Promotions: What’s in it for retailers?

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Vehicles for OK Grand Challenge promotion

Kudzanai Sharara Taking Stock
The grocery retail sector is witnessing intense promotional activities as retailers are going all out trying to lure customers into their stores.

In the past, only two promotions were prominent, that’s the OK Grand Challenge and the TM Bargain Bonanza, but of late retailers have been increasingly holding promotions throughout the year.

OK now has three promotions under the main retail chain, another two under OK Mart and two under Bon Marche.

The retail giant is currently running promotions one for the OK Zimbabwe chain and another one for OK Mart.

This is at a time TM Pick n Pay is also running a promotion. Cue an industry frenzy.

Promotions, experts say, are aimed at increasing the average spend of customers and in the process increase market share for the retailer. Promotions are expected to generate foot traffic to the stores (everyone needs cheap products and a freebie) and lure customers towards more profitable goods.

Group chief executive officer Alex Siyavora is on record saying promotions increase the average basket size, growth in sales and reduced overheads.

His chief operating officer, Albert Katsande is also on record saying the retail giant use promotions to increase sales generation and more efficient use of existing capacity.

But has this been the case with retailers now running promotions at the very same time. This year, the two (OKZim and Pick n Pay) launched their promotions on the same day, both putting up colourful inserts in the press. OKZIM is running what it calls the “OK Shop Easy Club: Token of Appreciation” which is now in its second year.

The promotion, offers points to customers for shopping at the different OK Zimbabwe stores throughout the country. This year, a free Kwese installation is part of the “token for appreciation.”

On the other hand, TM Pick n Pay is running its “Rich Rewards Promotion,” with customers required to collect stamps that will be redeemed for non-stick pots.

While for shoppers discounts are tasting sweeter than ever, it will be interesting whether it’s worth it for retailers, or like Truworths last year, their margins are getting squeezed. Are retailers still seeing volume lift per promotion or it’s now a question of following the crowd since everyone is doing it?

Key questions to ask are whether these promotions are bringing in new customers into the stores, and whether these customers are buying other high-margin products taking into consideration that consumers remain tight-fisted and economically distressed, and promotion might not change how much they spend.

Two weeks ago, Truworths CEO Themba Ndebele, said markdowns, read promotions, are a sign that inventories are not moving fast enough.

Ndebele attributed the loss the group had made prior year comparative, to the markdowns that had been introduced to stimulate sales. In its last set of results, where there were no mark downs, and all sales at full price, Truworths returned to profitability achieving higher margins than prior year comparative.

So why all the excitement for grocery promotions, considering the category has notoriously low margins? OK had operating margins of 4,2 percent and net income margins of 1,9 percent in the first half of FY2018. Won’t the increase in promotions put a dent on margins and is this a sustainable strategy?

A Boston Consulting Group’s research indicates that 20 to 50 percent of promotions generate no noticeable lift in sales — or, worse, have a negative impact. Another 20 to 30 percent dilute margins in that they don’t generate an increase in sales sufficient to offset promotion costs.

In our view promotions tend to come as a double whammy, increasing the costs of advertising as well as reduce margins.

Running too many promotions removes the incentive for consumers to stock up when its running. Why stock up now when there will be another promotion tomorrow? It’s probably better to adopt a strategy of consistently low prices and eliminate promotions, or rather have higher prices that get marked down during fewer but effective promotions.

If retailers fix the basics and better evaluate promotions, they can reduce the number of promotions that dilute margins and increase the percentage of value-adding promotions.

It will be interesting to know the strategies behind these promotions as well. Is the goal to improve margins, traffic, customer loyalty, or some other metric?

At most results briefings, you hear management saying the previous year’s promotion was a success and hopefully the current one will do likewise. But questions should be on whether the promotion met the company’s strategic objectives, is it evolving and is performance improving over time?

Hopefully whatever strategies the two retailers are implementing, it will show on their return on investment. It will be folly if they evaluate only actual sales from a promotion rather than incremental sales. There is also need to determine the real incremental margin realized. The return on every dollar invested need to be known as it makes no sense to make promotion decisions on the basis of partial (or flawed) information. Only by analysing the data for all of the elements that affect sales and margins can a retailer determine the real performance and incremental value of a promotion.

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