S/4HANA Grocery Retail Blog part 4
By Dirk Dreisbach and Dmitry Melnik
Part 4: Promotions in Grocery Retail
This blog series focuses on grocery retail and the main challenges the industry faces today. Given the positive feedback we received on the first three series, our blog continues. Using concrete customer examples, we continue the theme of succeeding in retail, and start our examination from the end consumer viewpoint.
The relevance of (price) promotions in times of increasing costs and inflation
Mia is sitting in front of her laptop checking the latest promotions from the grocery stores close to her home. It’s her lunchbreak and she is putting together a shopping list of price promotions for the most regular food items her family consumes during a week. It’s a tedious task, but for the two years she has been working as a freelancer, and with increasing energy costs and inflation in the US, she and her husband Benjamin have to pay more attention to their weekly household budget. Compared to other families they still have an above-average income, but to keep their lifestyle in Chicago they have to save money by limiting their number of shopping trips and focusing on promotions and price offers.
Shortly before the shopping list is complete a message from her local grocery shop pops up on her smartphone, offering $30 off for the first three delivery or pickup orders. Doing the math, she is calculating their savings and decides in favor of the delivery service instead of in-person shopping. In addition, she will get a price reduction of $30. “Hey, that’s a deal!” She puts away her shopping list and instead orders online.
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For many decades, consumer product companies and grocery retailers have used “promotions” to attract consumers and to establish long-term relationships. In the literature, the term “promotion” usually refers to marketing instruments helping retailers and consumer products companies to increase their sales volume or turnover. Under this wide definition most kinds of product and packaging changes, advertising measures, variations in article placement, and further point-of-sale (POS) campaigns can be assigned the term “promotion”. More narrowly defined, promotions are equivalent to short-term, advertising-supported price reductions. With these price promotions, the regular shelf prices of selected articles (or even complete shopping baskets) are significantly reduced for a pre-defined campaign period and accompanied by an extensive advertising campaign.
For the correct assignment of the term, it is also crucial to understand which level in the sales channel has triggered the promotion and how the key stakeholders are interacting with each other. In food retail, a general distinction can be made between promotions initiated by consumer goods companies and promotions planned and run by grocery retailers. Addressing end consumers directly and independently from each other, these campaigns are called “one-stage promotions.” Examples are price reductions for private labels on the retail side or online raffles published on the websites of consumer products companies. On the contrary, if there is any form of cooperation between retail and the producing industry, this is referred to as “two-stage promotions.” Typical examples are flyers or newspaper campaigns from grocery retailers where articles or product bundles from a specific consumer goods company are promoted or marketing initiatives where consumers e.g. can gain bonus points on consumer products homepages and redeem them on retail level (see figure 1).
Let us look at the retailer-initiated one-stage promotion. Here are few examples of the Walgreens promotional coupons to end consumers:
Currently, Walgreens is the largest retail installation of SAP S/4HANA:
- Almost $133 billion in revenue in 2022 (source: company’s 10-K report)
- 9,000 stores
- 450,000 employees
- Over 100,000 active users including Stores / Corporate
- ~13 million POS transactions processed through the SAP Customer Activity Repository every day
- 45m handheld (from within the store) calls to SAP each day
- 2.5 billion item / store combinations
- SAP solution is a fully integrated solution covering Finance, Master Data, Pricing & Promotions, Supply Chain
If you recall Mia’s preference for delivery options, here an interesting fact: Walgreens completes over 10 million curbside or delivery pickup orders, supported in part by real-time inventory visibility through SAP CAR.
On the other hand, two-stage promotions imply some coordination between the retailer and its supplier, consumer products company. Here is typical two-stage or CPG-Retailer coordinated promotion. As noted in our discussion of the promotion methods, in this case
- Consumers purchasing $15 worth of qualifying Coca-Cola products –
- Can receive a $5 Walmart digital gift card.
- Customers can validate their purchase through Walmart’s promotion microsite and redeem their card.
