Promotions in Saudi Arabia:How to avoid a zero-sum game
Promotions in Saudi Arabia are only seen across modern trade, but in recent times have been so significant they’ve eroded value for both retailers and brands. In this short article, we will use an example category to explain the downward spiral that needs to be avoided, and how to use promotions more strategically.
Due to a challenging economic environment, shoppers in Saudi are cutting down on trips by an average of six per year increasing the pressure to make each trip count. As a result manufacturers have resorted to price promotions to such a degree that over half (53%) of FMCG expenditure in modern trade is now on promotion. This has led to a reduction in value in a number of categories, over 50 categories have increased their reliance on promotions in the last year alone. The pattern works as follows.
1. Challenger brand seeks to increase share
Typically it starts with a challenger brand who wants to increase their market share and runs promotions to attract trial by new customers. This works, but over time trains all customers to buy on promotion. The chart shows that in 2013 only 58% of Saudi shoppers bought on promotion, 37% of the volumes sold. After five years, 58% of the volumes getting bought on promos are coming from 83% of buyers.
2. Price war results
As they see the challenger brand gaining in share, eventually the bigger brands launch promotions. This works in the short term, but cash-conscious customers stock-up at the offer price and then buy less in subsequent time periods. This leads to the eventual failure of the promotional strategy as none of the brands can maintain the loss of value and profitability drops.
3. Volume and value suffer
Following the promotion, both value and volume are reduced for the category as a whole. The promotions have created a new price expectation amongst buyers and it is hard to then increase it again.
For retailers, the challenge is to increase footfall and promotions are effective for them to do this. However, the situation is the same as for the manufacturer, once all the retailers have the same promotions, there is nothing to differentiate them from one another no one really wins.
How to use promotions effectively
Promotions can be an effective tool to encourage new or lapsed buyers to try the brand. However, they need to be used strategically and sparingly. Key things that an effective promotional strategy needs to consider are the expandability of the category, an estimation of the growth in brand buyer share and the historical effectiveness of specific promotions.
While the promotional strategy itself doesn’t impact loyalty, price perception does. Promotions should therefore focus the messages around value rather than purely price.
Another crucial factor is the relationship between retailer and manufacturer. A change instore has the potential to change the norm for the whole category so it is vital that manufacturers and retailers work together strategically.
Ultimately, it’s building the consumer’s connection to the brand which is going to enable gains in the long term. There are many ways to do this and focusing all efforts on just the price promotional lever is missing out in the opportunity to do this properly and build the category in both value and volume terms.