Just as fmcg manufacturers begin to enjoy a glimmer of sunshine – with ice cream sales soaring by 33% and suncare products up 34% in the latest four weeks compared to last year – economic clouds loom on the horizon. The recent surge in inflation to 2.2% in July and flat GDP growth in June threaten to overshadow these bright spells.
July’s total store value sales performance undoubtedly received a boost from the sunshine, with unit sales rising 1.1% and value sales increasing 3% in food. The beer, wine & spirits and frozen sectors both did particularly well.
However, the likelihood of further interest rate cuts has diminished, meaning the relief from cost of living pressures will be slower than expected. This could quickly dampen optimism among brand manufacturers.
So in the face of unpredictable weather and recent economic changes, what is the winning formula for fmcg brands in the coming months?
As grocery volumes experience modest growth, promotions have come to the fore as an ever more important tool. There has been a significant increase in promotional spending over the last 12 months – up by 0.9 percentage points, or roughly £1bn more than last year.
Over the past 12 months, 68% of branded food value has increased its promotional investment, leading to value sales growth of 5.2% compared to the previous year. Meanwhile, the remaining 32% of branded food value to reduce promotional spend has only seen a 1.5% increase. The difference has been even more striking over the past 12 weeks, during which 72% of brand value has seen increased promotional investment over last year, outperforming the other 28% of branded food value by 8.4 percentage points.
If the case for increasing promotional investment is compelling, then the decision on how to drive promotional efficiency is equally straightforward. Brands that increased their percentage discount depth outperformed the remaining 31% of brands by 3.4 percentage points. Meanwhile, brands that increased percentage of off-shelf volume saw even stronger results, outperforming their counterparts by 8.3 percentage points, making display the clear winner among these bases for driving promotional efficiency and thereby value growth.
Looking at the past 12 months as a whole, brands that increased their discount depth performed worse than those that reduced it. However, in the last 13 weeks, the trend has reversed: brands that increased their discount depth are now outperforming others. This shift highlights that deeper discounts are becoming a more effective driver of value sales growth.
Given the latest economic outlook, if the cost of living situation doesn’t improve significantly in the coming months, we can expect past trends to continue. The formula for growth is clear: increased promotional investment and off-shelf displays are likely to be a safe bet for success.
As always, the devil is in the detail. Manufacturers should assess brand performance within their specific categories and, wherever possible, conduct robust promotional payback evaluation before making investment decisions. This way, they can achieve efficient value growth.
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