LOST IN A LABYRINTH

ADAM BLAIR

Few in the supermarket industry would argue that trade promotion practices have a significant impact on all facets of the supply chain.

As just the most visible example, forward-buy inventory represents more than 20% of distributors' total inventory, according to a survey of retailers and wholesalers conducted by Andersen Consulting, Chicago.

Yet efficient promotion -- the Efficient Consumer Response initiative designed to smooth out the roller-coaster effects of promotion practices, among other goals -- has often hit considerable stumbling blocks in the industry's efforts to streamline itself.

This is despite the fact that original estimates of savings from efficient promotion were $10 billion, representing one-third of the total projected savings from all ECR initiatives.

One major reason efficient promotion has kept such a low profile has been because of legal concerns. Discussion of trade practices -- because they involve the prices distributors, and eventually, consumers, pay for product -- may be a violation of antitrust statutes. This has inhibited various ECR committees from directly addressing promotion issues, and delayed publication of best-practice guidelines for making trade promotions more efficient.

Besides forward-buying, other effects of current promotion practices include diverting of product; inefficient use of distribution center space, including the need for third-party warehouses to hold "excess" promoted product; and accounting costs associated with complex deal structures among manufacturers, wholesalers and retailers.

"Efficient promotion isn't being addressed by committees and reports, but it's being addressed in the field by various trading partners," said Dan Raftery, president, Prime Consulting, Bannockburn, Ill. "Everybody recognizes that there are a lot of inefficiencies in promotion practices, and people are doing a lot of different things to drive those inefficiencies out."

Among companies moving in the direction of more efficient promotions, several industry observers cited Cincinnati-based Procter & Gamble's Value Pricing initiative, introduced in 1992, as well its ongoing efforts to determine promotions' effectiveness, such as the recent "zero coupon" test in western New York state.

Distributors recognizing the costs inherent in current promotional practices are also taking steps. "Some wholesalers and retailers are proactively saying to manufacturers 'Let's restructure the way you give me trade promotions,' " said Frank Kinder, senior manager, Andersen Consulting. "They're saying 'Keep me whole in terms of the amount of promotion money, but remove these discontinuous economic incentives that force me to fill warehouses.' "

"We would favor an accrual approach to promotion, even though there's a risk involved," said Jim Swoboda, director of logistics and distribution technology, Spartan Stores, Grand Rapids, Mich. "The risk is that, in effect, the promotion budget has been passed on to the wholesaler. If we spend more than that, it's our risk.

"The pluses are flexibility," Swoboda added. "[A distributor] can run promotions on the items it determines are needed in a marketplace, at price points it determines to be fair and reasonable," he said.

Andersen's Kinder, however, warned that distributors need to understand the impact of all promotional deals, simple or complex. "A lot of distributors may not be in a position to understand their true net costs," said Kinder. "If they don't have clear understanding and visibility, they may make the wrong pricing decisions. That can hurt them both in terms of margin and penny profit."

"Very few trading partners have anything that approaches accurate costing systems," said Jack Haedicke, chief operating officer of OneSource, Windsor Locks, Conn. Haedicke served until recently as co-chairman of the ECR Operating Committee. "They tend to globally average costs across all product lines, regardless of operational expenses.

A long-awaited "White Paper" on efficient promotion from Andersen Consulting is scheduled for publication later this summer. Surveys of manufacturers, wholesalers, brokers, retailers and consumers conducted in mid-1995 provide a portrait of the complexities involved in making promotions both more efficient and more effective.

For example, manufacturers reported in 1995 that they spent 13% of their sales dollar on trade promotions, down from 15% in 1993, said Kinder. They predicted spending would decline only one more percentage point by the year 2000.

"With all the hubbub, discussions and awareness about making trade promotions a winning proposition, we were surprised that manufacturers were neither more aggressive nor more optimistic," about lowering trade promotion dollars overall, said Kinder. "Clearly they believe this is not going to go away."

Andersen also measured the dollar amount of trade promotion spending in the grocery channel, for branded, promoted products, at $25 billion annually. "The total may be close to double that when you consider alternate channels of distribution," noted Kinder.

Despite these challenges, some believe individual efforts may have a cumulative impact. "The environment on promotion has changed," said Michael Sansolo, group vice president of education, industry relations and research for the Food Marketing Institute, Washington. "A lot of participants have said that the force of the efficient promotion project being there has helped them clean up the system. The problems are not licked yet, but we're definitely getting something done."