Manufacturer promotions of the future will most likely be driven by the checkout scanner, not the warehouse order, and retailers are learning how to play by new rules.
A growing number of manufacturers consider pay-for-performance their preferred method of conducting promotions because it comes closest to achieving the goals of efficient promotion.
Because retailers in pay-on-scan programs receive discount allowances on products they sell, rather than on cases they buy,
manufacturers say their discounts directly impact the consumer. Further, the practice discourages inefficient forward-buy or diverting activities.
"Pay-for-performance is another indication that the world is changing: that we're all in the business to sell product," said Jerry Golub, director of health and beauty care at Price Chopper Supermarkets, Schenectady, N.Y.
Retailers in a pay-on-scan program place selected products on sale and send their scanner movement data, usually at weekly intervals, to the manufacturer. Only then do retailers receive their promotional discount allowances.
The growth of pay-on-scan programs has the potential to alter the playing field for retailers and manufacturers alike. Perhaps the two most substantial changes taking shape are:
Lower Retail Prices: Consumers stand to gain lower sale prices through a pay-on-scan program than from a traditional promotion. Retailers can reduce their prices further because they gain greater promotional discount allowances from manufacturers.
Manufacturers, in turn, are willing to pay these greater allowances because they have concrete evidence in the form of scan data on how their promotion is affecting consumers. In traditional programs, the retailer often dictates when and if consumers get a sale.
Less Promotional Flexibility: Pay-on-scan tips the control of promotions in the manufacturer's favor. Retailers must now adhere to a manufacturer's set promotional period to gain their allowances: If retailers cut the program short, they miss out on discounts; if they extend the promotion, they are no longer compensated.
Pay-for-performance also discourages forward buying and diverting, since promotional discounts end after a set period and may be restricted to a certain region. To avoid excess inventories, retailers and wholesalers must improve order accuracies and sales projections.
A promotional process that has greater manufacturer input can result, however, in gaining greater trust and cooperation, retailers said.
Pay-for-performance is currently still in its early stages, offered mainly by large manufacturers who are often leaders in conducting Efficient Consumer Response initiatives, such as Kellogg Co., Battle Creek, Mich.; Procter & Gamble, Cincinnati, and Kraft Foods, Northfield, Ill.
Some obstacles still remain for further program implementations, retailers said, including some retailers' lack of sophisticated front-end technology and retailer wariness to change long-standing promotional practices.
"Scanner-based promotions are going to be a very strong area of growth," said Glen Griffiths, director of sales promotion and communications at McNeil Consumer Products Co., Fort Washington, Pa. "I think they're going to be a primary funding force."
"We're going toward [pay-on-scan] for many of the promotions we run," Golub said. "I think pay-for-performance really does channel promotional dollars right to the consumer."
Because manufacturers offer greater promotional discounts through pay-for-performance, retailers can offer further reduced prices than in a traditional promotion.
"Your retail prices become much more attractive for the consumer" through pay-on-scan programs, said Jim Boudreau, senior vice president of merchandising at Brodbeck Enterprises, Platteville, Wis.
The main driver of lower retail prices is that "in pay-for-performance, the monies we get from the vendor are greater," he said. "In the past we got about a $3 billback on a case, but now we may be getting from 75 cents up to $1 or more per unit sold."
"Usually we can get a lower net cost [through pay-on-scan], so we can look more competitive in the ad for that period," said Jan Gilbert, vice president of merchandising at Scolari's Food & Drug, Sparks, Nev.
Price Chopper's Golub agreed. "Manufacturers can spend more [on allowances] knowing that the entire expense will be reflected in savings to the consumer," he added.
He cautioned, however, that retailers shouldn't sacrifice their profit margins in the drive to lower prices. "We need to be careful that we maintain the desired levels of profitability when we do these promotions."
