Cannondale study sees some light at the end of the inefficiency tunnel.
Can’t live with it, can’t live without it” has long been the attitude of packaged goods manufacturers and retailers towards trade promotion. Now that consumer pass-through has reached an all-time low, the credo may become “Can’t live without it, can’t kill it.”
Trade promotion inefficiency is still the single most important issue among manufacturers, according to the latest Trade Promotion Spending and Merchandising Industry Study from Cannondale Associates, Wilton, CT.
A full 90 percent of CPGs who responded to the spring Cannondale survey cited the issue as very or extremely important. Retailers didn’t place it much farther down, either, with 69 percent listing it as a major concern. Those percentages are lower than last year’s study (three percentage points on the manufacturer side, nine among retailers), but not enough to have anyone throwing a party just yet.
“Trade promotion accounts for 15 percent of gross sales and 40 percent of the overall marketing budget,” says Don Stuart, Cannondale partner and author of the study. “If you include account-specific marketing [as trade promotion], it accounts for 60 cents of every promotion dollar.”
Dissatisfaction remains extremely high on both the retailer and manufacturer sides, according to the survey’s 300-plus respondents. Nearly 63 percent of retailers are unhappy with their share of trade dollars, and 78 percent of manufacturers feel trade spending doesn’t provide enough value.
The biggest complaint from manufacturers is that retailers are pocketing price breaks instead of passing them on to consumers. Most believe that no better than 49 percent of promotion dollars are passed through to consumers, while as much as 27 percent goes directly to the retailer’s bottom line. According to the study, the truth isn’t much better: Retailers state that 59 percent of trade promotion dollars are passed on to consumers (down from 68% just two years ago), and that 17 percent is pocketed (up from 13% in ’98). “That’s a $7.5 billion shift in funds,” says Stuart. “If you [again] include account-specific marketing, that can represent 30 percent of the manufacturer’s bottom line.”
Feeding the Beast That hasn’t stopped manufacturers from increasing the amount of marketing dollars funneled through retail channels, however: 55 percent of manufacturers have increased trade spending in the last five years, and 66 percent have increased allocations for account-specific programs. In comparison, only 53 percent said they had boosted ad spending in the period, and just 28 percent said they had increased consumer promotion dollars (See chart, pg 52).
Account-specific spending was the Holy Grail for trade promotion in 2000, representing 11 percent of the marketing budget (compared with 7% in ’98 and 9% in ’97, when co-marketing testing boosted levels). Cannondale cites broader usage of frequent-shopper card programs as the main reason for the increase.
Despite increased spending, results are down: Only 24 percent of account-specific promotions generated incremental volume for retailers, down from 51 percent in the 1999 survey and 61 percent in ’98. Marketer estimates were higher at 41 percent, but showed a similar two-year decline. Cannondale suggests that greater sharing of data from frequent-shopper programs and other efforts would help reverse the decline. (Something must be done, because 74 percent of manufacturers plan on boosting allocations for frequent-shopper programs over the next five years.)
Respondents were in agreement on the waning effectiveness of price-reduction programs: only 33 percent of retailers and 19 percent of manufacturers said the tactic generated incremental volume. On the other hand, the two groups disagreed on the effectiveness of traditional features and displays: Manufacturers said that 74 percent of programs generated incremental volume (up 26 percentage points from 1999), while retailers put the figure at 46 percent (down 30 points from last year).
Shining Stars Praise for the industry’s leading manufacturers and retailers is getting greater. Procter & Gamble was again cited most often as the manufacturer that most effectively utilizes trade funds, having been mentioned by 47 percent of retailers – a 14-point increase over 1999. Kraft Foods’ reputation also improved, with its citations rising nine points to 35 percent.
Significant gains were also made by General Mills (five points), Coca-Cola (nine), and Nabisco, which debuted among the top 10 this year. Unilever and Kimberly-Clark also cracked the top 10, while Campbell Soup Co., ConAgra, and Dole all slipped from the ranking.
Asked what makes the best better, retailers above all pointed to flexibility, and more specifically a company’s ability to tailor promotional activities to fit a retailer’s image. Other important attributes were management commitment, simplicity, innovation, and strength of consumer programs.
On the flip side, manufacturers again selected Wal-Mart as the best retailer at using trade funds. The chain’s 52-percent citation rate, which climbed by double digits two straight years, puts Wal-Mart “in a league of its own,” according to the report. Following Wal-Mart were HEB and Publix, although both chains were cited by fewer manufacturers this year.
Entering the top 10 this year, and marking the first time a warehouse club has made the ranking, was Costco. The chain’s appearance points to a trend among price discounters – including Wal-Mart – to funnel trade dollars directly into price. “As manufacturers take note of this dedication, traditional retailers should also heed this warning,” the report states.
Manufacturers cited management commitment as the top criterion that distinguishes leading retailers, followed by simplicity, consumer programs, superior technology, and flexibility.
An increased emphasis on equity (long-term effects of promotion on both brand and retailer) as well as the emergence of the Internet as an exchange channel for trade promotions (both for procurement and program development) could dramatically improve both perceptions and performance, the study concludes.
“The sense of frustration that permeates trade promotion is nothing new,” says Stuart. “But the ability to change is more possible now than at any time in the past.”
That should be music to the industry’s ears. The only question is whether anyone is ready to finally hear the call.
Cannondale asserts that the emergence of the Internet as a method of exchange – and not as a sales channel – “will have the most profound impact on promotion since the early 1980s.” To explain its reasoning, the company uses the latest jargon.
“Disintermediation”: Cannondale asserts that manufacturers and retailers will link directly to share promotion practices and create a “frictionless environment” for buying and selling, as well as for promotional planning, control, execution, and evaluation. CPGs and retailers have begun investing heavily in electronic exchanges like Transora and WorldWide Retail Exchange (August PROMO).
“Manufacturers and retailers need to streamline,” says Cannondale partner Don Stuart. “Meetings, exchanges of paper – do they have to be done face-to-face? There’s no reason why the administrative process can’t be done online. That frees time for manufacturers and retailers to hypermediate.”
Back to the dictionary: “Hypermediation” means that once manufacturers and retailers are freed from resource-sapping promotion processes, they can concentrate on developing greater information exchanges to customize and evaluate promotions.
Hey, they’re much better words than “inefficiency.”
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