The Promotion Trap: Why Promotions Are Now a Critical Cross-Organization Retail Issue

Transcription

1 The Promotion Trap: Why Promotions Are Now a Critical Cross-Organization Retail Issue Prospective View: June 2010 Sponsored by: By: Nikki Baird, Managing Partner Edited by Steve Rowen, Managing Partner

2 INTRODUCTION THE FORGOTTEN PROCESS Promotions have undergone a strategic shift in the last two years, created by the combined forces of economic pressures; a re- learning of the importance of promotions as a traffic driver as retailers move away from other, less effective price strategies; and new requirements imposed by the drive to localize assortments. However, these new drivers behind promotions are creating challenges for a promotions process that was never very well- defined to begin with. Promotions today require much more granularity in both planning and execution; a thirty percent or more forecast error on a promotion forecast created at a distribution level is a recipe for disaster. And consumers are far less forgiving than they used to be - if a retailer makes a promotion promise to consumers that gets them into a store, it is imperative to not break that promise. A competitor is only a smartphone search away. This document takes a look across all of RSR's research that is relevant to promotions, and brings it together to give a prospective view on the business challenges and organizational inhibitors related to promotions, along with the new demands being placed on the role of promotions in the retail environment. Recommendations follow on how to get started down the path of a world- class promotions process. RETAIL WINNERS AND WHY THEY WIN Throughout RSR's research, you will see us reference "Retail Winners." Our definition of Retail Winners is straightforward. We choose to follow top line performance. Retailers cannot cut their way to successful growth, and only those retailers that can consistently demonstrate that they understand and can meet the needs and desires of their customers are going to succeed. Assuming industry average comparable store sales growth of three percent, we define retailers with sales above this hurdle as Winners, those at this sales growth rate as average, and those below this sales growth rate as laggards or also- rans. It is consistent throughout much of RSR s research findings that Winners don t merely do the same things better, they tend to do different things. They think differently. They plan differently. They respond differently. THE STATE OF PROMOTIONS IN RETAIL It wasn't too long ago that the use of promotions as a retail pricing strategy was actually on the decline. Many retailers, particularly in grocery but not exclusively, tried to put a stake in the ground based upon everyday low price (EDLP), and tried very hard to convince consumers that while they may not have the lowest prices on every item, overall, customers paid less because the company wasn t raising prices on other items to fund promotions. It didn't work. Many retailers found it extremely difficult to actually afford an EDLP strategy - their supply chains weren't efficient enough to be price competitive across all products and categories. But even as retailers looked to move away from EDLP towards more promotional strategies, several other issues came into play over the last two years, fundamentally altering retailers' perspectives on promotions. 1

3 ECONOMIC PRESSURES In almost every business challenge question that RSR asks, regardless of topic, there are options for retailers to convey their confidence - or lack thereof - in consumer spending. Beginning in the middle of 2008 and continuing today, our research has found that retailers grow ever more uncertain about consumer demand. The only certainty they do find in consumer behavior is increased price sensitivity. In all of 2009, almost universally across RSR's research, consumer price sensitivity was a top concern for all stripes of retailers. In our Pricing research specifically, it went from #4 on the list at the beginning of 2008, to #2 on the list (behind pressure to improve the bottom line) at the beginning of In 2010, it fell to #3, but only because retailers are more desperate to drive profitable sales of any kind than worry much about price strategy. 1 The net result for retailers and manufacturers alike: an increased reliance on promotions. In January 2009, retailers and manufacturers both reported that their response to declining consumer demand was to offer more promotions: 68% of retailers and 52% of manufacturers reported that the number of promotions had increased significantly. Those promotions fell across an increasingly complex inventory base: 70% of retailers reported an increased focus on private label products, and 58% of retailers and 83% of manufacturers reported a much larger number of SKUs in their assortment. 2 Unfortunately, as economists who study the psychology of buying will tell you, it's much easier to lower prices than it is to raise them, and retailers find themselves in a challenging place as a result; while consumer confidence seems to be improving, consumer behavior has not returned to previous buying habits. Hence retailers struggle to find balance between the need to continue to offer promotions that drive consumers into stores and the alternative: reinforcing a consumer expectation that everything they buy needs to come with a discount. A KEY PRICING STRATEGY At the same time that retailers are trying - and failing - to wean consumers off of discounts as a primer for any shopping, they are also learning important lessons about the role of promotions in their pricing strategy. RSR's research has found that a promotional price strategy, combined with an emphasis on key items, is by far the most favored price strategy in use today, far more than EDLP (Figure 1). 3 1 Getting Back to Good: Retail Pricing 2010, RSR Research Benchmark Report, January Retail Supply Chain Collaboration: Moving Beyond Coercion, RSR Benchmark Report, January Getting Back to Good: Retail Pricing 2010, RSR Research Benchmark Report, January

