A guide to significantly increase promotion

effectiveness
FMCG SUMMIT 2014
25th of November, 2014

Srecko Debelak, Senior Director at A.T. Kearney

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Context

Products sold through promotions very often represent a large share of retailers
overall sales reaching up to 30 percent or more. As a result, promotion products play an
important role in determining both the economic success and competitive positioning of
retailer.
In many cases, however, the effectiveness of promotions is not always entirely clear.
Some retailers just try to follow the general market trend toward offering more and more
promotions. Promotions are, in fact, frequently driven by suppliers trying to push sales of their
products. Often, these measures do not result in adequate financial gains for the retailer.
Only a few retailers have succeeded in leveraging the potential of promotions to serve as a
source of differentiation and innovation.
Developed by A.T. Kearney during projects with retailers representing various retail formats
and categories, the 10 steps to create value with promotions demonstrate how to improve
retailers` sales and margins, and how to increase customer loyalty. Drawing from focused
analyses and tailor-made strategies, the approach outlined in this presentation shows retailers
how to select and negotiate the most effective promotions as well as how to enable the
organization to implement this as a recurring process. Recent projects around the world have
achieved category sales increases of up to 10 percent and net margin improvements
ranging from 1 to 8 percent.
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A.T. Kearney go to market framework for retailers

Go to Market Strategy
Formats/
Channels

Category
Management

Pricing

Promotions

Marketing/Communication

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Promotions very often represent a large share of retailers

sales however, in many cases the success is not entirely clear
Selected examples
Retailer
Country

Spain

Belgium

Sweden

UK

Austria

Holland

Promo
share8
Market
share trend

<10%1

~15%2

na

~20%3

~28%4

~20%6

+1%-point

+2%-point

+1%-point

+1,5%-point

+1%-point

-4%-point

Strategic
direction
promotions

(2008-2010)7

(2008-2010)7

(2008-2010)7

(2008-2010)1

(2009-2010)4

(2008-2010)7

Focus on
EDLP
Hardly any
promotions

Increase
effectiveness
& efficiency of
promotions
Optimize
number of
promotions

Combination
of price waves
and
promotions
Effectiveness
& efficiency
program for
promotions
implemented

Strong promo
focus
Combination
of promo &
lasting price
cuts
Strengthening
of loyalty
program

Aggressive
promo
strategy vs.
discounter
Increase in
market share
driven by
private label
and store
layout
strategy5

1. A.T. Kearney research; 2. Estimate based on selected categories; 3. Irish Food Board, Estimate; 4. GfK, LZ; 5. Spar annual report; 6. GfK;
7. Planet Retail; 8. Without Loyalty Card Program

Strong
increase in
promo share
at competitors
AH follows
market trend
starting from
average
promo share
level

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10 Steps to Create Value with Promotions

Insight
1 Create transparency in promotion effectiveness
2 Generate customer insights on multiple levels
3 Understand the competition`s promotions

Strategy
4 Define a comprehensive promotion strategy
5 Diversify and articulate promotion roles
6 Define promotion types

Tactics
7 Select the most effective promotions
8 Negotiate with suppliers to optimize results
9 Control the sustained success of promotions

Enabling
10 Achieve continuous improvement
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Create transparency in promotion effectiveness

Elements of promotion effectiveness and impact on product margin

Elements of promotion effectiveness

Client
example

Retailer`s margin per week for a selected product

Margin loss on ordinary

sales
Margin contribution from
additional sales
Net effect

0
Weeks of
promotion

Total product margin

Effect from additional

traffic and basket size
Cannibalization effect

Weeks of
promotion

Supplier promotion
funding
Marketing cost
Net-net effect

Source: A.T. Kearney

Calendar weeks

Promotions dilute the margins of products

that typically already have small margins

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Generate customer insights on multiple levels

Customer insights in different levels

General customer insights
(derived from customer survey)

Insights on customer segments

(derived from customer data)

Switches store because of promotion

Customer groups

Customer type
Poten- Occatial
sional

5%

25%

Deep-dive analysis of individual

customer (e.g., from cross-shopping)

Category index vs. average

promotion effectiveness

Share of total product customers

120

Main

10%

Insights on individual customers

(derived from customer data)

Impact of promotions on target

customer

Promotion pack

110

Yes

Client example

14%

40%
100

16%
90

No

10%

40%

10%

70%

60%

Standard pack
80

100%
15%
Source: A.T. Kearney

65%

20%

Fruits Paper Ready Skin Meat Frozen

to eat care
food
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Understand the competition's promotions

Above-/below-average share vs. competition and scenario

analysis

Client example

Above-/below-average share of sales (in p.p.)

