justified by perceived trends in
consumer behaviour; a general urge to save money in harsh economic times.

What is less well understood is whether manufacturers are just giving in to retailer
pressure when they increase their spend on in-store promotional activity, or whether
this shift in marketing activity makes commercial sense and is intentional. Does in-store
activity deliver value to the brand owner? To the consumer? To the retailer? To the
shareholder? And, if so, how?

In order to address these, and related issues, the IPA approached Lawrence Janes,
Head of Media Solutions and Development at dunnhumby, Tesco’s Clubcard database
partner, for help. Being the largest supermarket retailer with over 14 million Clubcard
holders, its customer database is the biggest available in the UK and it enables us to
examine quarterly performance right up until December 2008 – i.e. when the UK had
been moving into recession.

The IPA invited dunnhumby to analyse the Tesco Clubcard database and the market
research amongst cardholders in order to discern the impact of price promotions in
relation to advertising on patterns of consumer behaviour and pricing.