Manufacturers would like to get better results for the money
they spend, and they would like to spend less, but they are
frustrated on every side. Their own sales forces give them a
thousand reasons why the system can't be altered. Retailers, too,
resist change because they have come to depend on the money that
promotions provide. Worst of all-and most surprising, given the
importance they attach to return on investment in every other
area-manufacturers themselves rarely know what return they are
getting on the money they invest in trade promotions. Trade
spending has quite simply become a standard feature of today's
marketplace, and most people share a mistaken fear that any attempt
to tamper with the present system, much less escape it, would have
huge downside consequences. While it is impossible and inadvisable
for companies to eliminate trade spending entirely, trade
promotions can be rationalized and the money invested in them made
as productive as any other prudent investment.
Putting Market Share
In Its Place
The biggest single factor in manufacturers' reluctance to cut
back on trade promotions is the fear of losing sales and market
share. Of course market share is important, but the quest for
market share at any price can lead companies astray. Manufacturers
know that the more they spend on promotions, the more they'll sell.
Many fail to notice that some market share costs more than it's
worth. One sales executive used to ask the company president each
month how much share he wanted. Whenever outstanding sales were
needed to make the company look good or give the sales force a
little extra luster, they would "rent" some share with increased
trade promotions. "Rent" is the right word, because only a high
level of promotional spending could sustain the market-share
increase. The customers it attracted vanished the moment the extra
promotions were dropped. More to the point, when the rented market
share disappeared, company profits increased. Even if no one is
deliberately gaming the system, it's a mistake to get too excited
about a rise in share-or too upset about a decline-until it is
certain that the sales in question are not costing more money than
they produce.
Valuing Trade
Relationships
In addition to nervousness about market share, there is a second
concern that inhibits efforts to reduce or otherwise optimize trade
promotions: manufacturers are reluctant to destabilize their
relations with the retailers who are their conduit to consumers.
The relationship is an uneasy one to begin with. Manufacturers
complain about the yield loss in their trade promotions (only
50-60% of their trade promotion money ever reaches consumers) and
about the rollercoaster effect of trade promotions on production
and warehousing. Retailers complain about their share of the
overall profit pool (typically, the manufacturer takes 80-85% of
the total profit and the distributor takes 15-20%, so trade margins
tend to be extremely thin).
But continuing to put up with an inefficient and frustrating
system of trade promotions is a poor way to improve these
relationships and no way at all to maximize sales and profits. One
way for manufacturers to help themselves in both areas is by trying
to align their interests with the interests of retailers in order
to produce win/win promotions with benefits for both. It is not an
easy task. The most recent attempt to improve relations is
Efficient Consumer Response (ECR), an informal industry-wide
program of protocols, meetings, and arrangements between
manufacturers and supermarkets to drive out inefficiencies and pass
savings along to consumers.
ECR has had some modest success at improving shipping and
logistics, but it will never make any headway against most trade
problems, because it is not possible to achieve an alignment of
manufacturing and retail interests that stretches across the entire
breadth of the relationship. When alignment does occur, it is
almost always a matter of detailed economics-the velocities and
margins of specific brands and products at specific retail
accounts. It is this kind of specific, tailored alignment that
produces win/win benefits for both manufacturers and the trade, and
it is this kind of alignment that manufacturers should try to find.
One good place to start looking is in product categories. Many
manufacturers manage their trade spending uniformly across an
entire portfolio, but in fact, trade-promotion programs for premium
and value categories should be very different if they are to
produce maximum win/win impact for each dollar spent.
Premium categories, for example, are less affected by in-store
promotions such as price discounts and more likely to get a lift
from efforts to build brand equity. As a rule, premium brands are
less profitable for the trade, but retailers have to carry them in
order to stay in business, since premium brands are the brands
consumers make a special trip to buy. In exchange for increased
sales volume, retailers are often willing to support the idea of
more advertising-and fewer promotions-for premium brands. Over the
long run, in fact, advertising can do more than promotions to
increase volume, and in premium brands, volume is a better source
of revenue for everyone than complicated promotions.
In value categories, on the other hand, it is essential that
marketing strategies and trade promotions benefit retailers
directly or the trade will refuse to cooperate. In all categories,
but especially in value categories, the most profitable strategies
are nearly always win/win alignments that create benefits for
retailers as well as manufacturers.
