Misguided Paradigms Plague Today's Trade Promotions
NEW YORK — Trade promotions are a core part of doing business for consumer packaged goods (CPG) companies, but is the allocation of funds equal to the payoff? A recent conference call hosted by Wells Fargo Securities LLC looked to find the answer.
"The conference today was initially called 'Trade Promotion,' but I expanded that name to be 'Trade Promotion and Other Misguided CPG Paradigms,'" said speaker Kurt Jetta, CEO, founder and lead product developer of TABS Analytics. His Shelton, Conn.-based consumer analytics firm has been working on a broader thesis the past several years that trade promotion is just one misguided paradigm in the CPG industry.
"The broader thesis is that most — meaning the majority of the historical weakness in the consumer packaged goods industry — are self-inflicted wounds. Primarily, they are self-inflicted by the largest companies in our sector," Jetta said, noting trade promotion ranks No. 1 among the misallocated resources based on failed and flawed paradigms.
While there are macroeconomic weaknesses in the industry that can be seen in the decline in personal consumption over the past few years, he pointed out the food and beverage industry has decelerated at a rate greater than overall personal consumption.
"Our analysis suggests there is a major substitution at play where consumers, primarily driven by millennials but not exclusively, are shifting their purchasing preferences toward entertainment and electronics — and away from not only consumer packaged goods, but more prominently apparel," he explained.
The top tier of CPG manufacturers — defined as $5 billion-plus in a general market channel — account for 36 percent of sales, yet have only experienced a 0.6-percent compound annual growth rate over the past six years, he cited.
"That's virtually anemic. That, in and of itself, is the biggest drag on our industry. That's 0.6 percent on dollars. On a unit or volume basis, it's actually flat or down slightly," Jetta pointed out, adding that the three largest tiers of CPG manufacturers account for almost two-thirds of sales, but that's actually where growth is the lowest. "...Growth is being driven by Tier 4, Tier 5, and private label as well."
Based on TAB Analytics' estimates, CPG companies spend $150 billion annually on trade promotions — or discounts that go directly to the consumer so they can buy products at a lower price than they normally would.
Research data on 15 different categories considered "the bread and butter" of the CPG industry — accounting for 20 percent of sales and including all Tier 1 CPG manufacturers — shows that almost all consumers have at least one deal-seeking behavior and 35 percent of consumers use at least five deal-seeking behaviors.
"When we talk about deals, it's not something you can train consumers off of to any great degree because it's such a fundamental way consumers shop. They have an arsenal of tactics they are using, from everyday low-priced circulars to bonus packs," Jetta said. "An interesting phenomenon we've identified, though, is what we call the discouraged deal shopper phenomenon. There is a noticeably higher percentage of consumers not participating in any deals."
Along with deals, powered by trade promotions, the consumer's arsenal of tactics also includes loyalty cards. Jetta called the shift that retailers and manufacturers are making not only to loyalty cards, but also digital coupons "one of the fundamental issues facing the industry." He highlighted major retailers such as Kroger, Safeway and CVS as key players in this arena.
Classifying loyalty programs as another misguided paradigm, he said "the whole notion of a loyal shopper is somewhat misguided. Loyalty card users are actually among the least loyal consumers that shop in any given store."
Other misguided paradigms addressed by Jetta included:
- Online Grocery: "It's just a distraction at this point. There is a general fallacy of e-commerce potential because, first of all, most people don't buy groceries online. Two-thirds do not; 34 percent purchase online. But the most important stat is only 4 percent buy regularly. That's abysmal. That's what we call a 12-percent state of loyalty."
- Fixation on Millennials: "The biggest segment in the target market in our industry is households with kids and this is where we’ve seen some of the biggest declines. But are the major manufacturers talking about them? No. They tend to talk about the millennials. Again, it's a misallocation of resources."
- Obsession With Organics: "Based on our research, 13 percent of shoppers consider themselves regular purchasers of organic drinks or consumables. We know that is much higher for produce, but produce is not the majority of products. Even among the vaulted millennials (ages 18-34), the rate is 22 percent. Organic is not a thing in the mass market. Certainly, there are niches for it. Certainly, it’s been popular with Whole Foods, but Whole Foods is a small part of the market."
Diet and low-calorie products, while not necessarily misguided, present an interesting dynamic, he said, because the better-for-you consumer is aging out, with the highest preference for buying diet and low-cal among those aged 55-plus.
"There definitely is a shift toward organic and natural, and all those other things," Jetta said. "The question is, though, is it a big enough opportunity to allocate the amount of resources, and time and effort that consumer packaged goods manufacturers and retailers are allocating to it?"