Deflation and trade promo: A bit of speculation

Having just written an item about how things aren't really quite as bad as we sometimes worry, now I'm going to offer a bit of speculation on the effect on trade promo if things got considerably worse in one area. What would happen to trade promotion if we entered a period of deflation?

Although it remains very much a long-shot (the WSJ economists' survey referenced below says that we'll have mild inflation next year in the US, about 1.5% or so), the possibility of deflation has gotten a bit of buzz lately, not just in the US, but around the world. A quick round-up:

• India's Economic Times has an article on the (remote) possibility of deflation there.
• This item says that consumer prices in Ireland will decline next year (by a modest 0.5%).
• The UK's Times reports on concern about deflation in that country.

There are lots more, just enter "deflation" into Google News and you'll get your fill. All make the point that deflation is unlikely, and that it has severe consequences only if it continues for a protracted period, which is even more unlikely.

But still: what if?

The reason I ask it in regard to trade promo is that it is often argued that the great increase in trade funding (which was in the low single digits when I got into this business -- a 5% co-op allowance was considered generous) began in the high-inflation seventies, when consumer goods manufacturers began raising prices dramatically as a hedge against the possibility of federal price controls (which were imposed, then withdrawn). The idea was to have a pro forma price increase so that the high price was on the books, but to give most of the increase back to the retailers as allowances.

Would deflation reverse that process? Would an extended decline in what suppliers could charge retailers cause cuts in promotional spending?

Given the large percentage of spending that goes into cutting prices at the shelf, especially in CPG and food, would there be a need for large trade promo budgets in a deflationary environment? What's the point of promoting your price cuts when shoppers have come to assume that prices are going to decrease?

Again, this probably won't happen, but occasionally it's interesting to consider possibilities. It would certainly be different, since none of us have seen deflation in our lifetimes (unless we've lived in Japan), which is what makes guessing the results difficult.