4 Figure 1: Promotions and Key Items Top Price Strategies Pricing Strategies Used Today (Respondents Selected All that Apply) Key Item pricing (staying price compemmve on key items) Hi- Lo Pricing (mix of regular and promo items) 48% 47% Everyday Low Price Seasonal Fashion/Markdown Cost Plus/Keystone Discount Manufacturer Suggested Retail Prices 23% 19% 14% 14% 12% Source: RSR Research, January 2010 Even retailers who turned to EDLP as a way to attract value- conscious consumers during the downturn found it a difficult practice to sustain, as the 23% who reported the strategy in 2010 represented a significant drop from the 31% that reported it in It requires a tremendous amount of organizational discipline, and constant coordination between merchandising and marketing departments to be successful at EDLP in the long run. If merchandising has eliminated all margin cushion across products and categories, one rogue promotion by a marketing group is enough to bring down the most disciplined of profit plans. But the downturn also reminded retailers that promotions don't just sell promoted products, they help drive traffic. A department store retailer shared a specific example. Their buying discipline in 2009 actually hurt them - even though sell- through was way up and the retailer was very profitable, a lack of markdowns (and the advertising of those markdowns) resulted in a significant drop in traffic and smaller basket sizes. Without the "promotional" impact of their markdowns, people simply weren't coming into stores to see the latest discounts. Promotions, it turns out, aren't just an economic necessity. They are an important part of retailing success. PRICING, LOCALIZED But perhaps more than any other factor, localization has made a permanent place for promotions in the retail arsenal - and not just promotions, but targeted promotions. Here's how it works. A retailer embarks on a customer centricity initiative. An important outcome turns out to be a focus on localizing assortment 4 Getting Back to Good: Retail Pricing 2010, RSR Research Benchmark Report, January

5 to meet the needs of more granular groups of consumers. This outcome isn't a trend or a fad. It's a fundamental shift in retail strategy that is making its way through the entire industry. 5 For many retailers, this localization has resulted in far more than a few more model stores based on consumer demographics. Rather, localization entails reviewing, category- by- category or department- by- department, the primary customer segments that shop those products and how to best meet their needs. And the biggest opportunity that retailers see coming out of localized assortments is a focus on localized prices (Figure 2). 6 Figure 2: The Promotional Path to Localized Prices Opportuni=es to Help Overcome Challenges (% Answering "A Lot of Opportunity") Winners Laggards Localized promomons 32% 67% Localizing our assortments through science- based processes 26% 43% One- to- one customer markemng programs 38% 68% Social Networks or other forms of direct customer input Vendor managed inventory (VMI) 24% 16% 29% 47% Source: RSR Research, September 2009 While Retail Winners view localized prices in terms of promotions and laggards tend to over- optimistically arrow in on one- to- one marketing, the result is the same: the way to localize prices is not to set geographic price standards, but to create the net effect of localizing prices by offering targeted promotions to specific sets of consumers. 5 In 2008, 56% of retailers reported that localized assortments are critical to their success. In 2009, that number had risen to 66%. Retail Merchandising: Buckling Down in a Tough Economy, RSR Research Benchmark Report, September Retail Merchandising: Buckling Down in a Tough Economy, RSR Research Benchmark Report, September

