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By Jamie Rapperport, co-founder and CEO of Eversight
Catalina recently released a report revealing that the top 100 CPG brands saw sales and market slip significantly in the past year. This was quite a surprise to many. While many are aware that large manufacturers have been losing market share to smaller ones for years, most assumed top brands were still faring better than the overall industry.
However, according to Catalina, this is no longer the case. Its recent report, based on a sample of 26,000 food, drug and mass-merchandise stores in the company's in-store promotion network, found that nine out of 10 big brands lost significant market share to smaller brands and store brands. Specifically, the report found sales for the top 100 brands collectively declined 0.8 percent over the previous year. This was the case across the board, from baby products to refrigerated meat.
So, why is this happening? One of the key (yet often glossed-over) reasons is trade promotion inefficiency. For a typical consumer packaged goods (CPG) company, retail “trade” promotions are the largest area of spend after cost of goods sold (COGS). CPG trade budgets fund virtually all of the discounts offered by retailers, and are one of the key tools available to manufacturers seeking to grow volume and share. In fact, a 2015 Gartner benchmarking study found that discounts and promotions represented upwards of 25 percent of revenue for a typical consumer goods manufacturer, which equates to hundreds of billions of dollars across U.S. CPG.
Despite the heavy investment most CPGs are putting into promotions, most promotions are highly ineffective and regularly losing money (as much as 70 cents on the dollar). A typical retailer runs on a slim margin (single-digit percentage operating profit). The retailers who are able to get more trade dollars, win. Those who fail to do so go out of business. Thus, trade-spend efficiency is the driver of success or failure in the industry. Yet, at the same time as manufacturers are doling out trade dollars worth about two times the size of their total marketing budgets, most leaders across consumer goods and retail industries agree that in-store promotional offers are not nearly as effective as they could be.
Differentiating the Promotion
At the core of the issue is that many of the promotional features are predictable and undifferentiated, resulting in declining consumer loyalty and response. Shoppers are trained to buy on standard offers like “10 yogurt cups for $10” or “two bags of chips for $6” – eroding both margins and brand loyalty. A common joke in the industry goes like this: ask a consumer their favorite brand of ice cream, and they’ll invariably tell you “2 for $5.” The result is that retailers must spend more to get less traffic, and require more trade dollars to make up the difference. This happened as the industry has converged on one or two of the most successful promotions for each category, destroying differentiation and increasing the weeks on deal. As more and more consumer volume becomes deal-driven, both manufacturers and retailers lose.
Yet, despite Catalina's alarming findings, there is plenty of hope for the top CPG brands – particularly when it comes to promotions. Recent omni-channel trends and advances in digital adoption offer an interesting and unique opportunity to move from generic discounts to promotional offers tailored based on what consumers find uniquely compelling. By measuring consumer response to various targeted test offers on digital platforms, insights can then be leveraged in brick-and-mortar based on a real-world understanding of what moves their shoppers to purchase.
Marketing has experienced a broad paradigm shift in recent years – the art has been infused with science. This shift has been underscored by an ever-increasing reliance on data and experimentation. It appears we may be witnessing the early stages of similar transformation in the world of promotions and discounts, with consumer goods leading the charge.