The abolition of fixed retail pricing in the 60s saw power slip overnight from the brands to the retailers. Since then, stores have squeezed their suppliers with the development of own-brand products and trade discounting.
But every now and then, worms turn: last month, Johnson & Johnson (J&J) did exactly that with its decision to pull £12 million out of trade (price) promotions. Given that retailers command the high ground on the brand owner/supermarket battlefield, it's a brave move. The final arbiter of the lifespan of any product is always the store that decides which brands it allows to use store space for branded promotions and point of sale.
Brand erosion
J&J, with its predominantly health and babycare-related products, is a well-known brand with plenty of consumer trust. Yet, as with many FMCG brands, this strength is being eroded by own-brand. And the fact remains that price promotions shift product, delivering obvious advantages in-store. So by taking cash out of BOGOFs, "twofers", money-offs and such, brand owners could be biting the hand that gives them shelf space in the attempt to achieve more strategic in-store marketing.
Ian Billington, founder of Tesco agency Billington Cartmell and himself a former Mars marketer, describes J&J's position as a "classic trap. J&J is in a position where there's no significant difference between own-brand and its rival brands," he says. "That's a place no brand would want to be because that's when it becomes a commodity with no point of difference. It's a real challenge to get around."
In Billington's view, a brand that cuts back on trade promotions needs to create a clear rationale about why it is different. He cites Green & Black's as an example. Although owned by Cadbury, the organic chocolate marque has based its proposition around quality of ingredients. As a result, consumers are willing to pay more because they trust in that proposition, which is a major factor in why it has been insulated from the pressure to discount.
But the idea that supermarkets are indiscriminately demanding cut prices from brand owners is wide of the mark. According to AC Nielsen, around 25 per cent of the average shopping basket contains discounted goods, which still leaves three-quarters at full price.
Nick Gladding, retail analyst with researcher Verdict, dismisses the notion that all retailers are killing brands' profit-margins on behalf of bargain-hungry consumers. "Such promotions are important for driving footfall, which is especially important at a time when consumers have concerns about budgets and interest rates," he says. "But the trick for retailers is to have promotions on certain products and then make it look like everything is cheap. Sainsbury's is a good example of a retailer that does this well because it can't compete directly on price with the likes of Tesco and Asda."
Kellogg sales development manager Robert Suth agrees. He says: "It's very much a moving target with retailers and discounting. Retailers that perform well don't tend to discount. Those who don't will look for a good deal (with suppliers).' Suth argues that every retailer uses different strategies, but he admits it's a challenge to defend brand equity and retain control on how products are sold when the retailer is the brand owner's sole route to the consumer.
There's no doubt price promotions hit profit targets while shifting volume. But the flip side if too much is invested in this route is the erosion of a brand owner's greatest asset, the brand itself. Suth says the bulk of Kellogg's marketing strategy is based around the strength of its brand portfolio. A prime example is Special K with its flavour varieties and promotions based around dieting clubs. Balancing that is Corn Flakes, which sits on a more commoditised shelf and therefore adheres to a more price-based strategy.
Retailers can't afford to take any prisoners. There are codes of conduct in place to stop space being sold outright, but it is inevitable suppliers will be the first to be hit as retailers vie to be the cheapest.
However, the UK's largest supermarket chain denies that a brand pulling money out of price promotions would result it losing shelf space.
"It wouldn't affect promotions," insists a spokesman for Tesco's FMCG management. "We work over the year with a strict agreement on what goes where. Certain promotions might have a set place and might be moved once it has ended, but there's no bargaining. Promotions are a good thing for brands because they help drive sales."
In practice, however, the boundaries are unclear. One senior marketer with a top three retailer says that spats between retailers and brands are fairly commonplace and retailers will often flex their muscle to rein in the brand. "It's a tactical fight, and it often happens," he claims. "We're not allowed to sell space, but one way or another we do. If a product is not supported by trade (price) promotions, then you won't get an additional line. It comes down to the fact that the retailer will use them (brands) to protect profit."
He cites an example a few years ago where a leading supermarket threatened to delist Nestle products over a pricing argument. The store actually went through the motions of looking at buying Nestle products from Canada on the grey market, but was stopped by EU trade rules and eventually the row fizzled out.
Clearly, brands walk a tightrope. But if J&J is taking a chance in slashing its price activity budget, it should be heartened by the history of other brands that have ploughed cash into price pushes in-store at the expense of wider marketing activity, and subsequently had to switch quickly back to brand-building.
Chief among these is Heinz, which hasfrequently dabbled with shifting its marketing budget to price activity, most recently in 2005, and then had to come back to brand-building, such as its Win a House promotion.
Endless cycle
For J&J specifically, the move could well be cyclical. It is worth noting that, between 2004 and 2006, J&J's marketing budget according to AC Nielsen had fallen by almost a third. Now, this latest move sees the brand owner once again committing its higher 2004 budget to marketing. How J&J uses this surplus to tackle the challenges it now faces will determine whether its marketing future will be built on its brand, or whether it is forced to return to strategically thankless price promotions.
ON OFFER - FAVOURITE DEALS
According to industry estimates there are around 140 different types of trade promotion. Here are some of the most popular:
Multi-buys or BOGOF deals: the favourite promotion. However, the question for many consumers is what determines the original price
Listing allowances: where the brand pays tobe stocked. This can give the brand access to impulse purchase areas around the check-outs and gondola ends
Promotional price support: money-off deals that are paid for by the brand
Displays: the brand will divert marketing spend to pay for in-store advertising, such as window banners or in-store TV through the supermarket's own media centre
Volume payments: the retailer receives a rebate from the brand for hitting sales targets.