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A guide to significantly increase promotion effectiveness FMCG SUMMIT 2014 25th of November, 2014 Srecko
A guide to significantly increase promotion effectiveness FMCG SUMMIT 2014 25th of November, 2014 Srecko

A guide to significantly increase promotion

effectiveness

FMCG SUMMIT 2014

25th of November, 2014

Srecko Debelak, Senior Director at A.T. Kearney

The old question valid today as never before I know that half of my budget

The old question valid today as never before

The old question valid today as never before I know that half of my budget is

I know that

half of my

budget is

wasted …

I just don’t know which

half

!

John Wanamaker (1838 1922) a US merchant, father of modern advertising and a pioneer in marketing

We save 60% of the ‚wasted’ budget !

? TV Digital Newspaper Outdoor
?
TV
Digital
Newspaper Outdoor
Context ■ Products sold through promotions very often represent a large share of retailers’ overall

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.

A.T. Kearney go to market framework for retailers Go to Market Strategy Formats/ Category Pricing

A.T. Kearney go to market framework for retailers

Go to Market Strategy
Go to Market Strategy

Formats/

Category

Pricing

Promotions

Channels

Management

Formats/ Category Pricing Promotions Channels Management
Formats/ Category Pricing Promotions Channels Management
Formats/ Category Pricing Promotions Channels Management
Formats/ Category Pricing Promotions Channels Management

Marketing/Communication

Promotions very often represent a large share of retailers’ sales – however, in many cases

Promotions very often represent a large share of retailers’ sales however, in many cases the success is not entirely clear

Selected examples

Retailer

Retailer
Retailer
Retailer
Retailer
Retailer
Retailer

Country

Spain

Belgium

Sweden

UK

Austria

Holland

Promo

<10% 1

~15% 2

na

~20% 3

~28% 4

~20% 6

share 8

 

Market

+1%-point

+2%-point

+1%-point

+1,5%-point

+1%-point

-4%-point

share trend

(2008-2010) 7

(2008-2010) 7

(2008-2010) 7

(2008-2010)

1

(2009-2010) 4

(2008-2010) 7

Strategic

Strategic   1
Strategic   1
Strategic   1
Strategic   1
 
1
1
Strategic   1

direction

promotions

Focus on

Increase effectiveness

Combination of price waves and promotions

Strong promo focus

Aggressive

Strong

EDLP

promo

increase in

Hardly any

& efficiency of promotions

Combination of promo &

strategy vs.

promo share

promotions

discounter

at competitors

Optimize number of promotions

Effectiveness & efficiency program for promotions implemented

lasting price cuts

Increase in

AH follows

market share

market trend

Strengthening of loyalty program

driven by

starting from

 

private label

average

and store

promo share

 

layout

level

strategy 5

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

vtc5rWQkllznQln0Rx

5

10 Steps to Create Value with Promotions Insight 1 Create transparency in promotion effectiveness 2

10 Steps to Create Value with Promotions

Insight

1
1

Create transparency in promotion effectiveness

2
2

Generate customer insights on multiple levels

3
3

Understand the competition`s promotions

Strategy

4
4

Define a comprehensive promotion strategy

5
5

Diversify and articulate promotion roles

6
6

Define promotion types

Tactics

7
7

Select the most effective promotions

8
8

Negotiate with suppliers to optimize results

9
9

Control the sustained success of promotions

Enabling

10
10

Achieve continuous improvement

1 Create transparency in promotion effectiveness Elements of promotion effectiveness and impact on product margin
1
1

Create transparency in promotion effectiveness

Elements of promotion effectiveness and impact on product margin

Client

example

Elements of promotion effectiveness

Margin loss on ordinary sales Margin contribution from additional sales Net effect Effect from additional
Margin loss on ordinary
sales
Margin contribution from
additional sales
Net effect
Effect from additional
traffic and basket size
Cannibalization effect
Supplier promotion
funding
Marketing cost
Net-net effect

Retailer`s margin per week for a selected product

0 Weeks of Total product margin promotion Weeks of promotion Calendar weeks
0
Weeks of
Total product margin
promotion
Weeks of
promotion
Calendar weeks

