Counting on BOGOFs buy one, get one free

By Brian Moore, International Retail Consultant

How to make the most of Buy-One, Get One Free promotions

What started life as a multibuy - where a shopper was able to buy four packs of the same brand for the price of three - suppliers and retailers gradually 'upped the ante' in order to compete with other brands in the category: they offered three for the price of two, and eventually ended up with two for the price of one, in other words 'buy one, get one free', or BOGOF.

In its day the BOGOF was undoubtedly effective for all parties, but big issues are now building up for the key parties involved, the shopper, the retailer, the supplier, and the government.

Who funds the promo costs?

For Australian convenience store operators, lacking the buying muscle of the supermarkets, yet needing to be competitive, the key issue is who funds the cost of the promotion.

For the supermarkets, the issue is to create excitement in the store, and clear excess stocks without devaluing the category.

For suppliers, the issue is one of danger as continuous BOGOFs devalue the brand and the category. If a jar of, say, Nescafe is available on continuous BOGOF the consumer is effectively paying half the normal retail price … over time, making the brand in the mind of the consumer worth half its value.

In the UK, the BOGOF has been so successful that consumer press and the politicians have become involved, as they believe that buying one more than they need can lead to wastage, especially in the case of perishable food. This negative publicity has recently led to Tesco introducing buy-one-get-one-later, meaning the shopper picks up the free item when they have used the first one - thus avoiding possible waste.

However, the real issues for Australian convenience retailers are "who makes money from a BOGOF?" and "are they a good promotion tool for independent retailers?"

This leads to being able to calculate the costs for the shopper, the retailer and the supplier, in a 4-for-3, 3-for-2, and 2-for-1 promotion, in any category.

Example 1

The first example shows where a retailer and a supplier decide to jointly fund the BOGOF promotion: The supplier will supply the free item 'free of charge' to the retailer, who in turn offers 'buy one, get one free' to the shopper for $10. The supplier makes a normal gross margin of 50% - in other words, they can manufacture the product for 50% of the price to the trade. The supplier also makes a normal net profit of 10% on normal sales.

Meanwhile the retailer makes a normal trade margin of 25% of shelf prices, ex sales tax, has handling costs of 10% and overheads of 10%, leaving 5% net profit. State-of-art retailers normally have a net profit of 5% of sales, ex Sales Tax.

Costing for a BOGOF

1. Joint Funding by supplier & retailer

In the above example, where the retailer gives up his gross margin on the free item, and the supplier supplies the free item free-of-charge to the retailer, it can be seen that the retailer loses $0.75 per item, and the supplier loses $1.50 per item. Obviously, this means that an Australian convenience retailer, unlike the major multiple retailers, without the power to force the supplier to refund the retail margin, will lose money on every BOGOF promotion!

Example 2

Now see example 2 below, where the retailer has the power to make the supplier replace the retailer's margin on the free item in a BOGOF.

Costing for a BOGOF

2. Supplier funds retailer's margin on free item

Here it can be seen that the retailer continues to make his normal margin on the free item.

However, because the supplier has to refund the retail margin, it can be seen that the supplier loses $2.75 on every item sold in a BOGOF promotion. So, unless an Australian convenience retailer has the power to insist on refund of retail margin, or the supplier really wants the promotion at any cost, then the retailer will lose money on a BOGOF.

Sure, the promotion will create excitement in store, but the retailer will still lose money …

Incidentally, if you think that demanding the refund of retail margin from the supplier is tough, in European Retail, some powerful retailers insist on not only a refund of margin to replace lost profit, but also demand the refund of the full selling price including Sales Taxes to recover the lost shopping basket opportunity!

Brian Moore EMR-Namnews Ltd.