With Costs Rising, Those Old Trade Promotion Strategies Just Won’t Cut it Anymore, Adapt Now or Lose Out
Due to recent and ongoing geopolitical factors, including poor crops from 2021, an increase in the price of goods and raw materials was long foreseen, but the increase has exceeded expectations. Beyond knowing about these rising costs, it is incredibly important to understand how the rising costs and prices will affect not only consumer behavior and the FMCG industry in general, but how FMCG companies can secure their profitability with the rising cost levels.
Price Hikes Draw Consumers Attention to Promotions
The Finnish retail chain Kesko did a comprehensive review of the topics and themes that are currently affecting consumer purchasing behavior in Finland. Utilizing data from Kesko's different chains, barometers, and sales data, Kesko formulated a basic understanding of current customer behavior and attitudes in grocery shopping. Heidi Jungar, the Director of Customer Insights, stated that some of the most important things affecting consumer behavior right now are tracking promotional offers, preparing food for several days in advance, and planning purchases more carefully.
As shown below, the Swedish firm Matpriskollen recently conducted a consumer survey which showed that a whopping 83,8% of consumers will be basing their purchases on sale items and current promotional offers. Over 31% of the customers surveyed are planning to start buying cheaper products and brands as well. These trends also show that to cope with rising prices consumers are especially looking for relevant and useful promotions that cater to their needs.
This increased pressure solidifies the fact that promotions have never been more important for brands to secure profitable growth.
Rising Costs of Goods and Inflation Leaves a Strong Impact
When looking at the inflation rates in Nordic countries between January 2022 and May 2022, it’s important to also look specifically at the inflation of food prices. Labeled F&B May 2022 (F&B meaning food and beverage) in the chart below, you can see how high the inflation rates for the food and non-alcoholic beverage industry were in May of this year. For all four countries; Sweden, Denmark, Norway, and Finland, these rates are at a staggering 30-year high.
A deeper dive into a specific product level in Finland multiplies the figures. Over the past year, coffee prices have increased phenomenally as seen in the chart below. According to Analyse² Price Tracking service, the average price of Paulig’s Juhla Mokka coffee package (a standard package of coffee) increased by over 47,5% from January 2021 to June 2022. The average price for the package was 4,48€ in January and rose to 6,61€ in June. This is a significant increase, especially in a country known for consuming the most coffee per capita. This increase is visible in the chart below, where the prices of Paulig's Juhla Mokka 500g coffee packet has been averaged from January 2021 until June 2022. The prices were collected from the biggest retail chains in Finland utilizing the Analyse² Price Tracking service.
Additionally, due to a rough agricultural season last year, agricultural producers were already forced to raise prices by 21% last autumn. According to ETL (the Finnish Food and Drink Industries' Federation), the food industry paid 16% more for production costs last year and sold products at an increase of up to 11%. This is a significant increase as even before the latest increases in costs and prices, approximately 58% of the food industry's costs were directly related to the purchasing of supplies and raw materials.
Trade Promotions Matter More Now Than Ever: Make Them Count
All of these recent studies, reviews, and data solidify the importance of not only maintaining trade promotions but ensuring that they are supporting profitable growth and relevant for the right customer segments.
You cannot repeat the same old trade promotions anymore unless you want to take a losing gamble on profitability.
So how can FMCG brands not only have trade promotions that drive profitable growth but ensure that they maintain customer loyalty? Listed below are some helpful hints aimed at keeping trade promotions thriving even in times of change.
- First, analyze the impact of increasing cost levels on the profitability of your latest promotions by combining all the relevant data sources
- Second, test new promotions to learn how consumers react to higher promotion price points
- Also, try out smaller bundle sizes, this can work well if consumers are not yet used to the new higher normal prices
- Leverage AI solutions to learn from these trials faster
- Simulate the profitability of upcoming promotions with different price levels and trade terms
- Negotiate your adjusted promotional plan with retailers based on insights on changing consumer demand to create win-win deals
Utilizing these insider tips, brands and major FMCG companies can not only combat the rising costs and price increases, but they can solidify their position in the market and drive profitable growth.