EDLP is the right strategy, but retailers and suppliers are stuck on big promotions

Date: May 28, 2020
Author: David Sables is CEO of Sentinel Management Consultants - sales negotiation advisors to leading fmcg suppliers
Source - The Grocer

Covid-19 crisis pricing is an interesting one. Particularly savvy shoppers have noticed their normal basket jump as much as 25% – not because prices have gone up, but due to the lack of their beloved promotions.

It’s logical that during crisis shopping, price promotions need to be dropped to ease the burden of surges on promoted lines. However, price cuts and multibuys define the retailing model of the major chains, and it is delicately balanced with budgeting through the suppliers who fund them.

Theoretically, promotion budgets ought to be diverted into ongoing price for a smooth everyday lower price, or EDLP. Have you had the Covid-19 EDLP talk yet? Most suppliers have. This is where the buyer justifies a demand for a cost price cut to fund EDLP, and ease logistics during the crisis. But the supplier budgets to fund this consumer compensation have been eaten up by the higher cost responses in the socially distanced marketplace – not to mention the fact that huge foodservice channels have simply disappeared, creating huge budget pressure.

This disruption has raised the question about how we promote going forward. Many forget the history of EDLP: remember ECR (efficient consumer response), the industry movement to drive returns through efficient demand and supply. Category management studies at great expense showed how to do it right on promotion. Whilst that all feels very 90s, the principles are still right.

On categories where loading the household doesn’t lead to higher consumption (such as toiler paper, soap powder and toothpaste) big promotions shouldn’t be run, as they incur huge logistical costs and make no difference to the income from the category. These should instead keep an ‘everyday low price’. On the other hand, with expandable categories like snacks and drinks it is more forgivable to promote. So, 25 years ago ‘de-escalating’ big promotions towards EDLP was all the rage. It got some traction globally, but it didn’t work in the UK.

Knowing that it’s the right thing, some hope EDLP will stick in place post-pandemic. Not a chance. Major retailers don’t want this: over 50% of the market is own label and EDLP brings brands closer to own-label pricing, therefore diluting retailer margin when switching occurs. And don’t forget EDLP is the model of Aldi and Lidl, so they would immediately lose one of their differentiation levers, accelerating the pace of their losing battle.

And for suppliers, no matter where the market settles on low price, the volume opportunity still exists and suppliers cant resist the tactical share steal of a big promo. They don’t care if it doesn’t drive category sales – it drives their brand. Furthermore, no supplier will unilaterally lead on EDLP while allowing their competitor to promote on, and co-ordinating the industry on this is a bore and a delusion.

Here are three reasons to ban big promotions altogether: even when they work well, there is a tendency to feed health and obesity issues with snack-type foods; dealing with buyers has far less friction – partly why Aldi stays top of the GCA suppliers’ favourites list; and sales teams have become promo-booking monkeys, so we can turn them back into business drivers.

So please: let’s not have another round of expensive strategic drives for EDLP. It’ll never work.