ATLANTA -- Unless brand marketers can provide supermarkets with incentives to curb forward buying and diverting, efficient promotion is likely to remain an unrealized goal of Efficient Consumer Response.
Efficient promotion is "absolutely critical" to the success of the ECR initiative, according to consultant J. Mark Harran.
"The forward-buy phenomenon impedes ECR attainment. It must change, otherwise efficient promotion becomes an oxymoron," he said.
Harran, who retired Dec. 31 as senior vice president of sales, customer development and marketing services for Kraft General Foods, Northfield, Ill., made his remarks here at a conference titled "Efficient Promotion: A Fundamental Premise of ECR." The conference was sponsored by the Strategic Research Institute, New York.
"Cleaning up forward buying is a formidable task. It has become embedded in the profit structures of distributors, and it is also handy for manufacturers. There are also significant transition-period costs to confront," he said.
Harran cited estimates that diverting accounts for an annual volume of between $7 billion and $20 billion.
These trade practices slow product flow through the system, which also has an adverse impact on quality at the point of sale, he said. They result in uneconomical spikes in manufacturing and shipments, which extend upstream to raw material suppliers. Promotional allowances are not passed through to the consumer.
Faced with these facts, Harran offered what he described as a 'logical leap': "Manufacturers must find the solution to forward buying and diverting. There are three reasons for this. One, they dislike it the most. Two, they stand to lose the most now. Three, they control the trigger.
He proposed seven possible solutions to the logjam, which individually or in combination could help combat the problem:
1) Continuous deals. Offer a deal continuously on an "equivalized" basis. It can be accrued to use for a high-low deal. This can eliminate shipment and manufacturing spikes, but it has several limitations, especially for high-low retailers.
2) Scan-downs. "This is what we thought was the answer originally," he said. But he points out that there will be fraud potential as long as there is no national system -- a third-party network, with audit-proof data -- to administer it. It also shifts inventory risk onto retailers' shoulders, an issue manufacturers must offset.
3) Total CRP adoption. Continuous replenishment forces manufacturers to say "no" to uneconomical trade practices. However, it may cause a retailer to become uncompetitive if it stops and its rivals do not.
4) Buy and hold. This has been around for years in the perishables business. A retailer takes a long position but inventory is moved according to consumption (big order, more smaller shipments). This can avoid many "spikes" associated with forward buys. "Contract pricing may be a better option," Harran said.
5) Value pricing. This strategy both cuts prices and levels spikes. But the shock of going "cold-turkey" can cause antagonism between partners. This, too, needs to be part of a total plan. And as Procter & Gamble has demonstrated, it is a competitive advantage to be first.
6) Cost to serve. Also known as menu pricing, this strategy is to offer price incentives for positive supply chain actions. "This is a user-friendly, voluntary path to life after forward buy," Harran said. "But potentially complex to sell and administer."
7) Consignment. This is the most controversial option, a radical departure from tradition, but there are a few tests out there. Among its key problems are loss of price flexibility for the distributor while the supplier assumes more downstream inventory costs, which must be offset.