Price promotion during the downturn:

shrewd or crude?A report of key findings

from an IPA seminar

Promoting the value of agencies

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ContentsForeword 3

Aboutdunnhumby 6

Introduction 7

Managmentsummary 8

Theanalyses 9

1.Customerexpectations 9

2.Shoppingbehaviour 11

3.Retailerbehaviour 13

4.Brandownerbehaviour 14

Categoryimpact 15

1.Softdrinks 15

2.Beers,winesandspirits 17

3.Household 19

4.Snacks 21

5.Healthandbeauty 23

Thedownsideriskofpromotions 25

1.Impactonbrandloyalty 25

2.Casestudies 26

Dairy 26

Household 27

Confectionery 29

Acknowledgements 30

Keycontacts 30

Additionalreading 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

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ForewordThe 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

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.

Peter Field

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Figure 1

Clorox brand expenditure on price promotion versus advertising

-40-30-20

-100

10203040

Advertising spend%

chan

ge ve

rsus l

ast y

ear

Promotional spend

Q2 2006Q1 2006Q4 2005Q3 2005Q2 2005Q1 2005Q4 2004

Source: Lodish & Mela, Harvard Business Review, Fall �008

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

-8

-6

-4

-2

0

2

4

Q2 2006Q1 2006Q4 2005Q3 2005Q2 2005Q1 2005Q4 2004

Reve

nue %

chan

ge ve

rsus l

ast y

ear

Source: Lodish & Mela, Harvard Business Review, Fall �008

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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

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IntroductionThe 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.

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.

Janet Hull