The Problem with Price Promotions

In the early nineties, a slowdown in U.S. population growth translated into smaller annual increases in consumer consumption, particularly of food products. Moreover, manufacturers’ product innovation slacked off, and companies had trouble distinguishing their brands in meaningful ways other than through price. Their response: Offer price-cutting promotions to boost sales.

Manufacturers and retailers acknowledged that continual promotions could erode brand image and encourage consumers to shop solely on price.

Also, companies could become dependent on short-term promotions to pump up sales numbers. Furthermore, manufacturers’ promotions gave supermarkets especially great power, for they controlled the promotions on food products. Supermarkets could demand a wide range of subsidies, including fees for prime shelf space and money to pay for promotional material and newspaper ads.

The focus on price promotions spawned practices such as “forward buying,” in which a supermarket bought more of a discounted product than it planned to sell during a promotion and then boosted its profit margin by selling the rest of the product at the regular price. Some supermarkets also “diverted” some of their low-priced shipments at a slight markup (but still well below the wholesale list price) to supermarkets outside the promotional area. For manufacturers, this meant that a large percentage of discounts intended for consumers wound up in retailers’ pockets instead

QUESTIONS

1. What are all the problems described in the case? List as many as you can.

2. From the point of view of the food manufacturers, what would you say is the overarching problem that includes many of the specific problems you named in Question 1?

3. Is there an even deeper problem behind the one you named in Question 2? If so, what is it?