Why Do Products Go On Sale?

Today's post is thanks to an interesting question from reader Patricia:

What I would like to know, with your background and knowledge of the food industry, is how "sales" work. More specifically, I find it interesting that when an item (for example, Kashi Go Lean Cereal) goes on sale in one store (for example, Albertsons), I then find it on sale at Target AND at Whole Foods (ironically, the cheapest at WF). When I got to thinking about this, I highly doubt all three stores just happened to put a sale on the product. The manufacturer must have a hand in the sale. Is this true?

Patricia, your suspicions are right on target. Manufacturers often play a role in sales of their products.

A hypothetical example: Let's say the makers of Kashi cereal built up too much inventory at their production plant. (There are lots of reasons why this might happen: Maybe management totally missed the trend of consumers eating less cereal. Or maybe the company just put in a stealth price hike, angering their customers so that they switched brands. The thing is, most products have manufacturing lead times that require companies to engage in some degree of demand forecasting, and those forecasts are often inaccurate.)

Okay. Since Kashi has a limited shelf life, and because it's costly for companies to hold depreciating inventory (or inventory that spoils, which is even worse), the company suddenly finds itself in a situation where it needs to sell off this extra merchandise, and sell it off fast.

An easy way to do this is to offer big discounts to your retailers and asking (or in some cases, requiring) them to pass that discount through to the end customer. This way, Kashi can ship extra boxes of cereal to all of their retailers and be highly confident that the excess inventory will quickly sell through to customers.

Keep in mind that retailers like Whole Foods or Albertsons can mis-forecast demand too, as can companies that exist "upstream" from Kashi (for example, companies that perform intermediate food processing steps with raw corn or raw wheat before shipping product to Kashi). Any player in the entire supply chain could theoretically find itself with excess inventory at one time or another.

And once in a while, consumers have the delicious situation when there's huge excess inventory of a product, and it's spilling out of the ears of the manufacturer, the distributors and the retailers--all at the same time. In this kind of situation you might see enormous discounts (3 boxes for $4, must buy 3!) that quickly clear the shelves. Of course, this is a great opportunity for you to stock up, as long as it's a product that you actually use. Don't let yourself get duped into buying a five-year supply of SPAM or Fruit Roll-Ups, no matter how cheap they might be.

One other type of situation: some product manufacturers may strike deals with retailers that limit their ability to discount merchandise. Luxury goods companies, for example, might feel that discounting activity hurts their brands' reputation. And book and magazine publishers usually forbid discounting, but will allow retailers to return unsold titles.

As you can see, the agreements between producers and retailers can vary widely, but rest assured, when you see the same food item on sale at multiple retailers, it's pretty much a guarantee that the manufacturer needs to move extra merchandise on short notice.

Finally, some closing advice for consumers: Discounting is part of the natural rhythm of retail, and from time to time nearly everything on your grocery store shelves will go "on sale." Keep in mind what typical prices are for the main staples and food items you buy, and when you see aggressive discounting, take advantage!

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How to Whine About "Big Food"
Dumb and Dumber: The Flaws of Measuring Food Costs Using Cost Per Nutrient and Cost Per Calorie

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Julia said...

Could it also just be a straight marketing ploy? I think that a popular marketing tactic is to just get the consumer to sample your product -- if you do, then there's a greater chance you'll buy. In lowering their prices, they are encouraging you to sample.

Daniel said...

Julia, great point. Absolutely, that's another reason why a company would offer a sale. And it's another opportunity for consumers, assuming it's a product you actually need and use.


NMPatricia said...

Thanks for the answer. It helps. When you post the "why", it helps to know how to respond.

Jen Blacker said...

Items are cyclical as well. Take frozen seafood products. During lent these go on great sales. Some companies have coupons out that are good for months. I end up saving these coupons until these products are on sale. I stock up on fish for for easy weeknight meals.

Same thing with snacks and pop. Those are always on sale during big holidays such as July 4th, Memorial Day and Labor Day. Also during Super Bowl time such as now.

Daniel said...

Good insight Jen! Thank you for sharing.