Making Trade
Promotions Work Harder
There are four ways to approach the problem of trade spending
and get more impact from the money spent. The first, already
widespread, is to tie trade spending to the way products are
marketed within the store-the input approach. Most manufacturers
already pay retailers to set up particular kinds of displays in
particular locations. Of course, almost any display or pricing
promotion will produce some increase in sales volume, but every
promotion will also increase costs and complexity, for the
manufacturer as well as for the trade, and all too often the
expenses are greater than the benefits. The trick is knowing
precisely which kinds of promotions are most effective for each
brand and category in each region of the country. In addition, for
brands that lead their category, manufacturers may be able to
capture the display hotspots in stores or in entire chains. But
this will only work for leaders, and even then it may fail unless
the manufacturer can make it attractive for retailers.
Studies have found that the one factor that best explains
differences in market share from one store to another is also one
of the least complex-shelf space and variety. To increase volume in
ways that will drop quickly to the bottom line, the easiest rule of
thumb is to design trade incentives around shelf space. Once again,
however, it is essential to remember that retailers have a finite
footprint and that more shelf space to one manufacturer means less
to another. The key to making any input strategy work is finding
win/win solutions for the producer and the trade.
The second approach is based on performance, or outputs. Rather
than pay retailers for each unit sold, some manufacturers pay only
for incremental improvements in sales. Their message to the trade
is, "You can do whatever you want in the store to move our product,
but if you sell more of it this year than last, we'll give you a
performance bonus." A number of companies are also considering a
variant of this approach called bundling, which would reward
retailers on the basis of total sales of all of a manufacturer's
products. In both cases, retailers are left to devise their own
in-store tactics and to do their own optimization of
promotions.
The third way to improve yield from trade spending is to move to
fewer and far simpler promotions. One manufacturer found that
shallow TPRs (temporary price reductions) three times a year
produced a higher return on investment than 25 different promotions
in different accounts. Others have adopted everyday low purchase
prices (EDLPP). EDLPP has several advantages. For one thing, it
attacks the costs and complexity of individual promotions. Even
more importantly, it eliminates the peaks and valleys in
manufacturing, warehousing, and distribution, since one stable low
price all year long takes away the retailer's incentive to buy a
lot one month and nothing the next. EDLPP is the new Procter &
Gamble strategy, and the company claims to have cut hundreds of
millions of dollars from the supply chain.
The recurring dilemma of EDLPP is what to do when a competitor
undercuts an everyday low price. The best policy is almost always
to wait it out, knowing that EDLPP is a long-term strategy. But as
a rule it is only category leaders, with their greater resources
and deeper pockets, who can afford to stick to their guns and play
the EDLPP game to a profitable conclusion.
The fourth approach is to radically reduce the number of trade
promotions a company conducts, cutting them by as much as 50%.
Drastic as this sounds, it can be an extremely effective approach
for premium brands if the outlays are transferred to advertising,
because premium customers are more concerned with brand equity than
with price. A number of companies have taken this approach with
surprisingly positive results. In one case, a packaged foods maker
eliminated 30% of its trade spending entirely, dropped half the
savings to the bottom line, spent the other half on advertising,
and realized significantly higher profits. One of its direct
competitors cut back dramatically on trade spending without
increasing its advertising budget. The astounding result: it lost a
quarter of its market share but made more money nevertheless.
It's Monday
Morning-What Do You Do Next?
Despite the all too obvious costs and drawbacks of the way most
manufacturers now run their trade promotions, optimization calls
for some careful thinking and planning. The principal questions you
need to ask and answer are these:
- How much are you now spending, and what rate of return are you
getting on the investment?
- Where is the money being spent? On displays or discounts,
inputs or outputs? Or are you simply giving away money?
- How much of the money you spend reaches consumers? What rate of
reflection are your competitors getting?
- What does each point of market share cost you? Are you renting
share, or do you own it?
- Does your trade-promotion program focus on win/win strategies
that benefit the trade as well as yourself?
- Are you running a single trade-promotion program and budget for
your whole portfolio? Or are you managing by category or by brand?
How well has your company mastered the marketing differences
between premium and value brands?
The most successful trade-promotion strategies are designed
around specifics. Different geographical regions, different retail
chains, different product categories, different brands-all make
different demands on manufacturers and present different
opportunities for cutting costs, improving alignment with the
trade, and enhancing results. To realize an outstanding return on
every marketing dollar, companies must understand and exploit these
differences, not attempt to wipe them.
Jonathan I. Mark is a Director of Bain & Company and
specializes in Consumer Products. Vijay Vishwanath is a Vice
President of Bain & Company and leads Bain's Consumer Products
Practice.