Promotions dilute the margins of products

that typically already have small margins

2 Generate customer insights on multiple levels Customer insights in different levels General customer insights
2
2

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)

Impact of promotions on target Customer groups customer Customer type Category index vs. average promotion
Impact of promotions on target
Customer groups
customer
Customer type
Category index vs. average
promotion effectiveness
Poten-
Occa-
120
Main
tial
sional
110
Yes
5%
25%
10%
40%
100
90
No
10%
40%
10%
60%
80
100%
Fruits Paper
Ready Skin
Meat Frozen
to eat
care
food
15%
65%
20%
Switches store because of promotion

Client example

Insights on individual customers (derived from customer data)

Deep-dive analysis of individual customer (e.g., from cross-shopping)

Share of total product customers

Promotion pack

14%

16%

70%

Standard pack

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

Above-/below-average share of sales (in p.p.) 3 Understand the competition's promotions Above-/below-average share
3
3

Understand the competition's promotions

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

Client example

Probability of main competitor to follow increase in promotion activity

1,5

1,0

0,5

0,0

-0,5

-1,0

-1,5

 
  Office supplier     Frozen foods  

Office supplier

   

Frozen foods  Office supplier      

 
 
  Ham/sausage  

Ham/sausage

 
 
  Cheese

Cheese

  Cheese
   

Childrens` products

 

Detergents

  Detergents Coffee

Coffee

 
   
 
Body care

Body care

Potential increase of

 
Bread

Bread Potential increase of    

 

promotion activity

 

Fresh poultry

 
  Snacks  

Snacks

 

Beverages

Beverages
 
Ready meals

Ready meals

 
  Ready meals   Dairy

Dairy

Confectioneries    

Confectioneries

   

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

Beverages 81% Snacks 75% Confectionaries 49% Ready meals 42%
Beverages
81%
Snacks
75%
Confectionaries
49%
Ready meals
42%

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

4 Define a comprehensive promotion strategy Dimensions of promotion strategy Price-promotion strategy model Higher HiLo
4
4

Define a comprehensive promotion strategy

Dimensions of promotion strategy

Price-promotion strategy model Higher HiLo Exclusive pricing As-Is Moderately promotional/ Relative category
Price-promotion strategy model
Higher
HiLo
Exclusive pricing
As-Is
Moderately
promotional/
Relative
category
price
specific
level
Strategy
EDLP
Aggressive pricing
Lower
Lower
Higher

Relative promotion intensity

Client example

Dimension Promotion strategy Objectives • Support low-price image • Improve image and profitability with
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
• Premium and organic products
focus
• 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
Communi-
cation
• Continue primary communication using
leaflets
• Shift TV ads toward image promotions
• Strengthen new media communication
5 Diversify and articulate promotion roles Characteristics and relative importance of promotion roles Client example
5
5

Diversify and articulate promotion roles

Characteristics and relative importance of promotion roles Client example Promotion Characteristic role 5% •
Characteristics and relative importance of promotion roles
Client example
Promotion
Characteristic
role
5%
• Value-oriented products,
e.g., environmentally
friendly, high quality,
newly launched
20%
Image
17%
Image
• Limited discounts
• Supplier-driven products
35%
Profitability
• High-margin products
• Visible store placement
Profitability
• Supplier promotion
funding
78%
• High-volume products
with strong price-
elasticity
45%
Traffic
Traffic
• Discounts to be
cheapest in market
• Supplier promotion
funding
As-is
Strategy
6 Define promotion types Variety and weighting of promotion types Type Primary location “My offers”
6
6

Define promotion types

Variety and weighting of promotion types

Type Primary location “My offers” Targeted promotions Loyalty card push Mobile app push Social network
Type
Primary location
“My offers”
Targeted
promotions
Loyalty card push
Mobile app push
Social network push
• My deals
• My cash rebates
• My lucky draw
„General offers" • In-store display Public ads • Temporary price reduction Mass Direct mailing promotions
„General offers"
• In-store display
Public ads
• Temporary price reduction
Mass
Direct mailing
promotions
• Price-pack deals
Electronic
newsletters
• Rebates/supplier refunds
• Contests/games
In/near store
Away from store

