Nielsen just released a new report on the state of trade promotion efficiency, along with a cool interactive microsite where you can explore the data: http://viz.nielsen.com/tradepromotionperformance

Here are some of the more interesting findings:

• Manufacturers now spend over 19% on trade promotions – that’s up from 10% just a decade ago.
• Trade spend is 2.5x advertising budgets (but since it’s off P&L, it’s rarely talked about because it’s netted out in the revenue line on a P&L statement).
• 71% of US promotions fail to break even – that compares to 59% globally. Italy came out ahead with the most effective promotions — only 41% lost money.
• The worst performing part of the store was bakery items, with 83% of promotions failing to break even. In grocery, just under 3/4ths of promotions lost money. The best performing category was personal care, with just 37% of promotions making money.
• According to Nielsen, eliminating 22% of promotions would increase sales revenue.

The Situation Facing CPG

Clearly there’s a problem here, but should CPGs be worried? In a word: yes. I believe the above represents an existential crisis of sorts for the CPG industry. Put simply, as discounts continue to deepen, it impedes manufacturers’ ability to invest in product innovation and growth; every additional dollar spent on promotions is a dollar less spent on new product development, supply chain, manufacturing, etc. It should come as no surprise then that a recent Strategy& study found the three-year compounded annual growth rate between 2009 and 2012 was just 1.6% for large manufacturers. During the same period, private label grew at almost twice that rate!

Over the past decade, the situation has gone from bad to worse as industry trade rates have steadily climbed from 10% to nearly 20%. Dale Hagemeyer of Gartner suggests this number could average 25% by 2016. At the same time, the ROI of promotional events has steadily declined. Whereas a 2007 Booz & Co. report estimated the number of promotions that lost money at just over 50%, Nielsen reports that today more than 2/3rds don’t break even! In other words, US CPGs are spending more and more on promotions that yield less and less — and the trend is accelerating. So what’s going on here? Why are so many promotions failing to deliver an ROI?

Addicted to Promotions

At a macro level, it looks as though US trade promotions are simply following the same pattern as a typical addiction. A hallmark of any addiction is that the user constantly needs more and more to achieve the same effect. This, of course, just leads to a growing desensitization to the substance — so the user needs even more. Following a similar pattern, since 2008 promotions have become less and less effective, while shoppers have become increasingly deal prone and accustomed to deep discounts.

A likely reason is that in the wake of the recession, the industry relied heavily on discounts to make up for waning demand, inadvertently training shoppers to buy on standard offers like “10 yogurt cups for $10” or “two ice cream pints for $6”; over time this eroded margins and brand loyalty, necessitating more promotional activity. As discounts proliferated, trade rates continued to escalate and shoppers became even less sensitive to promotions. Put another way, over the past decade promotions have been in a “discount death spiral,” requiring ever deeper discount levels to maintain the same effectiveness. Left unchecked, this is likely to continue until it envelopes the entire CPG industry.

A Break in the Clouds

Luckily, a few CPGs are beginning to turn the tide by shifting to more creative promotions, which rely less heavily on discounting to drive consumer demand. Companies such as BIC, AB InBev, Unilever are trying new offer structures (buy product a, get product b for $x), novel product bundles (think beer and chips), creative price-points ($2.22 or $3.45), and more compelling marketing language, as they introduce offers that are more targeted at the consumers of a specific retailer or region. This new generation of promotions are outperforming equivalent straight discounts by as much as 50%, and sometimes more.

This is possible thanks to the recent growth of digital – a report by Deloitte found that more than half of in-store sales are now directly influenced by digital — giving manufacturers a means to test new promotions with real shoppers to see what they will respond to best. By serving numerous different test offers to consumers through digital platforms (think social, online coupons, retailer mobile apps, etc.) as part of their regular shopping routine, manufacturers (and their retail partners) can quickly get a read on which promotions will work most efficiently in brick-and-mortar. This is the approach we’ve pioneered at Eversight — we call it Offer Innovation.

The bottom line is that simply eliminating promotions isn’t the answer. While it’s clear from the Nielsen report that many promotions underperform and some should be eliminated, they remain an absolutely crucial lever for manufacturers and retailers to drive demand — and this isn’t changing anytime soon. Instead, the key is knowing precisely which promotions to run, as well as where and when to run them (and which to avoid at all costs). The only way to do that is through broad, ongoing experimentation.