6 THE NEW PROMOTION CHALLENGE So a focus on promotions is not going to end when the economy comes back, and even if it did, many retailers are finding that promotions are far more strategic to their business than they originally imagined. But these are not your father's promotions. Between personalization and targeting, and more complex offerings across a more complex product base, retailers face a new reality for promotions that, if not addressed, could undo all of the gains that effective promotions promise. This new reality is driven by two implications of localized assortments: granularity and organizational alignment. GRANULARITY Retailers report the need to localize both inventory and prices in order to increase their relevance to their customers. In this context, localization is really an increase in granularity, both for forecasting inventory needs and targeting promotions to consumers. Particularly around promotions, it is no longer enough to forecast at a DC or region level and divide by the number of stores. If a retailer has done an effective job of understanding how to localize its assortment, then it knows that store demand profiles are going to be driven in large part by the different profiles of consumers that shop those stores. If the company targets one customer segment with a promotion, and not others, then the lift from that promotion will be uneven, reflecting the uneven alignment of that customer segment across the store base. In this case, looking at aggregate demand does not protect against the variability that lies beneath, it hides it - it prevents understanding which stores will be more impacted and which less, and hinders the ability to stock each individual store at the appropriate level for that store's unique level of demand. With a localized inventory - when anywhere from 10-40% of a store's assortment is customized based on the customer segments that shop there - the margin for error becomes even smaller. More SKUs in the same amount of space means less depth of inventory, more exposure to variability in demand, and thus more stockouts. ORGANIZATIONAL ALIGNMENT The intersection of product demand with customer segments reflects an organizational intersection, between two groups that generally have not spent a lot of time together: merchandising and marketing. Historically, merchandising has owned products and prices - particularly mass promotions - and marketing has owned the customer and customer communications. Little interaction was needed between the two groups when promotions consisted of taking negotiated discounts from suppliers and passing them on en masse to consumers. Merchandising negotiated the deals, and marketing put them in the Sunday fliers. Localizing promotions changes all of this. Now there is a consumer element to predicting demand for a promotion and where a promotion will do better and where it won't. When merchandising negotiates a deal around a product, and marketing separately plans an offer against that product that is targeted to a specific customer segment, and never do the two share this information, they can easily work at cross- purposes to each other, creating incredibly effective promotions (in terms of lift) that lose money (because of overlapping margin hits). RSR's research has found that retailers are beginning to be aware of this source of "margin leakage." In our most recent pricing benchmark, 60% of respondents reported that marketing should be more involved in setting price strategies vs. only 44% who report any participation from marketing today. As 5

