Items on sale aren’t about to expire
Friends and family offer me lots of opinions on why supermarkets put a product on sale:
- That’s how they get rid of spoiled (or soon to spoil) products
- The store bought too much and needs to move the product
- It’s a form of price discrimination (in the economic sense)
- The supermarket wants to steal customers from its competitors or otherwise pull them into the store
- It gives the routine errand of shopping some excitement
- Encourage shoppers to try new (and maybe more expensive) items
- The store raised the price last week, and now they cut it to pretend there’s a sale
- Loss leaders are placed out front to drive store traffic
There’s almost always some form of conspiracy baked into these suggestions. And there’s a little bit of truth to some of these.
But what I (almost) never hear is this one: A manufacturer paid the supermarket to put it on sale. And that’s the right answer most of the time.
Several studies I’ve seen (Nielsen and Acosta in various years) peg the amount spent on these discounts at 15% of the wholesale value of goods. These discounts (and some other similar spending) are commonly referred to under the umbrella of trade marketing or trade spending — that is, funds spent to support the retail trade.
For some perspective, a company like Kraft spent 6.5% of revenue on advertising in 2010 (with a goal to grow to 8%, but that might be on hold). I don’t know what Kraft spends on trade marketing – though it’s probably available in one of their publicly available reports – but I’d gamble it’s in the vicinity of 15%, if not higher. Given the amount of money spent on trade marketing, and that it’s a multiple higher than what’s spent on advertising, I’m always surprised that it doesn’t get more attention.
It’s a realm ruled by spreadsheets and other quant jocks — not the kinds of characters you see on Mad Men.
And a good trade marketing strategy can drive many more consumers to buy products on shelf than a good advertising campaign.
(Thanks to Lee Semel, Dave Hou, Dave Grossman, Sara Wasserman, Ari Appel, Elizabeth Christman, and Alex Tse for their thoughts on why supermarkets put stuff on sale.)