As the U.S. economy continues to improve, consumer confidence has been on the rise, which would typically indicate growth for consumer packaged goods (CPG) manufacturers as well. However, according to a new Hot Topic Report from Acosta—a full-service sales and marketing agency in the CPG industry—unit sales are flat across most categories, and trade promotions continue to decline as a key factor in driving incremental volume. The decline leads to more unprofitable sales for manufacturers. Despite this, CPG manufacturers continue to allocate an average of 15-20 percent of gross sales to trade promotion.
“Trade promotion is weakening as a mainstay of shopper marketing as it’s not delivering the results manufacturers had come to expect,” said Colin Stewart, senior vice president at Acosta. “As such, a promotional hamster wheel has been created, in which many CPG manufacturers tend to repeat an old strategy, but see less resulting gains. The wheel continues to spin and spin … until manufacturers adapt their strategies to the reality of today’s shopping landscape.”
Acosta’s Hot Topic Report, Reversing the Diminishing Returns of Trade Promotion, outlines the three factors keeping the hamster wheel spinning: weakening promotional value, promotional saturation and shopper behavior.
Over the last five years, the everyday price of items has been on the rise, and consequently, promoted prices have been as well. Thus, higher average prices, coupled with shallower promotions, have resulted in lower promotional lifts. Promotional lift is at its lowest level in five years, averaging just 75.4 percent—a 3.1 percent decrease from 2014-2015 alone, according to IRI Reviews.
Because of the lower returns on trade promotion spending, manufacturers are only exacerbating the problem, often earmarking more trade dollars for everyday low price strategies.
Thirty-six percent of shoppers rank paper circulars at the top of the list for impacting their shopping trips and what products they purchase, despite younger generations preferring digital to print, and newspaper deliveries continuing to decline. Today’s savvy shoppers will channel surf, wait for the next promotion, check a price online or even switch to private labels before spending more than they expect on a product.
Sixty-four percent of shoppers said they will shop elsewhere for competitive pricing and hold off on purchases until certain products are on sale. Sixty-seven percent of shoppers reported that at least half of their basket is filled with products that are on promotion.
“It’s clear that shoppers are not reacting to traditional trade promotion as they have in the past,” Stewart says. “Rather than perpetuating the hamster wheel, CPG manufacturers should focus on establishing a new promotion playbook, and maximize investment in trade promotion through a renewed focus on the fundamentals that drive base sales: collaborative planning; shopper-centric promotions; integrated sales and marketing; and trade optimization.”
Reversing the Diminishing Returns of Trade Promotion was compiled using research conducted by Acosta, as well as the company’s experience working with the nation’s largest CPG manufacturers and retailers. The full report can be accessed here.