Has a wet summer opened the promotional floodgates to margin erosion?

According to the ONS, grocery inflation fell from 17.7% in June to 14.8% in July. It’s expected to continue falling as we lap last year’s price increases, slowing value and volume sales growth. As a result, manufacturers are increasingly looking to increase volume and drive trade up to sustain growth, at a time when consumption may soften further as shoppers feel the delayed impact of interest rate rises.

This effect has been compounded by poor summer weather. Rainfall was 70% above the July average, and as a consequence our Springboard metric reported a 0.3% drop in footfall, with the high street hardest hit.

The impact of this dampened demand is clear across fmcg. Our total store data showed July’s market value sales were up just 3.8% year-on-year, well below the 13-week increase of 8.6% to the end of July.  As rain stopped play, units went into decline. Beer, wine and spirits, frozen and chilled were the hardest hit sectors. 

Manufacturers turned to promotions to boost volumes. Promotional investment was already on an upward trajectory across fmcg, but in July we saw a stark acceleration. The proportion of volume sold on deal was up by four percentage points on last year and, for the first time, promo deal depths exceeded last year’s, by 0.2pp. Together, they brought about an increase in promotional spend as a proportion of value sales in July, up 0.8pp on last year.

But increasing promotional spend as a proportion of value sales impacts margin and leads to margin erosion, if the promotional volume uplift is insufficient to cover the discount on base sales. Promotional efficiency fell heavily across the summer, meaning investment was ineffective at driving incremental volume, and likely meant manufacturers failed to break even. This may reflect the appalling weather, but it isn’t sustainable and will set alarm bells ringing.

As price-driven growth slows, and manufacturers increasingly look to promotions to drive up volume, promotional competitiveness will likely increase and the demand and cost for display will grow. That means it will be essential to measure uplift and cannibalisation to sustain margin. With a likely surge in demand for display space, it will be critical to develop a compelling category story to secure the optimum space ahead of the competition and hold down costs.

Manufacturers may also look to media investment to stimulate demand and drive brand equity. Like promotional investment, isolating and measuring the direct impact on value sales for each channel is key to optimising the media mix and safeguarding margin.

The rain not only depressed shoppers this summer but manufacturers’ margins too, as increased promotional investment failed to deliver volume uplifts. This provides a timely and salutary reminder to evaluate promotional spend or risk opening the floodgates to further margin erosion.