Despite the controversy and scandal sometimes associated with trade promotions in recent years, CPG manufacturers and retailers are showing no sign of losing interest in this marketing strategy.
On the contrary, over the past 15 years, trade promotions have grown from representing one-third of manufacturers' marketing budgets to two-thirds of their budgets, accounting for about $100 billion annually, according to Michael Forhez, industry director, consumer products, BearingPoint, McLean, Va.
“As mass media has failed to deliver eyeballs, trade promotions have gained steam,” Forhez said. Manufacturers are looking for the extra kick that temporary price reductions, displays and circulars can provide for their brands.
But with the burgeoning of trade promotion budgets has come a greater need for control and accountability of these funds by manufacturers and retailers. In the absence of those controls, trade funding has been used by manufacturers to merely “stuff retailers' warehouses” and by retailers to “extract dollars from manufacturers,” Forhez said.
The advent of Sarbanes-Oxley regulations signaled an end to those freewheeling days, requiring retailers and manufacturers to accurately account for how these funds are spent. However, the prevailing methods, such as Microsoft Excel and Access programs, are often insufficient to do that job.
As a result, numerous software applications have emerged to give manufacturers and retailers a leg up on managing this often complex and unruly marketing practice. “Less than 50% of manufacturers are using this technology,” said Michael Kantor, managing director, Trade Promotion Management Association, New York. “Retailers are higher, at 59% to 62%. But there is a strong trend toward implementing these systems as the benefits prove out. Those who don't will be left behind.”
“Technology allows people to make better sales decisions — where to place their bets,” Forhez said.
In addition to using these systems and integrating them into their other supply chain applications, retailers and manufacturers are increasingly working together on “performance-based” promotions that employ retailer point-of-sale data as a measuring rod of specific promotional activities, Kantor said.
On the retailer side, TradePoint Solutions, Pleasanton, Calif., founded in 2000, is an example of a company that provides Web-based promotion allowance management software enabling retailers to move from a paper-based scenario to an online approach. Among the retailers using this application are Safeway, Save Mart Supermarkets, FoodMaxx, Giant Food Stores and Stop & Shop.
Other vendors with systems that help retailers manage promotions include DemandTec, JDA and Oracle.
One midsized food retailer has been using TradePoint's application for over a year. The system, hosted by TradePoint, allows CPG manufacturers to electronically retrieve relevant information — UPCs, stock codes and descriptions — from the retailer and transmit deal information to the retailer. Deal data flows automatically into the retailer's accounts receivable department.
“For the most part, our buyers and category managers like it,” said the retailer's director of general merchandise, who spoke to SN on condition of anonymity. “It's more efficient and faster in communicating [deal information].”
The GM director cited accuracy as an advantage of the system compared to a manual approach. “When salespeople fill out manual forms late at night, mistakes and omissions are made, integers are transposed,” the director said. Greater accuracy means fewer verification processes need to take place.
Among its features, the system allows buyers to negotiate electronically with suppliers by requesting deal changes online. “That helps negotiations and keeps a record of all communications,” the director said. “From a paper trail standpoint, it's pretty valuable.”
When buyers do meet with suppliers, the system allows them to skip talking about everyday deals. “Now the conversation involves planning and new items vs. promotions on existing items,” the director said. However, the retailer still needs to ascertain information about a manufacturer's promotion budget and plans for major events. “Significant events require coordination and dialogue,” he said.
One of the biggest pluses of the system — which the retailer has not realized yet — is using the electronic deal information to populate ad circulars, which would eliminate the need to print out and key-enter data. But until the chain is able to incorporate that data into its internal systems, it will not be able to dispense with all of the paperwork associated with promotions, the GM director said.
FUTURE SALES CALL
Improving the accuracy of data used by retailers and manufacturers is also one of the hallmarks of data synchronization. With more accurate shared data, retailers and manufacturers can bypass administrative issues, such as delivery delays caused by product dimension errors; instead, they can focus on merchandising goals during manufacturer sales calls, to the betterment of their trade promotions and other collaborative activities.
This “Sales Call of the Future” was one of the themes discussed at the Data Synchronization Summit, which took place in Las Vegas Nov. 2-3. Brad Papietro, e-commerce manager for Wegmans Food Markets, and Lori Bigler, manager, business technology standards, The J.M. Smucker Co., participated in a session in which they endorsed using data synchronization to take merchandising activities to a higher level.
