PROMOTIONS – MYTH VERSUS REALITY?

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Free insurance, free service, free registration, free extended warranty, buy back facility, AAA service, complementary I-Pad 3 or a Samsung Galaxy S III, scratch and win cards, instant gifts, free credit card, sale, offers, bundled packages! Phew

Walk into a mall, open a newspaper or browse through a magazine during the month of Ramadan and the first thing that meets the eye are danglers, posters and advertisements regarding promotions, offers, gifts and prizes that are up for grabs. A regular shopping outing to a hypermarket or supermarket promises a life changing opportunity with a chance to win multiple four wheel drives, sedan cars, refrigerators, washing machines, microwaves, phones, cameras et al. Buying a car could not get better as almost every distributor throws in numerous freebies like registration, insurance, service warranty topping it up with gifts. Furniture, clothes, refrigerators, TVs, cameras, household utensils are all up for grabs at sale prices. If you have not made it to the neighbouring mall or automobile outlet as yet, probably you never will, because it does not get bigger or better than this.

In a market where even banks have swapped the mandatory interest schemes with prize money offerings, the lure, pull and draw of promotions as a marketing tool can hardly be overstated. Ramadan offers are the big daddy of all other sales and promotions. It’s a time when companies slug it out to mount the biggest and best offers.

A time for giving
Promotions and offers are not specific to the GCC region and one finds parallels in other countries, like Christmas sales in the US and Europe, Diwali discounts in India and the Chinese New Year shopping season in China and Hong Kong. While Ramadan promotions mirror the traits of other promotions, it’s unique mix of religiosity, bonding, spending and gifting gives it a distinct flavour. Says Pankaj Joshi, marketing manager, Al Jenaibi International Automobiles, “As it is important for a brand to be ingrained in the local culture and keeping with the Ramadan tradition of giving, we want to offer our customers a grand value offer.” Adds Ananth A V, regional director – Oman, Lulu, “Ramadan is a time when friends and families bond together, reflecting their shared relationships and brotherhood. As an extension of that logic, it is only natural that household spends witness a change.”

The various rituals surrounding the holy month like suhoor, fasting and iftars give a fillip to the sale of certain categories like food, beverages and utensils. High on the shopping lists are powdered beverages, concentrated juices, energy and sports drinks, rice, water, long-life milk, yogurt, laban, cooking oil and ghee. The increase in these categories range between five to 20 per cent. Concentrated juices like Vimto, Roof Afza etc see their sales skyrocket by three to five times, as they become an indispensable part of various meals. George Alexander, general manager, retail, engineering and distribution, Omasco says, “As during a festive season people tend to be light hearted and spend more, a lot of small utensils are purchased and these are used for iftars and storing food.” Festivities surrounding Eid gives an impetus to shopping for clothes and gifts. Says Vivek C Pande, CEO, life style group, Khimji Ramdas, “During the last ten days of Ramadan, a lot of gifts are bought as people want to exchange these with their friends and relatives.”

Companies have been quick to realise that customers are in a mood to loosen their purse strings during the festive season and want to make the most of the available opportunity.

Says Mohammad al Farei, managing director, Zeenah Group, “Over the years businesses have seen spends go up during the month of Ramadan and they want to capture on this trend as much as possible through promotions and offers.”

An increase in sales is not limited to necessities like food and gifts, but also encompasses high value items like car, furniture and even houses. There is broad unanimity that there is a major spike in sales during the month of Ramadan across product categories.
Says Rajesh Raman, vice-president – Oman, Menacom Group, “A number of companies report up to 30 per cent of their annual sales in and around the month of Ramadan.”
Says Joshi, “During these two months our sales increase by 10-12 per cent.”

Marketers use Ramadan offers as a strategic tool to attract customers, giving an additional boost to sales during this month. Ambuj Khare, senior general manager, Genetco, corroborates, “We try and find out what customers need and try to incentivise those purchases. During the last two years we have witnessed a 20-25 per cent growth, primarily because of the all round festivity.” Based on historical precedence, customers are aware that various distributors and brands will roll out alluring offers during the month. This makes them delay their shopping plans (for non essential items), till Ramadan so that they can make the most of the revised pricing.

For example, a number of customers buy their cars during Ramadan and so after a couple of years when they want to upgrade or change their cars they usually do it again during Ramadan. Says Abdel Karim Awwad, national sales and marketing manager, Audi Oman, “Our objective is not to lure customers into spending money, they will do that either way in this season. It is done so that they spend money on our product rather than the competition. And it would be a silly business proposition for us not to do so as it is a competitive market after all.”

The other push factor aiding sales during Ramadan are government bonuses (given to select departments) and the fact that a number of companies advance the dates on which they give salaries, so that employees can enjoy the festive season with their families. Banks and insurance companies too throw in generous offers like low interest rates helping customers. In certain cases interest rates on car loans fall to as low as 1.5-2.0 per cent.