Probability of main competitor to

follow increase in promotion activity
1,5

Office supplier

Frozen foods

Beverages

1,0

81%

Ham/sausage
Cheese

0,5

Childrens` products

Detergents

Snacks

Coffee

75%

Body care

0,0

Bread

Potential increase of
promotion activity
-0,5

Fresh poultry

Confectionaries

49%

Snacks
Beverages

-1,0

-1,5
-2,5

Ready meals

Dairy

Ready meals

42%

Confectioneries
-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

Above-/below-average share of promotions (in p.p.)

Source: A.T. Kearney

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Define a comprehensive promotion strategy

Dimensions of promotion strategy

Price-promotion strategy model

Client example

Dimension Promotion strategy

Objectives

Support low-price image

Improve image and profitability with
promotions
Sustain sales

Promotion
intensity

Reduce promotion intensity by cutting

number of promotions by 15% and
promotion share by 8%-10%

Assortment
focus

Premium and organic products

High-volume products with high price
elasticity to generate traffic

Discount

Reduce average discounts, eliminate

35%-45% discounts
Focus on < 35% accompanied with
some 50% traffic promotions

Communication

Continue primary communication using

leaflets
Shift TV ads toward image promotions
Strengthen new media communication

Higher

HiLo

Exclusive pricing

Moderately
promotional/
category
specific

Relative
price
level

As-Is

Strategy

EDLP

Aggressive pricing

Lower
Lower

Higher

Relative promotion intensity

Source: A.T. Kearney

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10

Diversify and articulate promotion roles

Characteristics and relative importance of promotion roles

Promotion
role

Image

Profitability

Traffic

Source: A.T. Kearney

Client example

Characteristic
Value-oriented products,
e.g., environmentally
friendly, high quality,
newly launched
Limited discounts
Supplier-driven products
High-margin products
Visible store placement
Supplier promotion
funding
High-volume products
with strong priceelasticity
Discounts to be
cheapest in market
Supplier promotion
funding

5%
20%

Image

35%

Profitability

45%

Traffic

17%

78%

As-is

Strategy
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11

Define promotion types

Variety and weighting of promotion types

Type

Client example

Primary location

As-is Strategy

My offers

Targeted
promotions

Loyalty card push

Mobile app push
Social network push

My deals
My cash rebates

0%

15%

100%

85%

My lucky draw

General offers"
In-store display

Mass
promotions

Temporary price reduction

Price-pack deals
Rebates/supplier refunds

Public ads
Direct mailing
Electronic
newsletters

Contests/games

In/near store
Source: A.T. Kearney

Away from store

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Select the most effective promotions

Client example

Tactics based on promotion revenue and margin

Lever
B

Keep/extend

A
A

Margin effect

Optimize
1%

Keep/extend
68%
Optimize
B

X
X

Eliminate
13%

Optimize
18%

Eliminate
C

xx%

Action

Revenue effect

Keep or extend promotions with highly positive

revenue and margin effects e.g., repeat or create
similar promotion
Optimize discount level of promotions i.e.,
between 30% and 45% to improve margin effect
Optimize type of promotion to increase revenue
effect
Avoid promotions with highly negative margin effect
Avoid promotions with negative sales and margin
effect
Consider performance of previous promotions for
planning

Share of promotions

Source: A.T. Kearney

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13

Negotiate with suppliers to optimize results

Negotiation of promotions with suppliers

Promotion selection
(step 7)

Promotion
effectiveness
(step 1)

Customer
insights and
competitive
promotions
(steps 2 & 3)

Negotiation of
promotions with
suppliers

Historical
performance of
promotion

Rebates
Marketing funds
Supply chain
conditions
Other commercial
arrangements

Customer
preferences
Competition`s
promotion
patterns

Keep/extend promotion
Optimize promotion
Eliminate promotion

Promotion
roles and
types
(steps 5 & 6)

Weighting of
promotion roles
Variety and
weighting of
promotion types

Optimized promotion plan

Source: A.T. Kearney

A.T. Kearney framework

Promotion
strategy
(step 4)

Objectives
Promotion
intensity
Assortment
focus
Discount %
Communication

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Control the sustained success of promotions

Promotion dashboard
Promotion sales ( mil.)

