In fact, many retailers in the UK for example have invested a lot of money and resources into expanding their selection of beauty products. The “big four” major supermarkets (Tesco, Sainsbury’s, Asda, Morrisons) have all added a notable amount of SKUs in beauty and hygiene since 2016. Aldi and Lidl have experimented more in beauty products recently as well — both German companies provide cheaper alternatives to brand-name cosmetics and hygiene products, and have seen great success in doing so despite having no brand loyalty to rely on.
Sales vs. Revenue Disconnect in the Beauty & Health Industry
Considering the increased interest and demand for beauty, health and hygiene products, one would think that manufacturers of these goods would see a substantial increase in profits as a result. Instead, 2017 and 2018 were both difficult for manufacturers in this sector, as average prices for key items like razors, skin care products, and cosmetics all fell within this time. Why is there such a disconnect between the rise in sales versus revenue for manufacturers in the beauty industry?
The main issue lies in price wars. Promotional wars are somewhat commonplace in retail. They are hyper-competitive, and they result in a net loss for manufacturers attempting to stay competitive in the modern market. In order to better understand the promotion war fiasco that is causing beauty manufacturers to suffer, it’s essential to take a deeper look into why price wars occur, what aspects of price wars make them so harmful to both retailers and manufacturers, and what retailers can do to prevent price wars from occuring in the first place.
Why Promotions are Used and Abused in Retail
Companies providing promotions seek to temporarily decrease profits in order to increase sales and attract customers. Customers will (hopefully) buy other items in store, or return to buy items at regular prices later on. Promotional deals are great for companies attempting to get rid of older items to make room for new products. This is particularly true for industries like the beauty, health and hygiene industry which have seasonal products or must make way for new consumer trends on a regular basis. Having 30-35% of items sold at discount prices is considered a healthy promotion rate for most retailers.
Promotions on their own aren’t a problem. The main issue lies in how competitors react to promotions within their sector. Retailers are always seeking to provide the best price on the market. When they see a competitor offering the same or similar items on sale, many retailers have a knee-jerk reaction and lower their prices to match or surpass the lowest price. Other companies follow suit, resulting in a snowball effect that sends prices tumbling.
This snowball effect has been exacerbated in recent years as companies like Amazon have started to use advanced algorithms to implement dynamic pricing. Using AI, Amazon changes their prices several times per day, ensuring they are nearly always offering the best prices on the market. The discount-hungry e-commerce market has heavily affected health and hygiene manufacturers in particular, as consumers typically have less brand loyalty in regards to products like razors or vitamin supplements. Manufacturers cannot afford to avoid selling their goods on Amazon, which provides them with an extremely large customer base. However, in order to work with large retailers like Amazon, manufacturers must face the competitive race to the bottom in regards to prices that retailers partake in.
In a Promotional War, Everyone Loses
Typically it is the manufacturer and not the retailer that must pay for this loss in profit margin one way or another, either directly through subsidizing promotions or indirectly as they must lower their wholesale prices to remain competitive. U.S. manufacturers P&G and Colgate-Palmolive both struggled to compete in 2017 and 2018 despite being veterans in the beauty, health, and hygiene industry. Gillette, a razor brand owned by Procter & Gamble (P&G), was forced to drop their prices for razors by 20% in response to overall decreasing prices of grooming products. Despite sales increasing by 2% within that time, their global revenue dropped by 3% by the end of the fiscal year.
Additionally, retailers do not benefit from the failure of companies like P&G due to falling prices. Low cost is not always the brand identity retailers want, especially when trying to sell beauty and health products. Also, by prioritizing discounts, retail companies are actively discouraging brands that prefer to make large deals with them and make way for companies like grooming subscription Dollar Shave Club, as well as DTC brands like Ulta and Sephora. These beauty and hygiene companies do not use the platforms large retailers like Amazon provide nearly as much as companies like P&G, and some of them do not need to sell their products wholesale to other retailers at all.
How Promotional Wars Affect Retailers and their Pricing Strategy
Retailers also have a lot to lose when they participate in price wars. The “big four” UK supermarkets learned this lesson the hard way in 2016 when promotional wars resulted in a cumulative 800 million pound revenue loss. Though manufacturers will typically subsidize various discounts on their products to retailers, profit margins decrease for both retailers and manufacturers when overall prices in the market drop. Considering the fact that retail companies often rely on profit margins as low as 1% to make money, it is no surprise that price wars negatively affect their growth and revenue too.
Price wars also have an effect on how retailers must manage their pricing strategy. Not only do promotions limit profit margins, they also make price optimization more complicated and therefore more prone to error. Promotions, particularly in the form of personal discounts (e.g. coupons), need to be taken into consideration when determining optimal prices. Price optimization using advanced algorithms may come to a certain “ideal” price recommendation, however the “real” selling price is 4-5% lower on average due to heavy promotional deals.
Pricing Strategies to Prevent Price Wars
Needless to say, no one wins a price war. Several factors need to change regarding business practices to help end and prevent future promotional wars:
- EDLPs (Every Day Low Prices) instead of offering discounts that temporarily cause a loss in profit, companies can instead settle on a price for their product(s) that has a low but still net-positive profit margin. This allows them to stay competitive on the market, as their prices are still low, but they do not get caught up in promotional wars in the process and still profit.
- Identifying KVIs. Finding Key Value Items that are popular with consumers regardless of promotional deals and ensuring that these items are not sold on discount is another great way for retailers to remain competitive in a market overflowing with promotional deals. The company can instead offer discounts on less popular products and rely on their KVIs as “anchors” for profit.
- More effective communication between retailers and suppliers. A peace treaty, if you will. Companies need to stop offering promotions in reaction to other companies’ promotions, preventing the snowball effect that occurs during price wars. By communicating with each other regarding their marketing strategies, manufacturers can avoid constantly shooting themselves in the foot in an attempt to remain competitive.
War is brutal. Price wars are no different in that regard, but have become commonplace in the retail industry. Health and beauty manufacturers find themselves particularly vulnerable to the endless loop of promotions as customers seek cheaper prices on various goods more so than they seek a particular brand. Health, beauty, and hygiene-related industries are particularly prone to deflation related to too many discounts, affecting retailers and manufacturers alike.
Promotional power may have switched from manufacturers to retailers recently, but with great power comes great responsibility. The beauty, health and hygiene sector may be in dire need of reform when it comes to price wars, but other industries can also find themselves caught up in a race to the bottom at some point - history tends to repeat itself if lessons are not learned and methods are not changed. Retailers must understand their role in price wars and implement effective communication and pricing strategies to prevent them from occurring in the first place. By doing so, the entire industry benefits from newfound stability, cooperation, and potential revenue increase.