Constant sales promotions can harm retailers in the long run
With household disposable income growth slowing since late 2013, and actually declining since early 2018, consumers have been under immense financial pressure.
As the financial position of consumers has deteriorated, they were forced to cut back on expenditure, both in the volumes they buy and by down-trading - buying cheaper brands or private-label products.
Discretionary spending for holidays or big-ticket items, such as cars, TVs and household appliances, were the first things consumers cut back on. For example, 21 percent fewer cars were sold in 2018 compared with 459677 sold in 2014, said Electus Fund Management equity analyst Damon Buss.
Investec economist Kamilla Kaplan said in a note that in the first quarter of 2019 growth in retail sales slowed to 0.9 percent year-on-year (y/y), from 1.2 percent y/y in the last three months of 2018. And growth in that quarter was already significantly lower than the 5 percent in the same period a year before.
“Based on survey evidence, a meaningful rebound in (the second quarter of 2019) is not expected,” she said. She did, however, indicate that she and a number of other economic commentators were expecting a 0.25 percentage point interest rate cut this week, which tends to be positive for consumer spending growth.
Nielsen Connect managing director Kerith Botha said their research showed that South Africa was a nation of “promotion-obsessed shoppers”.
A newly released Nielsen report shows that 75 percent of South Africans claim to know the prices of the grocery items they buy and notice changes in price, versus 69 percent in 2017. Thirty-one percent actively search for promotions and 16 percent go as far as changing stores for a brand they prefer, based on the best promotions on offer.
“The intensity of discounting becomes apparent when one considers that in 2018, 30 percent of the total volume of products in South Africa were sold at a discounted price. This has increased by 3 percent since 2017,” said Botha.
“What concerns us most is retailers are starting to acknowledge that it will be extremely challenging to get South African consumers to buy full-price (that is, no discount) goods, given that they have been trained to only buy on promotion from the years of discounting,” said Botha.
Buss said, however, that a number of retailers they had spoken to had stopped or significantly reduced promotions, because consumers were under so much pressure that the lower prices were no longer stimulating additional volumes.
“This is the reason why so many of the promotions have been loss-making, as per Nielsen's statistic that 67 percent of promotions haven't reached break-even,” he said.
Two other drivers of increased discounting or buying on promotion have been greater price transparency, and the entry of international apparel retailers into the local market, which have different promotional strategies than local retailers - that is, the international retailers like to have a small percentage of stock permanently, while local retailers, who traditionally preferred a few big promotions in a year, have had to adapt with more promotions.
“The danger with this is that, for manufacturers and retailers alike, promotions can be a double-edged sword,” said Botha. “Promotions may bring consumers to the store and result in temporary pick up in brand sales and volumes, but the long-term impact was more severe and could lead to loss of brand and store equity,” said Botha.