7 promotions and deals become more complex, retailers increasingly seek the input of another organization finance with 46% reporting desired involvement and only 23% reporting finance involvement currently. 7 RECOMMENDATIONS THE FIRST STEPS ON A LONG ROAD How can retailers position themselves to make better promotion decisions? Recognizing it as a distinct, cross- functional process that needs its own resources and support is a start. Knowing, as they say, is half the battle. But three additional areas offer significant opportunities: GRANULARITY OF FORECAST Localization is already putting pressure on overall demand forecasts, but promotion forecasts may actually be a better place to start to effectively increase granularity. Unfortunately, it is far easier to aggregate demand than it is to decompose it, and if they lack a way to approach store- level forecasts in their current tools, retailers will not have the information needed to make profitable decisions about localized demand. Rather than wrenching the entire organization into new demand forecasting capabilities, promotion forecasting can be a better place to start: a way to gauge your readiness for granularity in other process areas (like distribution, for example), while addressing an area that tends to have the lowest forecast accuracy to begin with. Store- level demand that is informed by customer purchase behavior is the ultimate goal, particularly when trying to create targeted promotions - a store- level forecast becomes the meeting point between customer segment response rates and the retailer's ability to supply promoted inventory. PROMOTIONS PROCESS TASK FORCE Once the capability is in place, an effective process must be built around it. The best way to accomplish this is to create a promotions process task force. Pick a category or sub- category to be the test bed, and define how merchandising, marketing, store operations (channel ops for multi- channel retailers), finance, and supply chain ought to work together. How do vendor- negotiated deals get communicated to marketing? How do marketing promotion plans get communicated to everyone else? Who has primary responsibility for promotion profitability or ROI? How does all of this get rolled into the master forecast so that everyone is on the same page? Once the process is defined and established in one category, take it to others until the focus on promotions becomes not a sideline function that frequently catches fire, but an integral part of the every- day running of the company. CLOSING THE LOOP IN EXECUTION A vast amount of low- hanging fruit resides in closing the loop on promotion execution. With in- store execution hovering at somewhere between 65% and 80% on a good day, it is no wonder that promotion forecasts tend to have high error rates - execution significantly impacts promotion effectiveness. A 7 Getting Back to Good: Retail Pricing 2010, RSR Research Benchmark Report, January

8 retailer won't get the planned lift if its consumers don't even know something is being promoted. This is especially challenging when more and more promotions are targeted - when marketing plays a key role in promotion execution through the communication of more personalized offers. Both inventory and customer redemption needs to be monitored closely, so that demand can be better matched against the forecasted supply - for example, by widening the promotion's target segments if a promotion is not creating the expected lift, or by ending offers if demand is outstripping supply. THE PROMOTION PRIORITY Finally, promotions are increasingly important to retail success, and not just blanket offers but relevant, targeted promotions across a more localized assortment. Because it crosses so many functional areas, it has long been neglected or dropped into gaping process cracks. But as it emerges as a key area for both differentiation and profitability, the need for a stronger process in both promotion planning and execution, and a promotions forecast to tie the two together, becomes critical. 7

9 APPENDIX A: THE BOOT METHODOLOGY The BOOT methodology is designed to reveal and prioritize the following: Business Challenges Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decision- making across the enterprise. Opportunities Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between winners and also- rans. Within the BOOT, we can also identify opportunities missed and describe leading edge models we believe drive success. Organizational Inhibitors Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning retailers understand their organizational inhibitors and find creative, effective ways to overcome them. Technology Enablers If a company can overcome its organizational inhibitors it can use technology as an enabler to take advantage of the opportunities it identifies. Retail winners are most adept at judiciously and effectively using these enablers, often far earlier than their peers. A graphical depiction of the BOOT follows: a

10 APPENDIX B: ABOUT OUR SPONSOR Aldata is a global leader in the supply of integrated business solutions to organizations that serve the retail consumer and wholesale distribution markets. Aldata has an unparalleled 20- year track record of delivering targeted software projects that substantially improve our customers businesses, from supplier to shopper. Today, Aldata customers include 15 of the World s 30 largest retailers, thousands of retail brands, and hundreds of national and regional chains. More at: solution.com/ b

11 APPENDIX C: ABOUT RSR Retail Systems Research ( RSR ) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, and thought leadership and advice on navigating these challenges for specific companies and the industry at large. RSR s services include benchmark reports covering the state of retailer technology adoption for topics ranging from merchandising and supply chain, store operations and workforce management, to customer- facing and multi- channel technologies. Custom research reports provide more in- depth views into topics of industry interest, and advisory services help retailers and technology vendors make the most of the insights RSR provides. To learn more about RSR, visit Copyright 2010 by Retail Systems Research LLC All rights reserved. No part of the contents of this document may be reproduced or transmitted in any form or by any means without the permission of the publisher. Contact research@rsrresearch.com for more information. c