Retailers like Lowe’s and Unilever sink profits into ad spend in ‘battle for volume’

The price-raising bonanza of the pandemic-era economy is winding down, and some major retailers are sinking their profits into advertising to recover sales volume.

“Companies are running out of pricing power,” Samuel Rines, economist and managing director of Corbu, told Retail Brew. “Across the board, management teams have said we aren’t going back to the algorithm, which is 2%, maybe 3% price increases.”

While admittedly raising margins for retailers, price increases also pushed many consumers to aggressively trade down to cheaper options, Rines explained. Now, companies are fighting to get those customers back, and advertising is one way to do it.

Rines called the effort “the battle for volume.”

Fighting back: Among those doing battle is Lowe’s. Bill Boltz, EVP of merchandising at the home improvement retailer, told investors last week that savings from cost-cutting efforts are being reinvested into “marketing and merchandising strategies to drive traffic and sales.”

He also noted that Lowe’s is experimenting with a new approach to advertising, with the launch of a loyalty program and an “enhanced marketing strategy” this spring.

“This season, we are taking a more sophisticated, tech-enabled advertising approach, and we will be featuring traffic-driving events that will motivate homeowners to get started on their spring projects at Lowe’s,” he said.

Lowe’s is targeting DIY customers in particular, as they tend to be more sensitive to price fluctuations and more hesitant to shell out for big-ticket discretionary purchases.

Another brand pumping serious money into advertising is Unilever. Out of a 2% gross margin in 2023, the company reinvested 1.3% in marketing for its top 30 brands.

“That investment in our brands focused behind strong superior innovations is a fundamental reason behind the acceleration of volume growth in the second half,” CFO Fernando Fernandez said during an earnings call last month.

Return to normal: Rines described this trend as a return to normal after multiple years of retailers “skimping” on ad spending to increase margins. “It’s more of a return to the previous behavior, where these companies knew that if they wanted to grow they needed to spend on ads,” he said.

The difference now is a shift in the mix of ad spending. He added that marketing dollars are shifting from digital giants such as Google to retailers such as Amazon and Walmart, which have seen significant growth in advertising revenue in recent quarters.

“If you’re Procter and Gamble, [for example,] and you’re selling through Amazon, you’re beginning to put dollars there as part of your advertising spend,” Rines said.