Retailers are finding that in many cases pay-on-scan programs spur store sales further than traditional promotions. While the sales increases are partly spurred by lower retail prices, they are also driven because retailers are forced to discount products for the entire duration of the promotion.
"Some [retailers] were maybe only performing for part of the promotional period requirement to get the billback," and then pulling the product off of promotion, Boudreau said.
"Now you have to perform for that entire period of time to get paid for what you actually sell," he added.
Pay-for-performance can also be a natural link to category management programs, retailers said. Building solid relationships with manufacturers through pay-on-scan could lead to specific promotions geared toward boosting a certain category.
"We're trying to discover how you promote a category appropriately," said one Eastern retailer who wished to remain anonymous.
"How do you promote items to drive a category to fulfill the roles and strategies you laid out for it?" he said. "Payment-for-performance is a good way to do it."
Brodbeck, which is now working with three manufacturers to determine profitability and movement in the ready-to-eat cereal category, for example, contends that pay-for-performance is another method of cementing its relationships.
Through its initial category reset of detergents, for example, "we've already made some retail price adjustments: some downward, some upward," Boudreau said. "Once we get through the entire process, I think there will be a relationship with these vendors to do some" pay-on-scan promotions.
Retailers cautioned, however, that pay-on-scan programs have some downsides that have yet to be adequately addressed.
Self-distributing retailers and wholesalers in particular believe that since they can no longer extend a promotion to suit their needs, or divert products to another market, they may be stranded with excess goods at regular price once the promotion ends.
"I don't want full-price merchandise sitting on a display when the promotion's over," Scolari's Gilbert said. "That's a disadvantage to scan-downs: You can get a good one-week [price] cut, but what do you do after that?"
"The downside from the retailer perspective is the chance of having excessive inventory: They feel they're not being compensated for that risk," said Ed Martin, vice president at Efficient Market Services, Deerfield, Ill.
Retailers must monitor stores' performance more closely as a way to get more accurate sales projections, he said. The more accurate the projections, the less risk of having excess inventories.
Currently, "retailers will log in the fact an item was promoted with an ad, but the actual store-level detail of which stores displayed the product is often missing," Martin said.
Retailers are also concerned that the loss of forward-buying will inhibit their ability to drive sales. By stocking up on discounted merchandise, retailers could extend promotions beyond the set period to suit their needs.
"If we make a forward-buy against a particular promotion, we leave our temporary price reduction on until we've sold through that particular product," said Scolari's Gilbert.
"Even if the vendor offered a four-week [promotion] and we made a six- or eight-week purchase, all we did was keep our TPR on, which kept us a little more competitive at retail," he added. "You drive more sales that way and you wind up in the long run with more gross margin.
"Because we're a local-based retailer with our own distribution center, we don't use inside margins; we make all [our profits] on retail sales," Gilbert said.
Other retailers, however, said scan-based promotions help them plan promotions more wisely by concentrating their efforts on improving retail sales, not on having buyers gain profit deals.
For the Eastern retailer, pay-on-scan focuses them on discounting items for which they will be compensated. In past promotions, the retailer often stocked up on discounted merchandise at the warehouse while putting some products on sale that lost money.
Through pay-on-scan, "we don't have to have a loss leader in our ad and try to make up for it with a warehouse forward-buy," the retailer said.
The logistics of compiling and sending the scan data pivotal to pay-for-performance also have yet to be settled, retailers and manufacturers said.
"One of the problems for manufacturers is that there is inconsistency in the data from one retailer to the next," McNeil's Griffiths said.
"We often have a lot of sorting to do, looking through different reports and deciphering what the product performance is," he said. "It would be simpler if we had one universal reporting system," such as electronic data interchange.
"There are two transaction sets, 852 and 854, which could be applied to this type of purpose," he said. Use of the transactions in the supermarket industry, however, is extremely rare.
"There needs to be a one-step process where the promotion ends and the information is automatically transmitted to the vendor," the Eastern retailer agreed. "But we're not there yet."