Client example

As-is

Strategy

0%

15%

100%

85%

Margin effect

Margin effect Select the most effective promotions Tactics based on promotion revenue and margin Client example

Select the most effective promotionsMargin effect Tactics based on promotion revenue and margin Client example + - B Optimize 1%

Tactics based on promotion revenue and margin

Client example

+
+
-
-
B
B

Optimize

1%

C
C

Eliminate

13%

A
A

Keep/extend

68%

B
B

Optimize

18%

-
-

Revenue effect

+
+
Lever Action Keep/extend A X • Keep or extend promotions with highly positive revenue and
Lever
Action
Keep/extend
A
X
• Keep or extend promotions with highly positive
revenue and margin effects – e.g., repeat or create
similar promotion

Optimize

X X
X
X
B
B

Eliminate

X
X
C
C

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

xx%
xx%

Share of promotions

8 Negotiate with suppliers to optimize results Negotiation of promotions with suppliers Promotion effectiveness (step
8
8

Negotiate with suppliers to optimize results

Negotiation of promotions with suppliers

Promotion effectiveness (step 1)
Promotion
effectiveness
(step 1)

Historical

performance of

promotion

Customer insights and competitive promotions (steps 2 & 3) • Customer
Customer
insights and
competitive
promotions
(steps 2 & 3)
• Customer

preferences

Competition`s

promotion

patterns

Promotion selection (step 7) Negotiation of promotions with suppliers • Rebates • Marketing funds •
Promotion selection
(step 7)
Negotiation of
promotions with
suppliers
• Rebates
• Marketing funds
• Supply chain
conditions
• Other commercial
arrangements
Optimized promotion plan
Optimized promotion plan

A.T. Kearney framework

Keep/extend promotion

Optimize promotion

• Eliminate promotion Promotion roles and types (steps 5 & 6)
• Eliminate promotion
Promotion
roles and
types
(steps 5 & 6)

Weighting of

promotion roles

Variety and

weighting of

promotion types

Promotion strategy (step 4) • Objectives
Promotion
strategy
(step 4)
• Objectives

Promotion

intensity

Assortment

focus

Discount %

Communication

9 Control the sustained success of promotions Promotion dashboard Promotion sales ( € mil.) +21%
9
9

Control the sustained success of promotions

Promotion dashboard

Promotion sales (mil.)

+21%
+21%

550

Promotion dashboard Promotion sales ( € mil.) +21% 550 575 250 325 475 Last year, actual

575

250 325
250
325

475

Promotion sales ( € mil.) +21% 550 575 250 325 475 Last year, actual Current year,

Last

year,

actual

Current

year,

planned

Current

year,

forecast

Estimateyear, actual Current year, planned Current year, forecast Actual Promotion role (%) 100 100 100 22

Actualactual Current year, planned Current year, forecast Estimate Promotion role (%) 100 100 100 22 10

Promotion role (%)

100

100

100

22 10 68
22
10
68
15 25 60
15
25
60
20 20 60
20
20
60

Image(%) 100 100 100 22 10 68 15 25 60 20 20 60 Profitability Traffic Promotion

Profitability100 100 22 10 68 15 25 60 20 20 60 Image Traffic Promotion share (%)

Traffic10 68 15 25 60 20 20 60 Image Profitability Promotion share (%) +2.5% 15.0 0.5

Promotion share (%)

+2.5%
+2.5%

15.0

0.5
0.5
14.5
14.5

14.5

Traffic Promotion share (%) +2.5% 15.0 0.5 14.5 14.5 12.5 Last year, actual Current year, planned

12.5

Traffic Promotion share (%) +2.5% 15.0 0.5 14.5 14.5 12.5 Last year, actual Current year, planned

Last

year,

actual

Current

year,

planned

Current

year,

forecast

Estimateyear, actual Current year, planned Current year, forecast Actual Promotion type (%) 100 100 100 2

Actualactual Current year, planned Current year, forecast Estimate Promotion type (%) 100 100 100 2 98

Promotion type (%)

