Trade Promotions Don’t Affect Base Volume for Established Brands in Grocery

Brands often view trade promotions as a way to capture the attention of new shoppers and generate trial, therefore increasing base velocity post promotion. Omnium data scientists tested this hypothesis by applying multiple mathematical models to 20 product groupings among eight brands/categories, controlling for ACV distribution and price. We found that depth and frequency of promotions had little meaningful effect on an item’s base velocity. This was consistent across all eight categories despite differences in category and brand penetration, purchase frequency and retail price.

This chart demonstrates that including past promotional activity as an explanatory variable in a model for baseline sales has little effect. Including the variable only improves the model performance by 3% on average.

Model 1 and Model 2 are both models for predicting baseline sales.
Model 1 Variables: ACV Distribution, Base Price, Account, SKU, Logged Sales
Model 2 Variables: ACV Distribution, Base Price, Account, SKU, Logged Sales, Past Promotional Activity

OOB RMSE is Out of Bag Root Mean Square Error. The Root Mean Square Error tells us how much the model misses the predictions by, and the Out of Bag tells us that this evaluation is performed on data that was not used to build the model (which removes bias, as the model is likely to perform better on data that was used to build the model).

Trade promotions certainly affect unit sales, revenue and profitability for each account, but they cannot be counted on to “raise your baseline.” Once base velocity is established (typically after about 16 weeks), these numbers remain remarkably stable – the biggest predictor is that historical number. This doesn’t mean that base velocities never change, recently, COVID-19 affected base velocities of items across almost every category, with some items receiving a boost, and other items taking a hit in velocity.

This also doesn’t mean brands should stop running trade promotions, advertising, sampling, couponing and other consumer promotions. These events can still be ROI-positive, just in the volume that they generate while the event is running! But even if they are not, trade promotions and other events are effective tools that CPGs can use to strengthen relationships with retailers and increase distribution. We recommend you carefully evaluate effectiveness of all spending and build annual retail account plans at the pack/promo price group from the bottom up for all accounts each and every year - and then take action.

Contact us if you would like to discuss your accounting planning process and how to improve trade spend effectiveness.