“With a promotional arms race, retailers and manufacturers are shooting themselves in the foot”

The increasing pressure to offer promotions is not leading to structural growth in the FMCG market, according to Davy Van Raemdonck of the research firm YouGov. On the contrary: margins are evaporating as shoppers increasingly buy items at a discount. Is there a way out?

A never-ending cycle

“Free” seems to be the new normal: promotional pressure in Belgium has risen to 23%. For brands, that figure is even closer to 37%. “That means more than one-third of a brand’s volume is sold on promotion. That’s enormous. Both retailers and manufacturers are shooting themselves in the foot with this promotional arms race: it’s a never-ending road. Even though promotional pressure is rising sharply, it doesn’t lead to structural market growth. It’s just eroding margins.”

Speaking is Davy Van Raemdonck, director of YouGov Shopping in Belgium and the Netherlands. The research firm’s panel data reveals yet another staggering figure: two years ago, 23% of shoppers were already purchasing more than 40% of their items on promotion. Today, that figure is significantly higher—he revealed the most recent figures at the Category Management Congress organized by LD&Co and RetailDetail, one of the three pre-events leading up to RetailDetail Night on November 19.

It’s hard to call this an effective strategy; it’s mainly a short-term phenomenon, he argues: market volumes today are only 2% higher than they were just before the pandemic, even though population growth has outpaced that increase. The flood of special offers is therefore not driving structural growth.

Pressure is likely to increase even further

“Retailers are now rolling out promotions en masse to attract secondary and tertiary shoppers. Shoppers are increasingly deciding where to shop based on those aggressive promotions. A year ago, Albert Heijn launched that famous ‘2+5’ promotion; I’m curious to see what they’ll come up with next. Will there be another aggressive promotion like that in November?”

Albert Heijn is dragging everyone along with it: even players who have always stuck to fixed, low prices every day now have to jump on the “free” bandwagon. Where will this end? “With inflation on the horizon, I expect to see some downtrading again in the future—even as shopping frequency is also declining. If there are fewer shopping occasions, you have to seize the opportunities even more when those moments do arise to convince shoppers. So the pressure to promote will likely increase even further. But you have to come up with even more aggressive promotions every year just to match the previous year’s sales volumes. That can lead to major financial implications—and possibly further cost-cutting at all levels—with negative consequences for investments in innovation.”

Away from the ‘free-for-all’

Is there a way out? “What I fear is that you’ll have to be able to handle losses in the short term if you want to grow again in the long term. The investments you make in promotions today are investments you’re not making elsewhere. Yet that’s precisely when you need to invest in distinctive innovations. They’re crucial to staying relevant.” But perhaps well-thought-out category management offers opportunities.

“Our studies can uncover opportunities. For example, we can see what shoppers buy when they switch to another retailer. If you map that out, you can better leverage the strength of your own product assortment, pricing, and promotional strategy.” At the Category Management Congress organized by LD&Co and RetailDetail—one of the three pre-events leading up to RetailDetail Night on November 19—Davy Van Raemdonck will delve deeper into the impact promotions have today and into possible strategies for moving away from the “free-for-all.” Other keynote speakers will also focus on the topic of promotions. You can order tickets using the button below.