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Food companies and retailers are becoming over-reliant on discounting to drive sales of everyday goods according to fresh data, in a sign that consumer demand is not recovering even as price inflation normalises.
Companies across Europe are increasingly attempting to entice inflation-squeezed shoppers by cutting prices on food and other consumer products. However, the discounts are failing to boost sales as planned, according to till data shared with the Financial Times.
Promotional intensity — which measures goods on promotion as a share of total sales — increased 15 per cent for fast-moving consumer goods (FMCGs) in the UK, Germany, Italy, Spain and the Netherlands in the first quarter compared with a year earlier, data collected by research firm Circana showed. FMCGs is a broad category which spans everything from snacks, dairy products and meat, as well as personal care items such as shampoo, nappies and aspirin.
The tactic appears to be working, albeit to a limited degree: sales volumes in the same countries began to recover, falling just 0.2 per cent in the three months compared with a 1.1 per cent fall a year earlier.
Yet the measure tracking how effectively price cuts are boosting sales — the share of goods that would not have sold if they had not been on discount, also known as trade efficiency — has been falling steadily, as consumers continue to hold back spending and shop around for the best deals.
“The sales uplift from a promotion is getting shorter and shorter, which means big brands are having to do more promotions or deepen the level of discount,” said Ananda Roy of research firm Circana.
Manufacturers of packaged food and other household goods managed to offset high input costs and suppressed consumer demand during the cost of living crisis by increasing prices for shoppers.
Inflation in Europe has fallen back significantly since its peak in 2022, but not to pre-Covid levels. In the year to May Eurozone inflation rose to 2.6 per cent, up from 2.4 per cent the previous month, exacerbated by a strong labour market.
The prices of food and other supermarket goods, meanwhile, are still 30 per cent higher than they were in 2021, according to Circana, forcing companies to look for other ways to boost revenues.
Discounting was “marketing’s heroin”, said Roy, warning that excessive price cuts could encourage shoppers to only buy a brand when there is a deal on. “Dropping your prices on products that would have sold in any case is just eating into your margin and profit,” he said.
Companies report that consumers have significantly cut back their spending following months of rising prices. In their last set of earnings, large groups such as Nestlé, McDonald’s and PepsiCo reported signs of real stress among low income consumers in the US in particular, where consumers had until now been resilient.
Manufacturers of branded products have been losing market share to more affordable own-brand goods during the cost of living crisis. Retailers have also slashed prices on white label products, but not as intensely as branded foodmakers, and more effectively.