Promotions in the Recession's Wake

The recession the world has just been through is not the first nor last but its severity and length makes its lasting impact very different from most others. Every recession forces consumers to change or suspend behaviour, normally reverting once the worst is past. This time a more permanent change has been ingrained in behaviour and choice, as consumers have become conditioned to seek out value and discounting has become part of their DNA. 

There is in fact a precedent in the American crash of the 1930s, where the change in consumer behaviour was so dramatic that it took a generation to re-adjust back. But no matter how deep or long any recession may be, fundamental consumer aspirations eventually rise to the surface again, as they are now. Austerity may have forced many to cut non-essentials, but throughout the recession the premium and luxury sectors (from LVMH to M&S food) continued to perform strongly, demonstrating that shoppers never lose that desire to aspire.

At the core of brands and retailing over the past 6 years has been discounting and promotions. The recession’s length and severity has seen them become deeper and deeper, breeding a generation of deal junkies, who require a higher dose of discount each time, often expecting and demanding 50% plus. This has driven companies, under extreme pressure, to deliver headline grabbing promotions which start to lack credibility. It’s just as well the recession is turning as this discount cycle looks to be at breaking point financially as well as credibility wise. It’s important to understand some of the key factors that have impacted promotions during the past 6 years. 1) Discounters have become mainstream. 2) Discounting has become deeply ingrained with consumers conditioned to seek out deals. And 3) digital has fundamentally changed the power of the consumer in seeking value and the tools brands and retailers have to deliver it.

Even during the heady boom years, the country was always divided between those who felt prosperous and those that didn’t. However, now there is an additional layer of debt-laden consumer who will be forced to remain in a recessionary mind set. The more fortunate are re-emerging to buy the products and services they desire and aspire to, but are likely to still stay value savvy due to their recessionary experiences. So for some years, there will be a significant cohort for whom price will be remain key, while the rest will need to be weaned off the heavy promotional discounts they have become used to. The difference now is that they are increasingly open to being weaned. 

Some recent examples have shown that it is not easy for brands and retailers to switch into and out of a position of low price and discounting. JC Penny built its middle America success on a positioning of weekly sales and coupons which they attempted and failed to move away from in recent years. Wal Mart tried to do the opposite by moving from its position of everyday low prices to one of discounting but it didn’t resonate with their consumer. So a key challenge is that years of reduced prices and discounts have reduced the floor as to what consumers expect and are prepared to pay. As a consequence some brands and retailers have become so heavily reliant on discounting, and their brand equity so altered, that the road back is questionable and financially it may be far better to recognise the new reality and positioning. For others the time to start reclaiming a more premium positioning and re-engaging consumers emotionally is definitely now, while accepting that the weaning process will not be fast.                                

There is increasing evidence of the impact and damage years of discounting has imposed and that consumers are ripe for a change. As recently as last Christmas retailers such as Fat Face and Next held back on discounts until 26th December and significantly outperformed competitors who price slashed pre-Christmas in a bid to boost volumes. Consumers clearly showed they were prepared to accept that a real deal can only happen occasionally and to value that deal when it comes. Transparency and honesty have been buzz words during the social media boom, and consumers seem to be increasingly savvy and demanding of this across their brand relationships. This behaviour also starts to boost the reputation of these brands and their price integrity, suggesting that the time is right to start reconsidering your pricing strategy. There are decades of evidence that random and frequent price discounting eats away at a brand’s equity, which consumers will take full advantage of before ultimately switching.

These years of heavy reliance on price discounting, coupled with much advertising spend being refocused below the line on promotions, has failed to create much engagement with consumers, leaving a post recessionary challenge and opportunity for brands and retailers. Research has consistently proved that not building your brand’s equity, though advertising and marketing, for more than 6-12 months does long-term expensive damage to future growth. For too much of the past 6 years the battle ground has been at the fixture for short-term sales rather than advertising for long-term brand building. Look at Ryanair, even they are wakening up to this reality. Discounting may drive consumption but this is behaviour not an emotional state which is the ultimate driver of longer term loyalty. But as we have seen with JC Penny, suddenly stopping discounting can backfire so there is likely to be a long transitional state where a combination of value and loyalty building programmes need to be used to re-engage consumers.

While the recession raged, technology and social media completely transformed communication and marketing, giving an increasingly sophisticated arsenal and array of opportunities with which to enhance the consumer experience. Technology has also lengthened many purchase cycles providing more opportunities for promoting, which not only can play a critical role in attracting and holding shoppers, but importantly increasing opportunities to add value and drive engagement and loyalty.

For many, increasing prices for products and services that have been on permanent promotion for years will prove difficult. But the opportunity now is to draw consumer’s focus away from low price through value, provenance, range, quality etc. If current prices can’t be increased then review the opportunity to introduce premium services or enhanced products to drive higher margins. Or shift the discount away from the core offering, as in the car industry where the finance is discounted not the car.

The end of the recession may see a real shake-up in the promotional landscape, as unrealistic promotions start to backfire and we see a shift away from finding the cheapest to finding the best value. Years of over promotion have made consumers discount dependent but also savvy to what’s real and increasingly wary of what’s not. While promotional appeal is not going away any time soon, the end of the recession and digital technology offer the opportunity to start to build experience, equity and premium back into your products and services.