In this blog we focus on these two types of promotions: one-stage and two-stage. To be more precise, they make up three types of promotions: promotions initiated separately and run independently either by the retailers or by CP companies, as well as common promotions planned and conducted in close alignment between grocery retailers and CP companies.
Promotion focus on fast-moving product categories and established brands
Of the diverse product categories that are offered by grocery retailers and consumer products companies, not all are equally suitable for use as promotions. If product groups are rarely purchased or are only important for a smaller group of consumers, a price reduction with the associated communicative and cost-intensive effort is usually not worthwhile. When selecting their promotions, the majority of grocery retail and consumer products companies rely on high-turnover and fast-moving product categories which attract a broad range of consumers.
When analyzing different promotion categories there is a large number of “advertising classics” among the product groups with which the highest promotional sales are achieved. Some of these “traditional” promotion items are used in effective advertising for decades. In particular soft drinks, hygiene items, sweets as well as beer, wine and spirits have all been the key pillars of a successful campaign since the 1950s. Even today many consumers know which articles are meant when talking about “the real thing” or the “king of beers”. If such established brands are included in the weekly campaigns and offered at attractive prices, a great response from customers and a high frequency in the sales outlets of the related grocery retailer is almost certain.
Colorful diversity – different types of (price) promotions
Thanks to the product designers and managers in the consumer products industry and those responsible for marketing in grocery retail, a large number of different promotion types have emerged in recent years. Especially the category managers in charge for the leading brands use these opportunities to change the price, content and/or volume as well as the packaging of their established standard product for a limited promotion time. But grocery retailers also increasingly offer their private labels in a wide variety of promotions in order to modify their standardized shelf items to increase consumer attention.
The different types of promotions are primarily variations in the number of items, the packaging size, the filling quantity or the packaging layout. Depending on the product, ingredients or flavors can also be changed for individual campaigns. Typical examples of this are body care products that are offered with a special fragrance, or a chocolate brand that is being expanded to include a new taste for a special period (e.g., a new coconut mix in the summer months).
The various types of promotions can simply be divided into those aimed to “fill up (household) stock,” so the purchased products will be consumed over a longer period of time, and those that support “test purchases” for a new product launch or as an alternative to the previously preferred product. There are also “classic” price-offs, in which the products remain largely unchanged and only the price is reduced during a pre-defined campaign. In general, there is always a price advantage for the buyer, regardless of whether this is expressed in an increase in quantity, in discounted special sizes or simply in a price reduction for the original product.
Promotions aiming to “fill up (household) stock” are offered as multi-packs, product bundles, larger packaging sizes (e.g., “family packs) or more-fills (e.g., “+20 percent”). All of these formats have in common the “usual” purchase amount being exceeded when only one promotional item is bought. This means: if a consumer buys such a promotional item instead of the normal product with the “standard” filling quantity, stocking “at home” occurs automatically – with the same buying rhythm.
This “stockpiling” aspect occurs most clearly with multi-packs or product bundles. These promotion types contain two or more standard products of regular size or combine further standard products into a “bundle” (e.g., double packs of shower baths with a content of 250ml or a bundle of cola bottles with different flavors). In certain forms these multi-packs or bundles can also be supplemented with products from the same product category. For example, a new launched after-sun lotion can be added to a multi-pack of sunscreen.
Here’s an example of the multi-pack sunscreen from Edgewell Personal Care at Walmart. Both are SAP customers.
The advantages for consumer products companies and grocery retailers are obvious. Especially multi-packs and bundles lead to higher sales per individual purchase and might also support further cross-selling. Negative side effects might be an expected drop of sales (post promotional dips) in the following weeks due to the stockpiling aspect, when the products “stocked” at home have to be consumed first, before there is a new demand.
In the case of promotions for “test/trial purchases”, the content or the packaging size normally deviate from the (later) shelf product. These promotions are usually designed in such a way that the contents of the packaging are significantly lower than the standard filling quantity. Such “try-out promotions” are intended to attract customers and – ideally, after having tried them for the first time – convince them to become their preferred standard product. Promotions for “test/trial purchases” are primarily used for new product launches or to establish new product variations and are either offered in “trial packaging sizes,” as cash backs, or sometimes even as “giveaways”.
