In other words, by having these wacky “Save 50% promotions”, consumers ultimately will pay more for their groceries. In the course of a year we raised regular shelf prices to generate a “war chest” of discounting funds. The other option is to raise prices to generate more margin to fund these crazy discounts. Reduce the quality of the direct materials? Yes, these can and have been done at Arnotts (tried a Scotch Finger brick–I mean biscuit–lately?). What options do they have here? What would you do if you were faced with the demand to participate in this discounting? Well, you need to make the product more profitable.Ĭut costs? Beat up suppliers? Well, that can be fun too. They will scramble to run economic modelling off the millions it will cost to participate in the mass consumer bribery called “50% off”. What happens to the management at Arnotts? Well, they will be smiling for the cameras about the wonderful partnership they have with the retailers, but it won’t be peace and love inside the Arnotts office. The offsetting margins will more than pay for the profit I forego on the Tim Tams. In other words, I can get you to buy other products at full price by enticing you in with cheap Tim Tams. But why would anyone do this? Sell product below cost or below what is required to break even-and regardless of how much extra volume is purchased, no profit will ever be made because it is all below variable cost? The answer lies in the enormous gains the retailer will make as the increased consumer store traffic will result in shoppers buying a basket of goods that is, on average, valued at $100. Now, Woolworths may agree to fund this promotion and meet Arnotts half way so that they both take a hit to their gross margins. If your 5th grade maths is working, you can see that Arnotts have a loss of $0.88 cents on this deal, since Woolworths have a policy of fully-funded promotions. Woolworths want to offer consumers 50% off–in this case, a savings of $1.63. So Arnotts’ cash gross margins (the margin BEFORE they pay selling, general and admin expenses) is about $0.75. It will cost Arnotts approximately $1.20 per packet to manufacture. Normally, Woolworths will buy these Tim Tams from Arnotts for $1.95. Woolworths want to run a “Save 50%” campaign to keep competitive with the Coles “big red hand”. Let’s say a packet of Tim Tams sells for $3.25, as it does in the catalogue picture linked to this article. So when the price promotion is employed they make no money and often a loss. Most suppliers run on gross margins of 40-50%. The effect on the supplier’s margin is a pure economic disaster. The supplier effectively compensates the retailer for any lost margin due to the price special. ![]() What does that mean? It means that Woolworths still make the same margins they would have made at full price. Here is the reason why they can keep these catalogue specials running week after week, offering 50% savings: They are funded entirely by the supplier who makes the product. Why? Because they get to sell all these great brands at up to 50% discount and have enormous store traffic to drive sales and margins as consumers buy the specials–and then top up the trolley with full-priced and high-margin products such as personal care goods. Retailers like Woolworths and Coles love price promotions. The amount of product that is purchased on price promotion is about 30% more than regular weekly sales or baseline sales, as they are known in the industry. Here are some interesting statistics about food retailing in Australia: Over 50% of all product is sold with some kind of deal or promotion (save 20%, buy one, get one free, etc). One thing that stood out was the reliance of the entire industry on price promotions. There were many quirks about food marketing: It is a complicated story to take biscuits from the oven, into a packet, onto the shop shelf, and then eventually home onto your household shelf. It was also the end of an era, as the Campbell Soup Company mopped up the last of the share register to take full ownership. It was a great time to be in the biscuit business, with 18% EBIT margins generated from 50% gross margins. ![]() I started analysing the prices of products like Tim Tams back in the mid-1990s, when I was the first dedicated pricing manager for Arnotts biscuits-and possibly in the Australian FMCG industry overall.
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