These special offers are particularly common with toiletries, which is the sort of thing you don't buy every time you are at the supermarket (toothpaste, soap, deodorant etc) because they last for weeks or months. You note when something is running out and buy another one when it does.
These offers still make good sense for the retailer, because the biggest single item of cost is the storage/display. While stuff is on the shelves (or in the warehouse ready to go on the shelf), it costs money in terms of cash tied up, rent and rates, heat and light, insurance, pilferage. Food goes off quite quickly, so if a bag of carrots costs 30p wholesale and is no longer saleable after a week, the holding cost of that bag of carrots is 4p per day, but let's stick to toiletries.
To illustrate the principle and using arbitrary figures (this is primarily a maths problem), let's assume something retails for £1 (net of all taxes), costs 30p wholesale and that the retailer has to make a minimum margin of 20p per unit to cover all fixed costs (head office, computer system, advertising, red tape, net profit/return on capital etc).
Let's further assume that storage/display cost of the item is 2p per day and it normally stands on the shelf for 25 days. The retailer's margin is selling price £1 - wholesale 30p - [25 days @ 2p storage] = 20p, by the time you have bought three of them, he has made 60p margin.
If he does a 3-for-2 offer, people will think great, it wasn't really time to buy another bar of soap or tube of toothpaste yet, but I've enough space for three in stock in my bathroom cupboard, and people will buy them in advance. As long as the items now only stay on the shelf for eight days, the retailer is home free:
Selling price £2 - 90p wholesale - [3 x 8 days @ 2p storage] = 62p margin.
Obviously, the retailer can achieve one of two things: he might sell more stuff from the same retail square footage; or he might require less square footage to sell the same amount of stuff, it comes to much the same thing in the end.
The calculation is quite marginal. If the item is never sold singly for £1, only in batches of 3 for £2, then that becomes the new normal, and the eight-day turnaround period for the special offers will creep back up to a much longer period (no more impulse buying). Even if the period only goes up from eight to ten days, that 62p margin turns into only 50p margin.
So that is why the retailer does this sporadically and seemingly at random. This week it's toothpaste on 3-for-2 and he shifts enough toothpaste for everybody for the next ten weeks. And next week it's 3-for-2 on toilet rolls, or deodorant, or soap, or vitamin tablets or whatever, so next week everybody buys enough toilet rolls or whatever for ten weeks, each time thinking that they are getting a bargain, which they are for the simple reason that for the next ten weeks they are paying for the storage of those goods.
A grim document
9 hours ago
23 comments:
On some special offers the supermarkets demand special prices from their suppliers for special offers. This will increase the supermarket margins and allow them some more flexibility in how long they need to shift the product to make a profit.
MC, yes of course, there are an infinite number of other factors.
For example, the storage cost saving potential for the retailer is exactly the same as the storage cost saving potential for the wholesaler - so the wholesaler is as happy selling 3,000 units in one go today for £700 as he is selling 1,000 units at a time for £300 every three or four weeks and so on.
Yes of course. The manufacturer is equally pleased for the same reason
More delighted if I think about it. They have been paid for a larger number of units than normal, presumably making a larger profit overall. The risk is then on the supermarket that somebody will buy Klunge for Men on a 3 for 2
"So that is why the retailer does this sporadically and seemingly at random."
Interesting post - we buy toiletries this way but have to shop around. They all seem to do 3 for 2 sooner or later.
Gambling research suggests that spacing the offers randomly, or in a pseudo-random manner is the way to keep people looking out for them even if they are quite widely spaced.
Mr C, the advantage for the manufacturer is much smaller, because what he wants is a nice steady output of so many units per hour and so many hours day etc.
AKH, yes, you have to shop around, but when you see something on your list of "things we buy sporadically in bulk" that is to all intents and purposes an impulse purchase, and to keep you on your toes it has to be at random.
If you knew that bubble bath is on special 3-for-2 for the first week every month, then quite often you won't buy it as soon as you see it, because you know you have a stash at home that will last you for another two or three months anyway.
And there are plenty of people who aren't this cynical when shopping, and maybe they buy and use slightly more of something if they think it's cheap, so over a year, total sales tick up slightly.
And there are plenty of people who aren't this cynical when shopping
When it comes to grocery shopping, I don't think people on average budgets are that price-sensitive. I have the impression that most people just go for an approximate price-level in choosing which supermarket, the time-costs in figuring out best prices of each item is high. But 3 for 2s will stand out in their regular routine, and they'll go for it. When on constrained budgets, people with extra time and limited budgets, will seek out these bargains, it's a win-win.
MC, I also had the impression that Tesco would turn round to a supplier and say "we had to put your product on a 3 for 2 offer (BOGOF, reduced price or whatever) as it wasn't selling fast enough, so that's all we are going to pay you", but perhaps that's just anti-Tesco propaganda.