Here are two examples from Peet’s Coffee, an SAP customer:
The first shows promotions to first-time subscribers (online purchasers of Peet’s coffee) and the second one represents redeemable points to first-time purchasers.
Classic “price offs” are reduced-price offering of the standard item and – in a broader definition – include also in-pack and on-pack promotions. As a rule, the number, content and packaging size of the standard product remain unchanged. In the case of in-pack or on-pack promotions, an additional product or service is added to the promotional item that may already have been reduced in price. Well-known examples are children’s toys in cereal packages. On-packs may have movie vouchers or free video game download codes attached to the standard product.
In practice, there are a high number of mixed forms. If classic price-offs are combined with discount and volumes sales (e.g., granting a further price reduction once a certain purchase level has been reached), they can also be seen as “stockpiling promotions.” On the other hand, “price offs” might be suitable for trial purchases in certain cases.
Close interaction and dependencies between consumer goods and grocery retail industries
If you look at the range of products advertised through promotions, it becomes clear that branded products dominate the leaflets, online offers and flyers of the large food retail chains. In many established markets, the proportion of promotions with branded products reach 90 percent or even more. In addition, some retailers launch their private label brands thus increasing the price pressure on the branded goods. Considering these factors, it becomes apparent that consumer goods and grocery retail companies have to cooperate up to a certain level. Only thanks to the established brands it can be guaranteed that the advertising will be noticed by a broad group of consumers and that the range of promotional items will be perceived as attractive. The consumer products companies in turn need grocery retailers to place new products at their points-of-sale and to secure the competitive position of their core brands.
Although consumer goods companies and grocery retailers both have an interest in the jointly planned promotions being successful, the actual objectives differ significantly. While retail companies are primarily running promotion campaigns to increase frequency of visits/purchases and to optimize cross-selling initiatives, consumer goods producers usually see expanding or securing their market share as their primary promotion goal. So, when selecting, placing and pricing promotions there are always conflicts of interest between consumer products and grocery retail companies which must be resolved in the course of an optimized promotion management process.
SAP offers a solution portfolio for consumer products and grocery retail industry
Considering the importance of price promotions for consumer products as well as grocery retail, SAP is offering a broad solution portfolio for both industries. Due to the close collaboration with leading consumer products companies and grocers worldwide, SAP has gained a lot of experience in understanding the most relevant market requirements and needed functionalities and has continuously developed and adjusted its related solution landscape.
Price promotions in the grocery retail industry
In grocery retail, price promotions are mainly planned, executed and monitored by Category Management. The key objective of Category Management is supporting the company’s strategic goals defined in the different planning cycles. Here the decision is made:
- what kind of promotion
- in which communication channel
- at what time period
- to which specific price
Balancing these factors can achieve the expected targets best. However, before the advertising material (e.g., online campaigns, newspaper inserts, leaflets or flyers) reaches potential customers, a number of different steps has to be coordinated and carried out.
Today SAP solutions are supporting the promotion process during all stages: from promotion planning and development to layout design and the distribution of the advertising material through to pricing and finally to measuring the individual success of a campaign. Here it is important that all solutions are seamlessly integrated into one system to ensure a smooth and error-free interaction between all process steps. In the next sections the most relevant SAP solutions, including their key functionalities are described.