Another big draw of Ramadan promotions is the fact that they are more broad based compared to other offers. Says Joshi, “While we may have tactical promotions on certain key models at various times of the year, during Ramadan we offer across the board promotions on all our models. We call it a season of offers as it goes on for almost two months. This year it is running from mid July to September.” Khare of Genetco adds, “Some people may be in a position to get an off season discount individually, but everyone is not in a position to avail of such discounts. During Ramadan we offer an incentive on our products to all our customers.” The universality of Ramadan promotions thus becomes a big motivator for people to go out and shop.

Strangely, the lure of promotions cuts across income segments, appealing to the affluent as much as to others. For example, a number of BMW and Audi customers start enquiring about the seasons promotion on models a month in advance. Says Raman, “Value for money holds true at every price point, people who can afford the better things in life are as conscious about money as others.” Says Rajiv Ahuja, head- corporate communications, Khimji Ramdas, “It is in human nature to be pleased with gifts and something extra.” According to the Ministry of Commerce and Industry guidelines, companies can only launch three promotions of two months each in a year.

Enabling factors
The question arises as to what enables companies to offer such discounts during the month of Ramadan and why can’t such offers be replicated through the year. The biggest reason offered is that the large surge in volumes and numbers help companies to offer lower prices. So though their margins per SKU (stock keeping unit) or product may be lower, but this gets compensated by the higher throughput. Says Alexander, “Profitability would get affected if sales were slow but the increase in volumes makes sure that despite lower margins on individual products, it turns out to be a good deal on the whole.” Adds Abdel Karim, “ People have no need to make large purchases throughout the year. But in seasons like this people are more likely to make large purchases of items that they will not normally buy at other times of the year. From a sales perspective, we can take advantage of this shopping spike and offer better deals. This is because we can sell a large number of our stock and make profit in volume rather than individual sales.”

The challenge for marketing heads is to forecast correctly the larger inventory that they would require during the festive season. A larger order than actual sales would leave them with surplus inventory, conversely, if they run out of stocks, it would turn out to be a lost opportunity. Based on historical factors, marketers usually predict the volumes that they would require and hope that the scales do not tilt on either side. Most companies have perfected this through a trial and error process.

The other enabler is the support that companies receive from their principals. Most large companies (MNCs and regional players) set aside a certain amount of their annual budgets for promotions and seasonal offers. Based on the market dynamics and distributor feedback, they extend this budget as financial support to their partners. Says Ahuja, “A certain amount of the turnover of the principal and distributors is reserved for sale promotions and the budget for any discount, freebies, limited time offer comes from this.” Based on historical indicators, a call is taken on the best time and way to utilise this budget and in the case of the Middle East market, Ramadan and Eid prove to be a natural choice for such promotions.

Says Alexander, “The principal’s support comes in different ways, they may give you branding support or pre package a gift along with another item or they may split the cost of the promotion equally with the distributor.”As a norm support from the principals is offered in the following ways. First, they may give higher budgets to the dealer/distributor, which can be utilised for promotions, brand building, prizes, freebies etc. Second, the cost of certain promotions may be shared equally between the principal and the distributor. Third, there are times when the principal may bundle a particular product as a freebie or gift with another product. For example, a blender may be bundled with a microwave oven or a vacuum cleaner may be given along with a TV. To cite a few examples, during this Ramadan, P&G is offering a limited time offer on its products like Ariel and Pampers by bundling together more than one pack, for the same or a lower price.

While a principal offers support they also use a check and balance mechanism to ensure that these promotions do not go overboard or affect the larger regional market. As a rule all promotional schemes have to be approved by the principal before their launch. A number of companies strive to maintain price parity between different markets in the region and too much discounting in one market can damage a brand’s reputation in other countries. “Our margins are fixed as brands like Rolex maintain the same price across the region,” says Pande.

Clout of the retailer
The pressure from the big hypermarkets like Lulu and Carrefour is cited as a crucial factor for the growing number of promotions that one witnesses these days. As shopping patterns change and more people gravitate towards hypermarkets and large format stores, retail chains are in a position to dictate terms to companies akin to a Walmart in the US.

The market can be divided into tier 1 retailers like Lulu and Carrefour; tier 2 retail outlets like Al Safeer, Mars Hypermarket, K M Trading etc; specialised shops and power retailers like E-Max, Sharaf, DG and the Ruwi high street. Tier 1 retailers command an overwhelming share of the market. In the audio visual segment tier 1 retailers account for about 50 per cent of total sales, the rest being shared by the remaining outlets. Given the predominance of the large retail chains, they are in a position to dictate terms to distributors. “Hypermarkets would like footfalls to happen and as a result they are putting the onus on distributors to give them better pricing almost through the year, whether it is a Ramadan promotion or back to school offers and it is all becoming a gimmick,” says Alexander.

