Funny story: At the top of the lockdown for Covid-19 in March, my daughter went to our local supermarket to buy a ham for our dinner. The ham was branded (company irrelevant here, but you know them), and attached to the bag was a $5.00 instant coupon. Checking out, the clerk went into a fit telling my daughter she could not use the coupon as no promotion discounts were valid during the pandemic lockdown. My daughter got her way and her discount, but the clerk had the sacker run back to the meat counter and remove all the coupons on the hams. It was at that point she recalled that there was not a single yellow trade promotion shelf tag on any of the products on the now bare shelves.
Growing up in our household, she knew what I did for a living and she knew what a trade promotion was. What she and all other shoppers suddenly noticed was that normalcy was over, and that the practice of high-low trade promotions was suspended due to both the practical issues of pantry-loading mayhem and the social distancing pandemic pandemonium the world’s supermarket chains were now facing.
I was intrigued about how the pricing looked, so I grabbed the last few receipts from grocery shopping and took a stroll through our go-to supermarket – the very same in which my daughter broke the promotion strategy. Items I knew were EDLP seemed to remain stable, with some exceptions. Store brands averaged slightly higher in some cases, however, for the most part no other EDLP items seemed changed. Of course, gone were the yellow trade promotion shelf tags even though most end cap and mid-aisle displays remained in place. No doubt, existing promotional contracts had to be honored, but even into weeks of the shutdown, there were noticeable changes in the end cap contents.
My curiosity led me to a question about the overall impact on both EDLP and High-Low trade promotion the pandemic has as well as this blog post.
It is estimated by most analysts and backed by recent studies that high-low promotional strategy encompasses about 75% of the practices of price discounting. Everyday low pricing (EDLP), as a promotional strategy, does have significant advantages, especially in consumer demand planning, simplified logistics and reduced advertising costs. Where it is especially valuable is for products that are more commodity-based like eggs, bread, and other non-impulse buying products or, for any product sold at Walmart.
This is not going to be an argument for or against EDLP, rather more of an observation of the current Covid-19 condition impact on promotional practices and thoughts about how we may see some changing of the existing EDLP versus High-Low paradigms going forward in a post pandemic world. Supply chain resiliency has become a major topic among CPG industry executives on both sides of the trade channel. Talking with many supply chain, marketing, finance and revenue growth management executives from both suppliers and retailers, I am hearing similar variations of three recurring questions among the many more they all have. While not specifically focused on EDLP, they did bring up issues that were part of the overall conversations around revenue growth management where the impact to both types of trade promotion are concerns.
- Will there be an increase in the percentages of store branded product over brands?
- Should we expect to see an increase in our funding of EDLP and/or High-Low trade spending?
- What impact or alteration should we expect around our demand planning going forward?
For question number one, clarification was produced in the observations of supply chain and sales executives who discussed runs on certain products like toilet paper, protective products like gloves and masks, paper towels, disinfectants, eggs, and bread. One major paper company key account manager told me “Like everyone else, we had our plants running overtime to produce more product, but we faced stiff competition due to offshore and lower quality products the retailers opted for simply because they were immediately available. But, when we could not get our products into the supply chain early on, they set up longer term deals with these lower quality suppliers who had large storehouses of product that they could not sell in a normal market.” This is the reason why we still see some of these brands hanging around the paper products shelves.
“The only good thing about this,” said one brokerage sales rep, “is that we suspended new trade promotions which means I have a surplus of trade funds to plan and execute to hopefully catch up when things get back to normal.”
This was a commonly frustrating theme among the sales reps and key account managers with whom I spoke. From a consumer perspective, I can assure you we experienced the same issue in our household when we wanted our usual quality branded product when the shelves began returning to normal volume. During the first couple of weeks of lockdown, frankly it seemed the consumers didn’t care about quality as much as they did having the products. In our neck of the woods, you stood socially distanced in a long line with your one reward being (a) early entrance into the store before the coming wave of shoppers, and (b) a single package of four small rolls of toilet paper sporting a brand nobody heard of.
The bad news is that we still had to pay for it at check out!
The other side of that coin is the frustration suffered by the retail supply chain executives. The head of supply chain for a large eastern seaboard retail chain said, “Overnight, 70% of our stores sold out of toilet paper, paper towels and even napkins. Our regular branded supply chain emptied the [distribution centers] and we had no other option than to go to a second, and even third tier supplier.” He added, “We even had to drive our own trucks to their warehouses to pick them up because they were unable to get them to us on their own; but at least we had product.”
