New accounting rules that have turned many traditional marketing expenses into a reduction in net sales/revenue could place more emphasis on trade promotion effectiveness, according to a new study.
Sixty-one percent of manufacturers say the reclassifications by the Financial Accounting Standards Board and Emerging Issues Task Force will lead to closer evaluation of promotion expenditures; 50%, increased testing of promotion options; and 50%, a total review of trade programs/strategies, according to "2002 Trade Promotion Spending and Merchandising" by Cannondale Associates, a Wilton, Conn., consulting firm.
"With the new accounting regulations, we're going to see an increased scrutiny placed on trade promotion in 2002," an unidentified manufacturer says in the study. However, the manufacturer added that trade promotion is "still going to be a critical part of our marketing expenditures."
Under the rules, key expenditures in advertising and promotion -- including slotting allowances, bill backs, off-invoice allowances, coupon redemption, discounts, rebates, free products, co-op advertising and price reductions -- have been reclassified to a reduction in net sales or revenue. The purpose of the change is to allow more accurate representation and easier comparison of profit and loss statements. While the reclassifications don't affect the bottom line, they could impact price/earnings ratios and stock price valuations.
To continue classifying expenditures as a marketing expense, manufacturers may avoid some of the more price-oriented aspects of trade promotion, focusing instead on specific customers, according to Don Stuart, partner, Cannondale.
"There will be less of a price focus and more emphasis on building brands," said Stuart.
Stuart predicts that manufacturers will start testing options -- like co-marketing and aisle-architecture programs -- that won't directly lower net sales.
Zatarain's, a Gretna, La., manufacturer of New Orleans-style foods, may respond by analyzing trade promotion more heavily internally, Dan Krause, Zatarain's business development manager, told Brand Marketing.
"Because there is a reclassification, my guess is that there will be more scrutiny about trade expenses," Krause said. He stressed, however, that the rules will have little effect on the way its does business with retailers.
Krause cited concern, though, about how the new requirements will affect the way investors perceive food companies.
"Among foods companies, it won't matter, because we're all in the same boat. But if you're an investor, and you're looking at a food company and another type of company, it could make a difference," said Krause.
Zatarain's just begun using a trade funds and deductions system from I-many, Portland, Maine, a provider of trade relationship management solutions. The solution gives Zatarain's a real-time system to manage trade spending. Deduction claims are matched to associated trade promotions, reducing back-and-forth messages between accounting, sales, marketing and agents.
The FASB rules could give more credence to solutions like this. That's because such systems give CPG executives better knowledge about the net impact of each promotional activity, enabling them to allocate their dollars more effectively. To keep spending in check, over the last few years many manufacturers have turned to software programs. Mott's, Stamford, Conn., for instance, is in the process of rolling out a trade promotion accounting and analysis solution from MEI. Based in Montreal, Canada, MEI's U.S. headquarters are in Basking Ridge, N.J.
A subsidiary of London-based Cadbury Schweppes that produces apple sauce and juice -- along with brands including Mott's Fruitsations, Hawaiian Punch and Yoo-Hoo -- Mott's expects to have the system completed by the fall, according to Fred Schroeder, MEI's vice president, sales, North America.
While Schroeder originally thought it was going to be a slower year for trade systems, the opposite has occurred, due in part to the FASB rules. Many companies now no longer want to get a system running in a year or two, but by the end of the year.
"Everyone's struggling with economics surrounding trade promotion," Schroeder said. "[Chief financial officers] are getting more involved in finding out things like where the money is, how it's being spent, and why deductions are there."
I-many may create a marketing campaign to talk about the benefits of trade promotion solutions, said Bob Tantillo, the company's director of product management.
If it does, it may address a loophole in the reclassifications. Tantillo cited that when manufacturers officially put resolution to a trade promotion, only then -- according to the new accounting rules -- is it officially an expense.
Marketers that have a trade promotion solution and deduction application could be at an advantage because they have more flexibility in terms of when the expense occurs. "When you overlay the new accounting requirements, trade promotion integration and deduction applications become even more important," Tantillo said. "Manufacturers may allow the deduction to occur, then resolve it when they want the expense to occur."
Karen Beckwith, president and chief executive officer, Gelco Trade Management Group, Minneapolis, said the requirements give manufacturers "another reason" to analyze the effectiveness of their trade spending.
"Instead of reducing trade spending, they may just spend it in a more effective way," she said. "Manufacturers will want to make sure they're spending money wisely."
A division of Gelco Information Network, the Gelco Trade Management Group provides Web-based, trade promotions management services. It just launched the Certified Consulting Practice, which provides clients with access to both Gelco expertise and consulting organizations specializing in the consumer goods industry.
Beckwith doesn't think the FASB rules will lead to a drastic change in trade promotion practices.
"Most companies won't change the way they do business -- just their accounting procedures," she said
Beckwith said the rules can actually benefit the CPG industry because they will put all manufacturers on a level playing field in terms of representation and comparison of profit and loss statements.
Even before the rules went into effect on Dec. 15, 2001, trade promotion was a point of concern for manufacturers. That's because traditional trade promotion is the largest marketing-line item for manufacturers.
Manufacturers currently direct 59% of their marketing budget toward customers, according to Cannondale. Of this, 49% is traditional trade promotion, while 10% is account-specific marketing.
Just 7% of manufacturers say they are highly effective at evaluating trade promotion productivity, the study states. Forty-nine percent say they are "somewhat effective." As for the customer perspective, 41% of retailers say both P&G and Kraft most effectively use trade funds, according to the study. P&G's ranking slipped two points from 2000, while Kraft's ranking went up three points. Other manufacturers in the Top 5 are General Mills, at 32%, up seven points; Unilever, 17%, up nine points; and Coca-Cola, 11%, down 9 points.
Some manufacturers started taking reductions in sales prior to the ruling. Procter & Gamble was one of them, according to Cannondale.
Rich Sea-Pak, a St. Simons Island, Ga., manufacturer of the Sea-Pak brand of frozen seafood and FarmRich brand of frozen snacks and appetizers, has also been in compliance, according to Jim Bruffy, the company's general manager, consumer products.
"[The FASB reclassifications] will have no effect on us," said Bruffy.
Bruffy said the firm's trade spending has been steady over the last seven to 10 years, and will remain stable for at least the next year or so. While the company doesn't plan to reduce trade spending, its focus on consumer promotion has been "dramatically increasing." Bruffy said trade promotion helps generate trial, but provides only a short-term lift. Consumer promotion, on the other hand, helps build brand equity, he said.
Rich Sea-Pak has just become more involved in trade promotion analysis. It's contracting with Gelco and market research firm Information Resources Inc., Chicago, to track the effectiveness of its trade spending.
"We want to see what kind of lifts we're getting from our trade spend," said Jody Joiner, category manager. "We'll be able to determine whether it was profitable for both the manufacturer and retailer."
