A lot of money is spent by manufacturers on promoting their brands through stores, i.e. trade promotions. Now manufacturers and retailers are getting smarter about tracking how the money is used.
Consider this: U.S. consumer packaged goods companies spend more than $80 billion annually on trade promotions, according to a 2002 study by Cannondale Associates. A 2003 AMR Research report put the average trade fund budget among CPG manufacturers at 10% to 30% of revenue.
CPG manufacturers send trade dollars to retailers with the understanding that grocers will use that money to fund specific promotional activities. However, one source revealed that "typically, the retailers use at least half the money to supplement their bottom line. They don't build the displays. They don't do half of what they're supposed to do."
Some retailers, however, are taking this process seriously. They are implementing systems that track the use and impact of promotions. "Brands are going to look much more favorably upon working with retailers that have systems in place to track the results of promotions than those that don't," predicted industry consultant Mark Heckman, president and senior analyst, Strategic Retail Solutions, Bradenton, Fla. Indeed, according to the AMR report, CPG executives want to reduce trade spending and see better returns on it.
"Brands and retailers need to have better empirical results and evidence of results of their promotions, relative to the past where a lot of those things have been less measurable and certainly more nebulous," noted Heckman. "A couple of things are really pushing that. On the retailer side, particularly for publicly traded companies, there's the drive for shareholder equity and profitability. They're trying to drive as much productivity as possible out of their promotions in the face of competition from Wal-Mart and some of the other channels."
The other key factor, Heckman added, is the Sarbanes-Oxley Act (SOA), which requires publicly traded food retailers to have financial control systems in place for the tracking, measuring and accounting of trade funds. Retailers must have these systems up and running by Nov. 15.
"Sarbanes-Oxley regulations hold publicly traded companies accountable for having controls and processes in place that will be able to prove beyond a shadow of a doubt that they are empirically tracking, measuring and accounting for their trade promotion dollars," said Heckman. "FASB [Financial Accounting Standards Board] 141 dictates how one recognizes revenue, when they recognize it, and how they're able to track that."
With the compliance deadline looming, how ready are retailers? "Of the retailers that I've talked to, there is a general feeling of confidence that they understand what they need to do and that they have steps or a process in place that they feel comfortable is going to bring them into compliance," Heckman said.
Ronald Lunde, principal of market strategy consulting firm The Lunde Co., Ponte Vedra, Fla., said some software suites are available to handle SOA. "But in the grocery industry, I'm having a hard time finding anybody that is deploying it at the moment."
Grocers, Lunde said, may believe their existing, traditional, financial accounting systems will suffice. Lunde is less sure. "Manufacturers have to be assured that the [trade dollars] they are spending went for the purpose to which it was intended," he said. "It is highly probable that the systems historically used by supermarkets to report those kinds of transactions, such as trade promotion allowances, will not meet that standard because they were never designed for it."
Historically, retailers have handled promotions processes as a series of discrete activities, with no real understanding of how trade funds affect sales and demand, said Rob Garf, retail analyst, AMR Research, Boston.
Yet today, driven by competition and government regulation, retailers are starting to take a more holistic approach to promotions management. An integrated, consumer-driven approach "allows retailers to take in all the variable pieces of information that will impact their forecast -- whether it's coming from trade funds, promotional events, external demographic information [or] geographic information -- and really be able to use all of these variables to create one demand forecast that will help drive the planning process."
One new system that helps bring together disparate promotional elements is Retail Media Management (RMM), from POSnet, Rolling Meadows, Ill. The system was designed as a single point-of-sale interface for electronically processing offers from multiple promotional distribution channels such as coupon Web sites, loyalty cards and e-mail.
Pathmark Stores, Carteret, N.J., is the first food retailer to use RMM. Trish Cucinelli, Pathmark's loyalty marketing manager, told SN earlier this year that the POSnet system will let Pathmark make more than one offer from different sources on one Universal Product Code (UPC). She also said the system gives Pathmark the ability to electronically validate that offers were applied to purchases at the POS and present that validation to manufacturers. This was not possible previously.
Because RMM integrates offers with loyalty information at the POS, it gives retailers "the ability to target specific customers using frequent shopper data," said Carlene Thissen, president of Retail Systems Consulting, Naples, Fla., which works with POSnet.
The current focus on integrated apps dovetails with another trend consultants have witnessed in recent years: retailers replacing parallel databases that fed different views of data to different disciplines with a single repository of data or data warehouse that gives one view of the data across the enterprise.
"The buzz now is data convergence," said Heckman. "Everybody's talking about taking data from all the different repositories and sources -- whether it comes from the brand, the retailer or syndicated data -- and being able to put it into one repository." The data warehouse, he said, is designed with open architecture so it can talk to a category management solution, frequent shopper application and other business systems.
As integration fever takes hold among retailers, vendors are seizing the opportunity and building out their offerings. "Best-of-breed vendors are expanding their footprint into other areas of consumer demand management," said Garf. "They are doing this to accommodate retailers' desire for an integrated framework that provides a single view of forecast data and a seamless workflow."
KhiMetrics, for example, announced last year that it was taking its system beyond price optimization and demand forecasting and going deeper into promotion optimization. "We did so because that was the next logical extension for this application," said Tim Manning, vice president of marketing for Khimetrics, Scottsdale, Ariz. "When you're naturally optimizing regular prices, promotions are a regular and dramatic component of any retailer's price mix."
Lawson Software, St. Paul, Minn., is also deepening its trade funds management capabilities. "We have had the financial management aspects of it all along, and have offered category management to the marketplace since August of 2001," said Carol Mackenzie, Lawson's retail vertical market director. "We are now doing more closed-loop promotions execution support, so we have a very deep store execution package." Lawson released Promotions InSight, an analytics tool, this year. "The purpose of Promotions InSight is to give a full financial return on investment by promotion," said Jeremy Spencer, Lawson's director of Retail InSight Operations.
"The technology looks at all the different types of promotions that a grocery retailer can run. Our mathematics work on all of the promotional history that the retailer has to help establish what is the best promotional technique to use for a certain type of product in a certain type of store, while also trying to get maximum revenue and profit uplift against the level of spend you're putting into the promotion."
In many cases, vendors are building out their offerings through partnerships with other vendors that have complementary technologies. "It's rare that one company has all the pieces of the puzzle," said Heckman. "It's easier to get someplace in 2004 by shaking hands with some of the other companies as opposed to developing all of the competencies organically."
Lawson and KhiMetrics are taking this path with Connect3 Systems, Cerritos, Calif., a provider of planning and execution systems for advertising, marketing and promotions. Lawson recently announced that a connector would soon be available to integrate Promotions InSight and the suite of Lawson Retail Operations applications with Connect3 solutions. This integration, said Mackenzie, "provides an all-inclusive promotions management solution that will improve and accelerate the promotion planning and production process."
KhiMetrics said its alliance with Connect3 was aimed at providing an end-to-end application for measuring, planning, optimizing and executing promotions.
Retailers can face significant hurdles when deploying these complex, enterprise-level solutions, and not just from the technical side. Depending on the grocer and the system, vendors told SN it can take at least several months to get a retailer up and running. The systems can cost upward of $1 million, and in some cases many millions.
As for the KhiMetrics solution, Manning said, "It is demonstrable that we can produce a return on investment regardless of its size well within a year of the capital outlay." According to Spencer, retailers that use Promotions InSight can expect a 45% to 55% annual improvement in the effectiveness of their trade funds spend.