The question asked, however, was about the potential of a shift in percentage of existing store branded merchandise as a percentage of the shelf. “Not us,” said the category manager for one of the nation’s largest retail grocery chains. “We were able to fill the slots our branded suppliers were unable to with our own store brands, but that was certainly on a temporary basis because we owned the supply chain and could get those products to our stores faster.” He also noted that customers knew their home brands, so there were few complaints. “Our strategy is to protect our branded suppliers’ positions, of course, and we are working hard to ensure safety stock assurance plans for any potential future lockdowns.”
For some of the smaller suppliers, unfortunately, they were unable to sustain the contract due to extended foreign production sources and therefore lost their slots permanently. “This saddens us,” said the VP of Merchandising for a big box household supplies retailer, “but we will be aggressive in helping our good suppliers once they are back on their feet.”
The second question gets closer to the heart of the EDLP versus High-Low promotion issue.
Retailers depend upon promotions to fuel their bottom lines. While there are specific advantages we spoke of earlier for EDLP, the huge median of the bell curve of CPG companies can ill afford to move to an EDLP strategy. They opt for a high-low trade promotion model because they can leverage their own growing consumer demand research, promotion optimization tools and better data to pinpoint the right time, right products, and right store clusters. What is likely to be the case going forward is, perhaps, a longer term promotion calendar strategy with more effort toward collaboration between the supplier and the retailer to include potential tactical fail safe scenarios.
“Our objectives are to ensure we work collaboratively with our suppliers to ensure supply chain integrity and product on the shelf,” replied the head of merchandising for one of the top regional supermarket chains. “We don’t’ anticipate a change in trade funding requirements, rather more focus on using the funding resources and working relationships we have in a more collaborative manner to make sure we are not ever caught off guard again.”
If these actions happen, it effectively accelerates the processes we have been promoting for several years now, and most importantly, extends the value proposition of three-way collaboration between the retailer and the CPG executives from marketing and sales. “It’s all hands on deck,” says the VP of marketing at a global food company. “We want to gain a more intimate working relationship with our counterparts in the sales organization to ensure that we are focused on delivering value to our consumer in a consistent message and positioning. This includes ensuring that our promotions are synchronized [with trade promotions] and that we can leverage the intelligence and insights that enable us to predict consumer demand and respond accordingly across all of our selling channels.”
Question number three is certainly a concern elevated because of Covid-19, but this is an issue that has already caused attention to how the supply chain would, should and quite possible could react to consumer demand across any market condition. The pandemic has exacerbated the problem and created an immediate escalation of tactical action to keep the CPG ship from hitting an iceberg.
One of the stated advantages of EDLP is that it eases the process of demand planning because there are no major variations in pricing, hence no need to focus so tightly on the baselines. During the early weeks of the lockdown, both suppliers and retailers were taken by surprise at how quickly the public reacted with what amounted to panic buying on an unexpected level. The demand plans were trashed. The herculean efforts of the brands to get production line output increased and transportation logistics scrambled to deliver the goods to block-long lines of socially distanced shoppers forced emergency action that resulted in planning no more than the next two days in time.
The lockdowns globally blurred the visibility to even the next month, much less the next quarter of consumer demand. Offices were abandoned and supply chain executives began virtual coordination with many tier one companies lacking the more sophisticated real-time virtual technology to replace the conference rooms. How far out the pandemic was going to stifle supply and demand planning was anyone’s guess. At least with the EDLP model in place, there was supposed to be a built-in consistency in price, but the truth is that most consumers saw spikes that were reportedly as high as a 25% increase in shopping basket. More than likely, most of those increased costs were due to the lack of temporary price reductions like buy one, get one (or more). Now, after more than five months since the beginning of the lockdowns, data is just now coming in that shows the true price impact, so we will have more intelligence soon enough.
Going forward, EDLP is still a solid long term strategy for retailers that operate with this model or suppliers with commodity products. However, what we may now see is the increase in hybrid EDLP where there is an ongoing discounted price, but also where the retailer accepts offers for high-low promotion opportunities as well. This hybrid approach has been growing even before the pandemic; so there is some evidence that, for certain products, it could become even more popular. It has the advantage of the long term stable consumer demand metrics, but also allows periodic tactical promotions to generate increased revenues, clear inventory or introduce new products.
We are still sorting through Pandora’s box of pandemic challenges, and more than likely, promotion calendars will settle down to little overall change. For my money, I don’t think the smoke on the battlefield has cleared just yet, so there may be additional casualties we haven’t counted.