A marketing executive explains the modus operandi used by large format stores – as they know that a discount or a promotion draws customers, so even if there is a two per cent off on an item, they will allocate it prime shelf space. This works as a magnet drawing footfalls for the entire hypermarket. Most marketers realise that if one brand or product is placed below the golden zone area (waist to shoulder height), the probability of it being picked up gets reduced. Everyone realises that addressability is big issue and once a customer sees a product that is within the price range that he is willing to pay, he tends to get swayed by what he sees. Adds Raman, “Brand loyalty in various categories is low and products are increasingly interchangeable, so if a customer finds a good deal on a particular product, he tends to flip his choices.” Faced with this predicament, most marketers are only too eager to follow the diktat of tier 1 retailers.

Most hypermarkets though tend to refute such claims. Says Ananth of Lulu, “Any company or brand aspiring towards growth and sales turnover is indeed focused on achieving greater visibility and recall. A hypermarket chain like Lulu offers numerous opportunities and options for companies to do so. Companies take advantage of such opportunities, which fetches them the visibility and reach, they need, within their respective target segments.”

Renting of shelf space is one of the prime revenue generators of retail chains worldwide and something that is bound to be followed by them locally. Says Pande, “The main income of supermarkets and hypermarkets comes from selling shelf space, so from their point of view they are completely justified in selling space to companies and brands based on their preferences.”

Taking a long term view
A shopping carnival like this is not a mere opportunity to push through more sales but also a chance to achieve other strategic goals. Says Mohammad of Zeenah, “Promotions can also be seen as a tactical brand building opportunity. Such chances help in aiding recall, getting higher sales from existing customers and helping in the acquisition of new customers.” Thus there are a host of brand related benefits that one can derive from large scale and tempting promotions.

Audi-Oman is looking at doing something similar with its RO2,000 worth of incentive offer (One year free insurance, a 13” MacBook Pro, a dinner for four at Shangri-La’s Barr Al Jissah Resort, a chance to win an Audi A1, 185hp 5 year/105,000 km service, 24-hour roadside assistance and a three year unlimited mileage warranty) on its high-end cars like the Audi A6, Audi A7 or Audi A8 L. Says Abdel Karim, “It is a long term strategy. We are not only selling cars, but the idea is to increase our market share and presence and that itself is a marketing strategy. The best way to see the success of a car is to see it on the road and to let customers experience our service.” The distributor’s aim is to let people have an Audi experience and to come and look at the car’s heritage.

If it is an excuse to build brands for some, for others it is a good occasion to let people sample new products. As people shop around till late hours with their families, a number of food and beverage companies put up kiosks in hypermarkets and supermarkets inviting people to sample their new offerings. Products which are received well, get introduced in quick succession to encash on the positive word of mouth publicity.

The negative fallout
On the flip side, constant discounts and promotions can end up hurting companies and brands irrevocably and for some the tipping point may be approaching fast. “Everyone gets impacted and the brand value of products get eroded due to constant discounting. As long as sales are going up, these can be managed, but in a downturn it will have a massive effect. People think that their short term gains will wipe away their long term sins but in the long run people will lose out,” says Alexander.

According to market estimates, in the audio visual segment there has been a 20 per cent reduction in margins over the last few years. Says Ambuj, “Our margins have gone down drastically, in the AV segment the market is in the hands of two or three companies who are the opinion makers, while we are the followers.” The constant price reductions have forced Japanese brands like Panasonic, Sharp and Sony to take some drastic measures. Some of these brands have announced that there will be no future price revisions on its 32 to 55 inch flat panel LCD TVs for now.

Others are quick to point out that the AV segment may be an exception to the norm when it comes to discounting, due to its high obsolescence rate. As product life cycles get shorter, there is a tendency to sell quickly forcing companies to use a discounting strategy. The fact that there are managers chasing quarterly, semi yearly and annual targets makes a bad situation worse.

There is a feeling that since the principals operate through an authorised distributor in the GCC market, there is more discounting and price undercutting. As the profit of a distributor is based on sales, he is constantly on the lookout for marketing opportunities, giving little thought to brand building. There are others who contest this line of reasoning. “There is an international and a local brand and the success of a product depends on the success of both these elements coming together. The local distributor is an extended arm of the principal and a majority of the local customers go by the reputation of the distributor,” says Khare. “The brand equity of a local distributor is an important consideration while making a high value purchase,”

adds Raman.
A few brands use the festive season as a chance to liquidate excess inventory, by offering garage sale prices. This can have disastrous consequences for a brand, as the distributor can never go back to selling the product at higher prices. It also cheapens the brand in customer minds. Ramadan promotions also leads to a drop in sales in the months that follow as the purchasing power of consumers goes down.

Aware of such dangers, most marketers are conscious about offering a value proposition. Says Ananth, “Our customers are more value-driven rather than discount driven and that being the case, it is important for us to keep our value proposition intact. We have a system in place that not only constantly evaluates products and their prices, but also ensures that it lives up to our core concept of value. We are sure that these promotions are more beneficial to our customers as well as our suppliers and need to be viewed as a win-win situation for all.” Going by the penchant of people for promotions, one can safely assume that promotions, discounts and offers are here to stay. So let’s drop that raffle in the drop box and hope to get lucky.


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