SAP Promotion Management (now part of the SAP Customer Activity Repository applications bundle). Link: SAP Customer Activity Repository applications bundle | SAP Help Portal
SAP Promotion Management (PMR) provides a comprehensive tool for the planning, managing, and analyzing of promotional events. Retailers can streamline their promotion processes, access real-time data, and accurately assess the impact of their promotional strategies. It helps to optimize promotion effectiveness and profitability through better planning capabilities. It is also important that SAP Customer Activity Repository (CAR) gathers various transactional data from various sources such as different applications. Then SAP Promotion Management uses such data stored in CAR. Here is the conceptual representation of the promotion (i.e., merchandising and marketing) process flow:
Figure 2: Promotion Process Flow
With SAP Promotion Management and integrated analytics, grocery retailers can plan target-oriented promotions for their customers based on forecasts and market trends, ensuring increased revenue and profitable sales. The application is a mature offering by SAP to support these main functions among others:
- Create a coupon represented as an offer that can be provided to the consumer for later redemption
- Create a promotional advertising vehicle which includes multiple promotional offers which can vary by geography
- Define a promotional offer that can vary by location and language
- Detailed definition of a promotion by type (percent off, amount off), by tactic (flyer, in-store, end cap), and with incentives (coupon, points)
- Export advertising vehicles to XML to be consumed by agencies for final production
- Exchange data with SAP Marketing cloud for digital marketing, SAP S/4HANA Retail for merchandise management, Omnichannel Promotional pricing for price activation through GK Omni POS
- Manage all of your promotional activity in an easy and convenient set of modules using the FIORI user interface
- Create what-if simulations to predict financial performance
SAP Promotion Management gets all data and necessary integration from the Demand Data Foundation module of SAP Customer Activity Repository (for example, for the pricing data) and leverages the Unified Demand Forecast (UDF) which can provide forecast to PMR. With the SAP Customer Activity Repository as the platform of SAP Promotion Management, the same data integrity can be ensured across multiple consuming applications.
Take the example of a typical grocery retailer such as COOP in Switzerland (link). They run promotions on all their 60000 items throughout their thousands of stores. The retailer implemented UDF in order to precisely plan their food quantities during promotion campaigns which also allows COOP to minimize food waste (see Forbes article and COOP’s SAP Innovation Award deck as well this video in which COOP’s executive describes, among other things, the imperatives for effective promotion management).
Here’s conceptual flow diagram of the SAP CAR including PMR, UDF, DDF and other related components of a typical retail IT platform.
Figure 3: SAP Solutions for Integrated Promotion Management
Our customers utilize these solutions to manage their promotions. For example, Dutch retailer Jumbo Supermarkten learned that promotion campaigns, while supporting revenue, may increase food waste given overstocking. In general, assessing and meeting consumer demand amidst promotional campaigns presents significant challenge. Utilizing SAP solutions, Jumbo expects to see 1% increase in turnover and 10% reduction in food waste. You can review details of Jumbo’s transformation here: link.
Additional SAP solutions supporting the promotion process
SAP Omnichannel Promotion Pricing Service (OPPS): Contributes to making detailed product and service prices available in real-time across all sales channels. It provides a centralized platform to manage complex promotional strategies, discounts, and pricing rules to offer consistent prices across all sales channels. This ensures customers receive the same promotional offers and benefits no matter where they choose to engage with the brand, which significantly enhances their shopping experience.
SAP Retail Promotion Analyzer: This tool allows retailers to measure and analyze the effectiveness of their promotions. Retailers can determine how different promotions have performed, understand their impact on sales, margins, and inventory levels. It provides data-driven insights that can guide future decision-making, facilitate strategic planning of promotions, refine promotion mixes, and optimize promotion assortments and quantities.
Price promotions in the consumer goods industry
The constant professionalization of promotion management is also one of the strategic tasks in the consumer products industry. The significance of promotions in terms of sales is still rising and the competition remains – due to new campaigns and ideas for innovative promotions – extremely high. Seeing this relevance it is not surprising that promotion management has become one of the biggest items in the income statement of many consumer products companies as well. Trade spend can represent 20% or more of revenue, and is second only to Cost of Goods Sold. As a consequence, investments in state-of-the art promotion management tools have become a “must”.
SAP offers its customers an industry solution for promotion planning, executing, and controlling that is specially tailored to the requirements and needs of the consumer products industry. Today leading consumer products companies must become P&L owners to drive not only revenue and volume, but do so profitably – for themselves and also for the retailing partners.
