Promotional Discounts in Grocery Supermarkets

The retail grocery industry is experiencing competitive changes in the Alberta marketplace. Empire Company recently announced a major expansion of its FreshCo banner into Western Canada to compete with traditional grocery retailers such as Loblaws, Walmart, No Frills, and Co-op (Canadian Grocer, 2020). With increasing competition, some retailers have been advertising deep discounts in feature advertisements to gain market share (Intelligence Node, 2020). Feature advertising is important for grocery retailers because it creates store traffic and is the primary method of communication for creating shopper awareness of store promotions (Gauri et al., 2017). Considering the widespread use of feature promotions in advertising, retailers have a great interest in understanding how consumers react to deep discounts, as well as the types of promotions that improve store performance metrics. In this article, I aim to review a scholarly paper on feature advertising, discuss potential marketing issues, and provide recommendations for effective promotional strategies. 

Summary of an Article

In the marketing study, An Empirical Analysis of the Impact of Promotional Discounts on Store Performance, Gauri and colleagues (2017) conducted a study to determine the effects of advertising deep discounts on the retailer’s store traffic, sales, and profitability. Deep discounting is a promotional strategy in which retailers advertise items significantly below regular shelf prices to attract customers who will purchase other more profitable items once inside the store (Bliss, 1988; Gauri et al., 2017; Lal & Matutes, 1994). Gauri et al., (2017) suggested that deep discounting can lead to an increase in store traffic, sales, and profitability. For example, deep discounting increases store traffic because it provides sensitive pricing information to consumers within a given promotional week. This acts as a commitment mechanism to assure consumers that they will have a guaranteed level of prices if they patronize the store (Lal & Matutes, 1994). Hence, by advertising deep discounts, retailers hope to attract consumers to the store by signaling the highest levels of savings (lowest market basket cost) relative to competing retailers. Additionally, deep discounting increases sales and profitability because once consumers are in the store, they tend to purchase other non-promoted items with higher profit margins in extension to the deeply discounted item (Bliss, 1988; Gauri et al., 2017; Lal & Matutes, 1994). Simester (1995) emphasized that retailers use advertised prices to signal their pricing image and set pricing expectations for other products. Although the consumer may know the price of the advertised products, they may not know the prices of the other unadvertised products before selecting which store to visit. Once in the store, the consumer’s travel cost becomes a sunk cost, giving the retailer leverage to charge higher prices on non-promoted products (Lal & Matutes, 1994). Consequently, retailers can attain higher levels of sales and profit margins on the incremental purchases of these non-promoted items.

As a result of the study, An Empirical Analysis of the Impact of Promotional Discounts on Store Performance, Gauri et al., (2017) discovered several interesting insights. First, the most effective deep discount promotions occur for high-penetration, high-frequency items. This is because featuring highly purchased or well-known branded items will appeal to more buyers and have the highest probability of purchase in a given week, thereby encouraging more store traffic (Gauri et al., 2017). Second, discounting too many items in one category leads to lower profit margins (Gauri et al., 2017). This suggests that the loss of profit margin on the featured promotions may not be offset by profits generated by the sale. Hence, the retailer may need to consider a balanced approach to featuring deeply discounted items across multiple categories within a promotional event. Third, deep discounting items in impulse categories tend to produce a spillover effect to purchases in other more profitable categories and are associated with higher profit margins (Gauri et al., 2017). In this context, retailers can use these insights to develop promotional strategies that maximize sales and profitability when featuring deeply discounted items.

