HILTON HEAD ISLAND, S.C. -- The issue of trade promotions is getting renewed industry scrutiny through a soon-to-be-released study that points to a huge savings potential for trading partners if practices are changed.
But even as the study, by Andersen Consulting, was previewed here last week at the Midyear Executive Conference of Food Distributors International, Falls Church, Va., some comments from a panel of industry executives indicated that the long-delayed effort to alter promotions practices won't be easy.
"Trade promotions are more costly and less productive than anyone ever realized," Frank Kinder, a senior manager for Andersen's Strategic Services practice in Chicago, said in outlining the points of the study.
Kinder, who noted that the industry invests more than $30 billion in trade promotions, said companies aren't doing the research to find out how much is really being spent. "Manufacturers say more than half of their events are profitable, but only 32% are doing the analysis. And those that do say the percent of profitable events is much lower. We've found it's more likely 10% to 20%."
Moreover, consumers are unaware that 50% of the sale items they purchase were on promotion, so "half of all sale items are given away," he said, adding that only 65% of every trade dollar is passed through by distributors.
The Andersen study was based on surveys and interviews involving a wide range of trading partners and proprietary consumer research. It points to continued resistance to change, partly because manufacturers consider promotions "a lever to produce steady earnings" and "distributors profit from trade promotion activity and will resist change unless we can see a way to manage profitability."
Trading partners have made efforts to improve practices, Kinder said, adding that the potential is far greater. "For manufacturers, there may be up to a 40% return on sales increase, compared to an industry aggregate, and for distributors up to a 60% increase."
Trading partners must take individual and bilateral actions to improve the promotions picture, Kinder noted. Unilateral strategies include defining the role of a promotion and targeting hidden costs. Companies can reach those goals by improving productivity and simplifying payment processing. Technology changes, such as a closed-loop planning system and expanding electronic data interchange and the uniform communication standard, will bolster the effort. Organizational improvements, such as redefining job/performance measures and upgrading skills, are also useful.
Integrated actions among trading partners can include restructuring the promotion agreement, refocusing on building value, standardizing the collaborative planning process and committing to automate and link the administrative process.
A panel of industry executives formed to comment on the study's findings confirmed the need to address trade promotion changes but was far from unanimous on how to execute change.
"We have to be careful in how we change," said Jeff Noddle, executive vice president and chief operating officer of Wholesale Food Cos. for Supervalu, Minneapolis. "Our concern is that change will result in fewer ways to go to market. Change might validate a certain way to go to market, such as EDLP. So we want to protect the ways we go to market so we don't have more limited choices and less excitement. We support fewer inefficiencies, but manufacturers must work with us for the transition." He noted that administrative costs are too high, causing distributors to suffer.
"Finishing the electronic links should have been a higher priority in Efficient Consumer Response," he said. "We need more EDI and UCS investment. A big burden is being shifted to distributors."
Marv Imus, president of Paw Paw Shopping Center, a one-unit supermarket operation in Paw Paw, Mich., said the problem of consumers not being aware of promotions can be solved through customer-specific marketing. "Through that type of marketing, customers are more aware of items being promoted," he said. "We're trying to look for trade practices that enhance customer loyalty."
Tom Christal, president and chief executive officer of Christal Co., a brokerage based in San Antonio, said organizations need to put more effort into execution of goals. "We spend too much time on planning, but the industry hasn't spent enough time figuring how to execute," he said. Through activity-based costing, he added, Christal Co. can better determine which manufacturer programs are profitable for the broker. In one case, the broker found a principal that wasn't profitable, but determined how to turn that around.
Christal and Noddle said the study's figure of 65% pass-through by distributors seems low. "That looks low to me today," Noddle said. "That figure probably wasn't low for 10 years ago."
Tom O'Brien, director of Customer Business Systems, North America, for Procter & Gamble, Cincinnati, said P&G has already enacted many of the practices suggested in the Andersen study in efforts to scale down promotions. "We have developed internal criteria for promotions, eliminating many kinds, reducing coupon expenditures and lowering list costs," he said. "Promotion is only one tool available. We want to test promotions against ECR principles.