Client example
Promotion share (%)

+21%

475

550

Promotion profitability (%)

+2.9%

+2.5%
575

250

Estimate
Actual

12.5

14.5

15.0
0.5

14.5

Estimate
Actual

19.3

22.0

22.2
1.2

21.0

Estimate
Actual

325
Last
year,
actual

Current Current
year,
year,
planned forecast

Last
year,
actual

68

100
15
25
60

100
20
20
60

Last
year,
actual

Promotion type (%)

Promotion role (%)

100
22
10

Current Current
year,
year,
planned forecast

Image
Profitability
Traffic

100
2

100
15

100
10

98

85

90

Discount distribution (%)

Target
Mass

100
9 6

59
4

Last
year,
actual

Current Current
year,
year,
planned forecast

Source: A.T. Kearney

Last
year,
actual

Current Current
year,
year,
planned forecast

Current Current
year,
year,
planned forecast

22

Last
year,
actual

100
5
20
40
10

25

100
16 5

43
13

23

>40%
30-39%
20-29%
10-19%
<10%

Current Current
year,
year,
planned forecast
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10

Achieve continuous improvement

Stage of excellence in promotion management

Area
Organization

Stage 1 Basic

Stage 4 Excellent

Individual category
manager responsible for
promotions

Separate marketing
functions steering
promotions

Decisions on promotions
driven by personal
experience of category
managers and suppliers

Process

Individual timing for

promotion planning

Category manager acts

within promotion strategy
and is able to analyze
details of promotion
performance to optimize
effectiveness

Limited coordination
between categories

IT/Tools

Limited transparency on
promotion performance
Separate systems for
planning, controlling and
reporting

Source: A.T. Kearney

Client example
Ranking
1

+
Client as-is

Competitor

Annual promotionplanning process defined

Feedback loop to adjust
promotion strategy and
guidelines

Integrated IT solution
combining planning,
controlling and reporting
with single front-end
Performance-Parameters
adjustable to adapt goals

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We have supported leading retailers on promotion topics in

multiple categories

Project
focus

Results

Northern European grocery

retailer

Western European grocery

retailer

US movie- and
game-rental retailer

Client situation
Large grocery retailer supplying
about 1,000 stores
Lack of insight into promotion
profitability and lack of alignment
between promotion and
merchandizing strategies
Project approach
Conducted internal analysis (past
performance, promotion levers,
processes, strategy, etc.)
Conducted benchmarking
(assortment, price, intensity,
channels, etc.)
Conducted customer survey
Developed promotion strategy
Identified quick wins

Client situation
Leading European grocery retailer
with large share of private-label
promotions
Market position suffering from entry
of hard discounters
Promotion effectiveness largely
unknown

Client situation
Large movie- and game-rental
company with 2,200 stores
Lack of insight into customer
purchasing behavior led to broadbased and reactive promotions
Project approach
Developed predictive models for: (1)
attrition, (2) promotion response and
(3) product cross-sell models on the
basis of customer sales data and
psychographic information
Designed new promotion program
on the basis of predictive model

Improved margin by 2% of sales

Optimized promotion strategy and
mix
Improved planning process

Improved margin by 1% of sales

Aligned pricing with promotions
Implemented controlling dashboard
and new planning process

Source: A.T. Kearney

Project approach
Created full transparency on
customer preferences and promotion
performance
Developed price-promotion strategy
to strengthen market positioning
Drew promotion plan selecting the
most effective promotions

Improved margin by 8% of sales

Increased sales by 10%
Reduced customer attrition by 12%

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A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since
1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned
firm, committed to helping clients achieve immediate impact and growing advantage on their most missioncritical issues. For more information, visit www.atkearney.com.
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