Key Issues with Deep Discounting

Although Gauri et al., (2017) found that that deep discounting can lead to increased store traffic, sales, and profitability, Guyt and Gijsbrechts (2020), who studied the relationship between promotional advertising and store visits, suggested that these effects tend to be generally modest. This is because consumers might not be aware of the promotion or the promotions might simply not be interesting enough to trigger a purchase. For example, consumers might be unaware of the promotion because feature advertising can be difficult to reach consumers, especially those who do not regularly shop at the store. The vast number of retailers competing simultaneously to reach potential consumers through feature advertising causes promotional clutter which can make it difficult for specific deals to stand out (Guyt & Gijsbrechts, 2020). Furthermore, the promotional deals that are not unique to the retailer might not be attractive enough to trigger a purchase. Multiple retailers often offer similar promotions, and the benefits can be too small for consumers to make an extra visit to the store (Guyt & Gijsbrechts, 2020). Hence, simply offering more or deeper discounts may not be the most effective promotional strategy for retailers to improve performance metrics such as traffic, sales, and profitability.

Recommendations

To increase consumer awareness and effectiveness of the deep discounting strategy, retailers can pair deep discounting promotions with a unique retailer-themed event. A retailer-themed event is a storewide promotional event, in which the retailer will mass advertise promotional features across a broad range of categories under a common theme (Gauri et al., 2017). An example of a retailer-themed promotional event is the No Frill’s 88’s event (Smart Canucks, n.d.). This promotional program generates higher consumer awareness because it promotes storewide savings across a broad range of categories, the discounted items are easy to recognize, and they are presented under a theme that is unique to the retailer (Guyt & Gijsbrechts, 2020). Hence, pairing the retailer-themed promotional event with the deep discount promotion can be an effective way to raises consumer awareness and makes it easier to for deeply discounted deals to stand out from other promotional clutter.

Conclusion

Competitive changes in the Canadian marketplace have increased pressure on retailers to advertise deep discount promotions to gain market share. Retailers use feature advertising as the primary method of communication to persuade consumers to visit their stores. Hence, understanding how consumers react to deep discounts is important for retailers to improve store performance metrics. In a study that examined the effects of advertising deep discounts on the retailer’s store traffic, sales, and profitability, Gauri et al., (2017) suggested that deep discounting can lead to increased store traffic, sales, and profitability. However, these effects might be limited if consumers are unaware of the promotions. To increase consumer awareness, deep discount promotions can be paired with unique retailer-themed promotional events. These retailer-themed events can generate more consumer resonance because events unique to the retailer can draw the attention of consumers to storewide savings across a broad range of categories, with discounted items being easily recognizable. When combined with retailer-themed events, deep discount promotion can become efficacious in affecting consumer’s purchasing behaviors and improve store performance metrics. 

References

Bliss, C. (1988). A theory of retail pricing. Journal of Industrial Economics, 36(4), 375–391. https://doi.org/10.2307/2098445

Canadian Grocer. Freshco expansion lands in alberta. (2020, June 10). https://www.canadiangrocer.com/top-stories/freshco-expansion-lands-in-alberta-95368

Gauri, D. K., Ratchford, B., Pancras, J., & Talukdar, D. (2017). An empirical analysis of the impact of promotional discounts on store performance. Journal of Retailing, 93(3), 283-303. https://doi:10.1016/j.jretai.2017.06.001

Guyt, J. Y., & Gijsbrechts, E. (2020). Evaluating the effectiveness of retailer-themed super saver events. Journal of Marketing, 84(2), 92–113. https://doi.org/10.1177/0022242919896334

Intelligence Node. (February 6, 2021). Deep discounts or everyday low prices: Which strategy do consumers prefer? https://www.intelligencenode.com/blog/deep-discounts-or-everyday-low-prices-which-strategy-do-consumers-prefer/

Lal, R., & Matutes, C. (1994). Retail pricing and advertising strategies. Journal of Business, 67(3). https://doi.org/10.1086/296637

Simester, D. (1995). Signaling price image using advertised prices. Marketing Science, 14(2), 166. https://doi.org/10.1287/mksc.14.2.166

Smart Canucks. (n.d.). No frills Canada flyers. https://flyers.smartcanucks.ca/canada/no-frills-west-flyer-january-15-to-212/single/5