To become a best-practice consumer products company the complete end-to-end process has to be considered. Starting with the Sales Planning & Budgeting, where all promotion targets across multiple dimensions are defined, followed by the Customer Planning, where all activities regarding volume, margin, assortment, and trade terms are combined and integrated into a collaborative customer-centric plan, over the Promotion Planning, where promotional activities are simulated and the best way to promote the product is determined, until Execution and Settlement, closing the promotion process by enhancing the visibility about executed promotions and tracking the performance. All these steps framed by continuous Statistical Forecasting and Optimization and supported by Model Driven post evaluations and innovative Machine Learning tools, completing state-of-the-art capabilities of a modern trade analytics solution.
Figure 4: Trade Management end-to-end business process
SAP Trade Management:
SAP Trade Management offers end-to-end trade management for consumer products companies. It allows businesses to handle all aspects of trade promotion, from designing promotional plans to managing funds and settling claims. Additionally, it provides performance analysis to measure the effectiveness of these trade promotions. These solutions enable new ways of working, collaborating and planning by allowing consumer products sales leaders to:
- Drive growth beyond short-term measures of promotion effectiveness to longer-term mutually defined targets including category growth, sustainable baseline volume growth and margin growth
- Sense and predict both the presence and severity of potential risk to revenue, volume and profitability relative to both company and consumer targets and KPIs in real-time
- Elevate value propositions and alignment to help retailers achieve broader business objectives versus simply hitting promotion targets
- Understand implications for all strategic and tactical decisions versus full-year targets, plans, and KPIs for both parties
- Enable fact-based decision making for sales leaders to drive activities best aligned to targets
- Align planning and execution across marketing, finance and extended supply chain
- Simplify volume dimensions across all channels and enable coordinated, flexible and agile responses to demand and supply dynamics
- Coordinate all volume across all channels via comprehensive programs and tactics aligned to jointly agreed KPIs
SAP Trade Management is built on top of native SAP architecture and is fully connected with SAP Back-office, Supply Chain and Analytics applications. This means zero build and maintenance cost for interfaces and guaranteed functionality with future upgrades. SAP Trade Management is tightly coupled to financials, which means one set of “books” and enables the account manager to build plans based on actuals from SAP ECC or SAP S/4HANA, not estimates or output from overnight batch processes.
SAP Trade Management is part of the SAP Integrated Sales Platform that can cover all go to market initiatives that today’s Consumer Products companies must perform to stay competitive in the new digital economy. SAP Trade Management application and processes are integrated with the SAP Sales Cloud, SAP Service Cloud, SAP Marketing Cloud and SAP Commerce Cloud solutions to deliver a unique end-to-end contextual customer and consumer experience.
It has been three months since Mia got the offer from her local grocery shop and became a regular online shopper, even with her weekly food demand. It is simply too convenient to select the offered items in the app, put them into the shopping basket, check-out online and get all products delivered at home within the next four hours. Also, fresh items shipped in cooling boxes have an extremely good quality and up to now not a single product has been unavailable.
The grocery store also provides a weekly shopping list based on her former buying behavior, so she does not even have to think about what is needed for her family for the upcoming days. She is wondering why this AI-generated list is so accurate and sometimes she feels the grocery store could read her mind, when offering price promotions for an “Italian week” or a barbeque party on a hot summer weekend. And the fact that the grocery store promises a best-price guarantee for several product categories make the decision process very easy.
In her next order Mia will add some cosmetics items and her weekly demand on hygiene products into her basket. In the app the grocery store has shared a price comparison and it seems the prices are not higher than in her usual drugstore. If she considers that the grocery store offers further discounts up to specific purchase amounts then becoming a “gold member” in the loyalty program is even more beneficial.
Finally, Benjamin and their kids are happy with Mia’s decision to focus more on price promotions because there is always a budget left to buy something extraordinary for the family. For example, with the last food delivery came a flyer for non-food promotions offering a four-person tent which was bought immediately by redeeming loyalty points and getting a further discount by direct payment. Why not enjoy a camping trip? Even the supply of food needed for the related camping trip consisted mainly of price promotions. As a consequence, Mia and her family are getting more personalized products, delivered to her home, at the right time to better prices … and everything powered by SAP.
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More information on SAP solutions for retailer is available on Cloud Retail Software Solutions | SAP Industry