“Accurate data synchronization sets a foundation so sales calls are not about invoice discrepancies or getting new items,” Papietro said. “Those things should take care of themselves because of automation. We want sales calls to be all about merchandising and how to grow the business, and not about administrative stuff.”
Thus Wegmans, an industry leader in data synchronization, over the past few months has been “rallying key vendor partners about how we can start changing the business,” Papietro said. “We're having in-depth conversations with about 15 to 20 partners — plus 50 are working toward that point — where we can eliminate administration [in sales calls].”
Smucker's, Papietro noted, is Wegmans' most accurate supplier, with product accuracy above 90%, compared to an overall average of 50%. “So we talk with them about the business — sales, market share. The old sales call is starting to go away between Wegmans and Smucker's.”
In addition to Smucker's, Campbell Soup is another manufacturer with which Wegmans “has stayed consistently at the top level” in data accuracy and more productive collaboration, he added.
For its part, Smucker's, by sending more timely product information via data synchronization, is “increasing the productivity of our sales force by 25%,” a reflection of the reduction of time spent discussing product inaccuracies, Bigler said.
Forhez noted that as consolidation leads to fewer retailers holding more buying power, manufacturers need to come to sales calls armed with enough information “to help retailers fix problems and figure out marketing programs, not just sell cases.” With the exception of Wal-Mart Stores, he said, few retailers have the processing power to “qualify among brands sold on deal and figure out what are the smart bets.”
While retailers provide the sales space to support promotions, it's the manufacturer who is investing dollars. Thus CPGs have as much, if not more, incentive to manage the trade promotion process as retailers. To help them, a number of technology vendors, including SAP, CAS and Gelco, are offering promotion management systems.
Coty, a cosmetics manufacturer based in New York, plans to employ a trade promotion management system from Atlanta-based CAS in the first quarter of 2007, according to Neil Rohrbacker, director, business intelligence applications for Coty. “We're trying to get more efficient,” he said. “We know we're spending 10% to 20% of revenues on trade promotions, so how do we maximize that?”
The CAS system will help Coty determine the right mix of trade spending by targeting products and types of promotional activities, Rohrbacker said. Then it will perform a post-mortem on which activity worked and which didn't. “If we only have a set amount of money to spend at a retailer, this helps make it a win-win,” he said. “We're not just throwing it out there.”
The system generates reports that Coty salespeople can use in working with retailers. “We can meaningfully look at the facts instead of doing something because we always did in that way,” Rohrbacker said.
The system also manages retailers' deductions, matching up funds deducted from invoices with the promotional activities they were spent on. This proof of performance comes in such forms as ads that ran or POS data. Retailers are prevented from “aging” their deductions — holding onto the promotional funds for a period of time before putting them to work on promotions. Aging has gotten some retailers into legal difficulties.
A Common Language
In a field as complex as trade promotions, there would seem to be a clear need for a set of standard metrics — a common language that retailers and manufacturers can speak. And now those metrics are on the way.
Since June, the Trade Promotion Management Association, New York and Gartner, Stamford, Conn., have been working with manufacturers, retailers and solution providers to develop a set of metrics for trade promotion management.
“We're 40% through,” said Michael Kantor, managing director, Trade Promotion Management Association, New York. “We are vetting the metrics to ensure they are accurate across all Key Performance Indicators and serve the needs of all channels.” He expects the metrics to be “actionable” by April of next year.
Kantor said TPMA is trying to get supermarket retailers involved in the project. Identified participants so far include one retailer, Army & Air Force Exchange Service, as well as CPG companies Hormel Foods, Kellogg's, Beechnut and Newell Rubbermaid.
The metrics developed to date are available at www.vcfww.com/document/Presentation/StandardizedMetrics.pdf. The framework of trade promotion metrics includes program, planning, deal, execution, settlement and analysis. Under each of these headings are a host of related metrics, definitions and parameters.
“Our goal is 70% adoption [of the metrics] for a given manufacturer in a given channel,” Kantor said. “The remaining 30% they would assess based on their own needs and customers.”
Retailers also need to understand the same set of metrics, particularly “on the execution side,” Kantor said. “This gives both retailers and manufacturers a go-to point to work within the system and collaborate on the same set of metrics. They are both concerned with lift, budget maximization and the aging of deductions.”