HoukTPM

September 28, 2008

Economic Turmoil: The Effect on Pricing and Promotion

I saw an item a few days ago (in Advertising Age) that Home Depot is planning to cut prices drastically to stimulate sales.

In an effort to pick up share from Lowe's and Wal-Mart in a pinched home-improvement segment, Home Depot is cutting prices between 5% and 50% on some 1,200 items. The discounts, which Home Depot expects to be permanent, will go into effect tomorrow and roll out during the next three weeks.

Putting aside the wisdom of such a move (my guess is that Wal-Mart and Lowe’s will match the price cuts if they show any signs of working, which simply means that everybody’s margins suffer – that’s the usual outcome of such price wars), the article raised the question in my mind of what this and all the rest of the current economic turmoil mean for trade promotion.

Herewith, a few guesses:

1) Retailers are going to demand significantly increased funding. Well, okay, I admit I’m not going out on a limb with this one – retailers always demand more money. But I’m talking about the possibility of demanding a lot more.

1a) An increased portion of the increased funding will go into pricing, to support the sort of pricing actions Home Depot is doing.

Before going on to the next point, let’s examine the question of who benefits from this. The answer is not going to be a surprise: If there is an increasing emphasis on pricing, then the manufacturers who have tools in place to analyze and optimize pricing will be ahead of their competitors. Actually, they are already ahead, of course, but to whatever degree the emphasis on pricing increases, their lead increases.

2) Another thing that we see happening is that lots of people are cutting their advertising. (Like the Home Depot price cuts, this is both perfectly understandable, and a really bad idea). But in terms of its effect on trade promotion and channel marketing, when combined with the pricing pressures we’ve already discussed, it’s likely to have the effect of pushing Shopper Marketing even more to the front rank of promotional tactics.

Here’s my logic: If a manufacturer is cutting ad spend, but still needs to build/maintain brand image, and needs to increase trade spend, doesn't that ad up to a perfect storm for Shopper Marketing (or in-store advertising in general?). Certainly much (or most) of the increased trade spending will go into price support, as mentioned above, but some will be price support in the form of advertising money being paid to retailers instead of to media (not what media wants to hear right now, of course).

And who will benefit? Well … Deloitte has a new study out on Shopper Marketing (I haven’t had a chance to read it yet, perhaps I’ll report on it more fully next time), and one of the findings, according to Brandweek, is:

Nineteen percent of consumer packaged goods manufacturers and half of retailers rank shopper marketing as the most effective activity for generating strong return-on-investment. Overall, 75% of manufacturers and 86% of retailers studied ranked in-store marketing among the top four activities in terms of gaining strong ROI.

Still, only 5-10% of companies are considered advanced at the tactic. One of the main impediments for accelerating the practice is the cost of data collection and analysis, according to 70% of respondents.

So, once again, the benefits will accrue to those who have in place the tools for data collection and analysis.

If you’re not on board, you need to hurry, because the train is leaving the station. I have no doubt that some of those who have not started will attempt to justify continued inaction to by saying, “This is a bad time to take on an expensive project of this type. We’ll do it when the economy recovers.” And probably they will – if they’re still around.

TPMA meeting in Phoenix in November

The Trade Promotion Management Association will be holding their fall meeting in partnership with the Vendor Compliance Federation, in Phoenix. The meeting will be held November 9-12 at the Camelback Inn in Scottsdale.

TPMA & VCF are joining this November to bring Innovation, Collaboration, and Execution to Scottsdale, AZ. Retail and manufacturer/vendor industry leaders will meet together and refine their Promotion Strategies and Supply Chain Operations for the changing business climate. This change is at the vanguard of competitiveness and profitability tailored to retailers and suppliers who are preparing for 2009 and beyond.

The agenda looks really good, and you need to be there.

How much longer can Kmart survive?

I live in one of the very few "under-stored" areas of the United States. We have no major malls or even significant strip malls or power centers in the immediate vicinity. I have to go about six or seven miles (the horror!) to get to the nearest Wal-Mart, and even further to Target.

I offer this information to explain why I shop fairly often at Kmart: it's the only major retailer close by (about a mile and a half).

When I tell folks I shop at Kmart, they look at me in wonder. I'm not discussing the coastal elite types who would never shop at any discounter, or perhaps visit Target occasionally when they feel like slumming (and make tired references to "Tarjay"). Even ordinary folks are aghast at the idea of visiting Kmart, a fact that is testified to by the emptiness of the parking lots.

And, I can affirm, their feelings are fully justified -- the stores are awful. The one I visit is old, and it shows its age. It's dirty and poorly lit. But worse are the products it sells and the service it provides. The shelves are frequently empty, the merchandise assortment is peculiar, pricing information is missing or wrong, there are never enough checkout lines open, and the lines are frequently delayed because items won't scan. A couple years ago, they put in self-checkout lanes, but they couldn't make them work, so they pulled them out.

Just about every time I go there, I leave swearing, "Never again!" But I keep going back, partly because of the lack of alternatives and partly because I get a perverse pleasure out of seeing just how bad a retailer can be.

Unfortunately for Kmart, there are relatively few customers who have no alternatives, and even fewer who get their kicks out of studying how not to run a store.

With sales and profits continuing to plummet* at Sears Holdings ...

Beleaguered retailer Sears Holdings Corp. reported a hefty drop in second-quarter profit as sales slumped, despite a restructuring aimed at drawing back shoppers who've taken their checkbooks elsewhere.

... we return to the question posed in the title: how much longer can they keep going? I can't see how they last another year, but what do I know? Well, actually I know one thing – when they go under, they'll blame it on the economy.

* The positive: "plummeting" profits are better than no profits at all. The negative: they manage to get profits in the face of declining sales only by cutting costs -- see comments about checkout lines above.

Meanwhile,

back at the blog ...

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