Kj: "When it comes to grocery shopping, I don't think people on average budgets are that price-sensitive"
Correct, and people know that there is no point in buying vegetables for the next month because they will all go rotten. So 3-for-2 offers with perishable food is usually because it is getting too old to sell for full price.
B, I suspect that's anti-Tesco propaganda. I see the same old products on 3-for-2 time and again but at random intervals.
I think that your penultimate paragraph sums up the issue best. 3 for 2 becomes the new normal. Certainly I always buy on the three for two principal for toothpaste, shaving foam and the like. Now I know that I am bearing the storage and financing costs, but I like to have a 'stock'. Plus I always know my stock level and when to start looking out for the right 3-4-2.
Just as intriguing is the price of razor blades. I do not think their retail price bears any relationship at all to manufacturing cost. Plus wherever you go in the world (well Europe) the price is about the same on a currency exchange basis. It seems that purchasing power parity does not apply. More research required methinks.
I'm not sure the shop saves the cost of storage per se because they have the same amount of storage space and the same costs of maintaining that space.
I'd suggest the benefit to the shop is that shifting certain lines in bulk allows them to dedicate a smaller amount of space to those goods thereby freeing-up space for other lines. This allows the same square footage of shop to offer a wider range of goods creating a more attractive store.
One reason I rarely go to Lidl or Aldi is that they don't offer the same range of stuff as Morrisons or Sainsburys so I can't buy everything in one shop. For the likes of Morrisons it is essential that customers buy not only the things that are cheapest at Morrisons but also things that are more expensive than Lidl but are bought at Morrisons because customers prefer to go to one shop only. The wider range they can offer for the same fixed costs, the more such customers they can attract.
Or you could just go to the pound shop when you need some more shampoo / shower gel / toothpaste etc and see what they have?
Chaps
As the owner of a supplier of these products to the large multiples I can tell you how this works - but I won't, because it would be commercial suicide.
Read into that what you will.
Oh go on Shiney, please tell....?
L, if the 3-for-2 is not permanently available it's not the new normal and the plan is working.
TFB: "they have the same amount of storage space and the same costs of maintaining that space. I'd suggest the benefit to the shop is that shifting certain lines in bulk allows them to dedicate a smaller amount of space to those goods."
That's what I said, isn't it?.
SL, there's no £ shop where I live.
Sh, fair enough. Give us a clue at least.
>>
Give us a clue at least
<<
In the case of big retail.... they never sacrifice any of their margin.
Sh, I'll have to take your word for it, but assuming purchase price from wholesaler 30p, that means they are getting the stuff for free. I assumed it was to do with storage and holding costs of stock.
"In the case of big retail.... they never sacrifice any of their margin."
So I was right about Tesco, then. Don't worry Sh, the truth is already out there.
MW - Oh it gets better - you need to maintain the 'lost' margin on the free one. The logic is the customer will not now purchase another one that would have been sold at full price
Assume Retail price = £1 ex VAT and retailer margin = 50p, producer margin = 20p.
Retaler sells two at £1 but expects to make £1 on the supply of two (i.e if he had sold two) so producer effectively supplies product for free.
Oh and probably pays for the POS materials (gondola ends, barkers etc) and the ad in the magazine and contributes to the TV add..... it goes on and on and on.
B - Why single out Tesco? You think our cuddly 'middle class' friends at retailers 'W' and 'S' are any different? Sometimes they are worse - esp as the volume is lower.
Sh, so the manufacturer supplies at a loss?
Sell two for £1 normal price each, retailer margin 2 x 50p = £1, manufacturer gets 2 x 50p = £1 (minus his costs of 30p/unit = 40p profit).
Sell three for £2 on offer, retailer makes margin 3 x 50p = £1.50, manufacturer gets 50p (minus his costs of 30p/unit = 40p loss)
??????
"Why single out Tesco? You think our cuddly 'middle class' friends at retailers 'W' and 'S' are any different? Sometimes they are worse"
I don't doubt it, I am sure they are all just as bad as each other. It's just that Tesco is the the only big one round here. It's partly why, unlike TFB, I buy as much as I can at Lidl, then what I have to at Tesco. Mind you, I often wonder if the likes of Lidl or the Coop are any better.
M >>so the manufacturer supplies at a loss?<<
Yes - surprised? Well you obviously "don't understand the power of the dark side" [said in a wheezy/heavy breathing Darth Vader-esq voice]. And you haven't even taken into account the costs of the promo I outlined above.
B >>Mind you, I often wonder if the likes of Lidl or the Coop are any better<<
They aren't believe me.
Sh, thanks, that's nice and simple at least.
I know that farmers supply a lot of stuff below cost of production but our generous government makes up the difference in land subsidies - it's just a question of the subsidies accruing to the least elastic factor, and shelf space is more limited than farm produce (you can buy it from abroad, probably subsidised as well).
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