We have trained consumers to look for deals and discounts in food and beverage. That is a reality. It is an unfortunate reality because it can devalue products. Retailers work to drive traffic into stores and sell product to consumers in their stores. Discounts are a big part of most retailer’s strategy and they expect suppliers to reduce prices to make their offers enticing.
In almost every category promotion is part of the game you have to play.
If you are going to sell into retail, you need to be prepared to offer ‘a program’ to your customers that will fit their strategy and support their objectives.
When you develop your program, you need to understand the initiatives being employed by each of your customers. For example, at Sobeys you need to consider Air Miles, in store specials, ad opportunities and theme promotions. If you are selling into Walmart, you can participate in roll backs (similar to an instore special) or ads. Every retailer has their own beliefs about what is most effective. You should learn about their expectations and have the program ready for each customer. When we say learn about their expectations, we mean the duration of the program, the level of discounting expected, the method of payment for the supplier and other details.
We suggest you create an annual calendar for each customer. Consider when it is the best time to make the investments to maximize the results.
Once you create your calendar you need to understand what it will cost. It is exciting to offer discounts to drive sales and your customers will be happy, but you still have to pay the bills. Do not fall into the trap that the extra volume or production efficiencies will just make up the difference. This can happen but you really have to experience some incredible efficiencies or volume increases to support a 15% discount. Consider the following examples:
In some cases, a volume increase will result in better efficiency and a lower product cost. If you can improve your product cost by 5% and reduce it to .76 per unit then you need to sell 22,222 units to deliver $2,000 in profit. Now you require a 122% increase in sales to generate the same profit.
If you discount your price by 15% your profit per unit decreases to 5 cents/unit. If you do not achieve any efficiencies to lower your product cost, you will have to sell a lot more. You need to sell 4 times the volume or 40,000 units to generate the same amount of profit before the discount.
In other words, a 15% reduction in selling price needs a 400% increase in sales to generate the same profit.
The sales lift required to generate the same profit increases exponentially relative to the level of discount. It is too easy to get caught up in the game of lowering prices without understanding the impact on profit.
The plan should be to get some efficiency from some volume increase and you need to determine what those numbers are.
If you want some help to figure this out join us for our Recipe for Success presented by FCC on Wednesday October 21 at 2pm Atlantic (1pm eastern).
Last week we shared some of the secrets of retail pricing, category margins and retailer profitability.
If you missed our SKUFood Recipe for Success presented by FCC last week you can view the replay here.
Did you notice Walmart have stopped price matching on other retailer’s ads? This is important in the retail landscape. It could be a sign Walmart are very confident in their price position.
Every retailer will expect you to offer some discounts. Part of your job is to keep them happy while delivering the bottom line you need to keep your business successful. There is no magic answer and it is something you need to be prepared to work on all the time!
If you want to talk about the numbers or need some advice just send me an email at Peter@SKUFood.com or give me a call at (902) 489-2900.