Quiz question : Can (beer) you (nappies) think of (coffee) products (biscuits) that are (cereals) always (cordial squash) on price promotion in one (pet food) supermarket (toothpaste) chain or (deodorant) another?
Today it’s being touted in the Telegraph today that Tesco will start a price war by reducing prices.
The article also takes the view “Unlike most “price war” announcements, analysts expect this to materially alter the profits that Tesco makes in Britain”.
How could it be? how will it affect profits?
Well the article talks about fewer buy-one-get-one free promotions and more low, round prices.
Imagine you’re a supplier and a supermarket offers you the chance to take part in a “bogof” promotion. Let’s look at the simple mechanics of these promotions;
You are selling at a rate of “packs of product per day”, [SKU’s to use the jargon] suddenly this rate can start to rise to 4, 6, 8 times that amount. (remember you are on bogof, so doubling of sales rate is a minimum!)
So where do you get all the spare stock from? you make it in advance of course on overtime.
You store the finished goods in additional warehouses ready to go out but remember you need bigger warehouses. You’re going to sell 4,6 times what you normally sell.
Oh and you’ll need to store the increased amount of raw materials as well.
You’ll have to try to forecast the demand across your different flavours and pack ranges e.g. if you only offer the 500 gram pack on bogof what happens to the 1kg pack sales?
As the promotion runs, you may well need to run production for longer hours and incur overtime costs.
And the supermarket, well they need more space to put your products out there, they need more transport to get the products out, so you see this “free” promotion seems to be increasing the costs to every one but us, right?
The consumer in the meantime is building a nice little stock of “free” goods at their end of your product, which leads to two behaviours.
- they don’t buy your (or your competitors) product for a while, they’ve got a stock at home.
- they end up throwing it out and they didn’t need that extra pack but hey it was free.
So what happens to your business at the end of the promotion?
Demand drops back and probably to less than before, the customers have got spare stock in their cupboards right?
Another competitor starts a promotion in the supermarket, be it another brand or the supermarket own label.
So now you have production lines with not enough to do, so what do you do? you go to another supermarket and offer a price promotion, yeah!
Here’s the quiz question again : Can (beer) you (nappies) think of (coffee) products (biscuits) that are (cereals) always (cordial squash) on price promotion in one (pet food) supermarket (toothpaste) chain or (deodorant) another?
I’m sure you can think of the brands.
So what might your accounting team say about this?
Well you’ve given products away for “free” and incurred additional overtime and storage costs, never mind the raw material you started with. So will they drive up the normal cost of the product to cover these costs and to make the “free products” less of an effect on your business? You can decide that.
The benefit of going to Every Day Low Prices is two-fold, in our opinion, based on Lean Management;
- The consumer only buys what they need and not any thing extra because it’s “free” – this is better for our food waste figures and our waist figures.
- The suppliers stop having to manage major swings in purchasing patterns, when in fact consumption is relatively stable. Do you really buy use toothpaste twice as fast because it was on BOGOF? So they get on with managing the costs in their business and can focus on reducing these.
So moving away from free products can have a major impact on the whole supply chain. It can reduce the costs and complexity of managing the chain and affects all of our waste [waists]. The reduction in costs can be passed onto the consumers but if you don’t pass all of it on, then your revenues may drop but your profit & margins can increase.