100

100

100

2
2
98
98
15 85
15
85
10 90
10
90
Actual Promotion type (%) 100 100 100 2 98 15 85 10 90 Target Mass Last
Actual Promotion type (%) 100 100 100 2 98 15 85 10 90 Target Mass Last

TargetActual Promotion type (%) 100 100 100 2 98 15 85 10 90 Mass Last Current

MassPromotion type (%) 100 100 100 2 98 15 85 10 90 Target Last Current Current

Last

Current

Current

Last

Current

Current

year,

year,

year,

year,

year,

year,

actual

planned

forecast

actual

planned

forecast

Client example

Promotion profitability (%)

+2.9%
+2.9%

22.2

1.2
1.2

22.0

21.0
21.0
21.0

21.0example Promotion profitability (%) +2.9% 22.2 1.2 22.0 19.3 Last year, actual Current year, planned Current

19.3

Last

year,

actual

Current

year,

planned

Current

year,

forecast

Estimateyear, actual Current year, planned Current year, forecast Actual Discount distribution (%) 100 100 100 >40%

Actualactual Current year, planned Current year, forecast Estimate Discount distribution (%) 100 100 100 >40% 6

Discount distribution (%)

100

100

100

>40% 6 5 5 9 16 20 30-39% 59 40 43 20-29% 10-19% 25 23
>40%
6
5
5
9
16
20
30-39%
59
40
43
20-29%
10-19%
25
23
22
13
4
10
<10%
Last
Current
Current
year,
year,
year,
actual
planned
forecast
10 Achieve continuous improvement Stage of excellence in promotion management Area Stage 1 “Basic” …
10
10

Achieve continuous improvement

Stage of excellence in promotion management Area Stage 1 “Basic” … Stage 4 “Excellent” Organi-
Stage of excellence in promotion management
Area
Stage 1 “Basic”
Stage 4 “Excellent”
Organi-
• Individual category
manager responsible for
promotions
zation
• Separate marketing
functions steering
promotions
• Decisions on promotions
Category manager acts
driven by personal
within promotion strategy
experience of category
managers and suppliers
and is able to analyze
details of promotion
performance to optimize
effectiveness
Process
• Individual timing for
promotion planning
• Annual promotion-
planning process defined
• Limited coordination
between categories
• Feedback loop to adjust
promotion strategy and
guidelines
IT/Tools
• Limited transparency on
promotion performance
•…
• Separate systems for
planning, controlling and
reporting
• Integrated IT solution
combining planning,
controlling and reporting
with single front-end
• Performance-Parameters
adjustable to adapt goals
Source: A.T. Kearney

Ranking

Client example

1 2 3 4 - + Competitor Client as-is vtc5rWQkllznQln0Rx 16
1
2
3
4
-
+
Competitor
Client as-is
vtc5rWQkllznQln0Rx
16
We have supported leading retailers on promotion topics in multiple categories Project focus Results Northern

We have supported leading retailers on promotion topics in multiple categories

Project

focus

Results

Northern European grocery 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

Developed promotion strategy • Identified quick wins • Improved margin by 2% of sales • Optimized

Improved margin by 2% of sales

Optimized promotion strategy and

mix

Improved planning process

Western European grocery retailer

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

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

Drew promotion plan selecting the most effective promotions • Improved margin by 1% of sales •

Improved margin by 1% of sales

Aligned pricing with promotions

Implemented controlling dashboard

and new planning process

US movie- and game-rental retailer

US movie- and game-rental retailer

Client situation

Client situation

Large movie- and game-rental company with 2,200 stores

• Lack of insight into customer purchasing behavior led to broad- based and reactive promotions

Lack of insight into customer purchasing behavior led to broad- based and reactive promotions Project approach

• Developed predictive models for: (1) attrition, (2) promotion response and (3) product cross-sell models

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

Designed new promotion program on the basis of predictive model

new promotion program on the basis of predictive model • Improved margin by 8% of sales

Improved margin by 8% of sales

Increased sales by 10%

Reduced customer attrition by 12%

A.T. Kearney is a leading global management consulting firm with offices in more than 40

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 mission- critical issues. For more information, visit www.atkearney.com.

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