INDUSTRY PLAYS NEW NUMBERS GAMES

DAVID GHITELMAN

A majority of consumer packaged goods manufacturers are considering alterations in their vendor allowance programs in the wake of changes in accounting rules, but those reconsiderations do not appear to have resulted yet in major changes in practice.

Interviews by SN with manufacturers, retailers and industry observers uncovered little evidence that a series of accounting rule changes, which went into effect in December and now require manufacturers to record vendor allowances as deductions from revenue rather than as selling expenses, have changed either the amount of money paid or the way it is made available to retailers.

Which is not to say that a change is not coming.

A survey of nearly 450 manufacturers and retailers by Cannondale Associates, a Wilton, Conn.-based retail consultancy, found 62% of retailers expect the accounting rule changes to result in a "total review of trade promotion/strategy."

Among manufacturer respondents, 61% said they expect their companies to make a "closer evaluation of promotion expenditures."

Nearly half of the retailers (46%) said they expect to see a reduction of promotion expenses, although only slightly more than a quarter (26%) of the manufacturers said they expect to see spending decrease.

The Cannondale report noted, "Clearly, at the time of this survey in early 2002, these issues were just beginning to surface. We anticipate the magnitude of these issues will only intensify as the ramifications are felt throughout the industry."

Ron Lunde, a Chicago-based retail consultant, attributed the inaction on the part of manufacturers largely to ignorance.

"Although the accountants are aware of the changes," he said, "it does not appear that CPG marketing and salespersons, or those responsible for retail marketing or merchandising decisions, have been well-informed of these issues.

"For the last 30 years or so, the 'how' of marketing has been honed. The new rules will undoubtedly make everyone involved in market expenditures -- whether advertising, consumer or trade promotion -- also revisit the 'why' of marketing.

"Both CPGs and retailers will have to seek new bearings."

However, some CPG manufacturers appear to have prepared for the new rules. A spokesman for Procter & Gamble, Cincinnati, told SN, "We've been aligned to the rule for some time. It will have no impact on our trade promotion plans.

"We work individually with customers to create and develop promotions that create value and a return for both of us. We monitor return-on-promotion dollars at the customer level.

"The rule change has no bearing at all for our advertising-trade promotion split."

The Cannondale survey noted that Procter & Gamble was unusual among manufacturers for having adjusted its accounting practices in advance of the rule change going into effect.

Perhaps more typical was a spokesman for a regional retailer who declined to comment for this story.

"If I tell you our vendor allowances haven't changed or have gone up, then our competitors are going to complain to the manufacturers about their payments decreasing," he explained.

The new accounting rules were issued by the Emerging Issues Task Force of the Financial Accounting Standards Board, a non-government body that formulates accounting rules for the Securities and Exchange Commission.

According to Lunde, the rules apply to vendors and their customers, including resellers and businesses that purchase products from resellers.

Among the trade practices covered, Lunde said, are discounts, coupons, rebates, slotting fees, cooperative advertising, barter, credits and volume discounts.