REDEEMING VALUES 1994-08-22 (3)

MARC MILLSTEIN

Couponing is entering a brand-new era.

In it, retailers and manufacturers are testing a wide assortment of highly targeted in-store coupon distribution systems that promise to hike redemption rates considerably and drive sales.

They also are trying to determine which systems work best to promote products efficiently and cost-effectively.

While newspaper freestanding inserts and print advertisements remain the dominant form of distribution by far, accounting for almost 90% of the 300-plus billion coupons printed and circulated annually in the United States, redemption rates using these sources are only 2% to 3% and may be dropping.

In the meantime, electronic point-of-sale

and shelf-based coupon dispensing systems from companies such as Actmedia, Catalina Marketing and Advanced Promotion Technologies are gaining a small but firm foothold in the industry. In-store sampling programs involving coupons as well as products also are being touted as especially effective in driving sales.

Compared with FSIs, these systems offer the advantages of targeting in-store shoppers specifically, generating redemption rates that can exceed 10% and prompting increased consumer purchases.

The big question many retailers now are asking is when these more targeted couponing systems will take hold throughout the industry, and how much of the FSI's role they will usurp.

FSIs still hold a number of advantages for manufacturers, such as low cost and advertising value. As evidence of the stronghold they still command, 88% of all coupons issued last year were distributed via FSIs. Accordingly, the jury is still out on where couponing is headed.

Retailers, though, are clear about what they want.

"The national FSI redemption rate is about 3% and dropping. Manufacturers have to address a real issue about spending millions of dollars for FSIs for that level of return," said Pat Nowak, director of marketing at Seaway Food Town, Maumee, Ohio.

"Is [FSI] couponing worth it? Well, it isn't. The economics are there today to support moving to these new systems in which the people most interested in the product get the coupon -- and that is what you want. What you don't want is to be producing 3 to 4 billion coupons a year and have only 2% or 3% of them being used," she said.

"People hate cutting coupons. That's the bottom line. I don't know what the redemption rates with the new programs are exactly, but I know consumers are taking the coupons and using them at the checkout stand."

Michael Tetmeyer, vice president of marketing at Hy-Vee Food Stores, Chariton, Iowa, sounded a similar note. "FSIs move some product, but not nearly the way other forms [of couponing] could. Electronic dispensing of coupons is something we're looking at. It's just a matter of getting things checked out. We will be moving into it."

Dick Schrudder, director of promotions at Raley's, West Sacramento, Calif., said he expects FSI usage to decline precipitously in the next couple of years. In place of FSIs, he urged manufacturers to support alternative systems, including in-store sampling.

"The future of FSIs, in my opinion, is dwindling. Newspaper circulation is declining and advertising readership is down. Whenever we talk with manufacturers, we suggest that money would be better spent on a local level, such as sampling and other in-store couponing programs," Schrudder said.

Nowak also called for manufacturers to support more in-store sampling programs. "We have a very competitive demonstration program in which manufacturers come in and do product sampling and hand out coupons. That way the consumer samples the product, gets a coupon and can go right to the checkout."

Although retailers would like to see manufacturers support in-store targeted couponing systems aggressively, the reality is that the programs cost considerably more to support and administer. As a result, answering the bottom-line question of whether FSIs or alternative systems are the most cost-effective to drive sales is difficult. Although FSIs may have low redemption rates, they are a much less expensive distribution vehicle.

The issue, said Jerry Austin, executive vice president of marketing at Fleming Cos., Oklahoma City, is what works best and most cost-effectively for manufacturers, and how quickly they will or should embrace the new technologies.

"That FSI is not only a coupon, it is also an ad. The customer sees that FSI. They may not redeem it, tear it out or save it, but they see it much as they see an ad in the newspaper. It has an advertising value other than its redemption rate," he said.

Tetmeyer agreed. "I believe FSIs probably are outdated. But every time I talk with manufacturers, they say they like FSIs, not necessarily for their redemption value as much as for how much exposure they get for their products. It's advertising." As for sampling programs, "we have seen some increased support of product demonstrations, but not a lot. It's very effective when it's done. But labor is very expensive. I'm not sure it will ever become commonplace."

Richard McNally, vice president of operations at the Pennsylvania Food Merchants Association, Camp Hill, Pa., and president of the Association of Coupon Processors, said FSIs clearly are an inefficient merchandising tool -- if all you are looking at are the low redemption rates.

When the total cost picture is explored, though, the issue becomes a lot more complicated.

"You can't get away from the fact that FSIs are an extremely inefficient tool. You know the numbers. There are 300-plus billion distributed and 7 billion redeemed. So 97% hit the waste baskets," McNally said.

"But the major issue for manufacturers is to measure the pull-through that [FSI] coupons get them and decide whether it is worth the 3% redemption they generate. Because the amount they can spend on some of the electronic dispensing vehicles can pay for a lot of FSIs," he said.

Other sources agreed that the question of which couponing vehicle works best, when all the costs and benefits are carefully analyzed, is not clear-cut.

"There are all kinds of electronic gizmos out there, things that in theory may be the most wonderful stuff in the world. But what we are dealing with is the question of what moves product and is most affordable," said an industry executive who asked not to be named.

"FSIs offer us more of a mass approach. That's one benefit to them. Another extreme benefit is cost-efficiency. It has a very low cost per coupon redeemed compared with the alternatives," the source said.

The debate about FSIs vs. alternative dispensing programs today also is influenced by the growth of retailer-driven, rather than manufacturer-initiated, promotional programs, said Rose Sheahen, manager of trade promotions in the trade marketing central division at Tropicana Products Sales, Mount Prospect, Ill.

"FSIs used to be very effective in all markets several years ago. Now, in many large metropolitan areas, especially like Chicago, retailers just don't get as excited about FSI drops and don't support them by putting as much product on the shelf. It's not an integral part of their marketing push," Sheahan said.

"But if you go into Roanoke, Va., or Des Moines, FSIs still have a major impact with the retailer. It will still be supported with an in-store promotion. In smaller markets, [retailers] don't necessarily have a marketing program of their own. But Jewel and Dominick's do. They don't take ours and run with them," she said.

Sheahan praised the benefits of targeted dispensing vehicles, in the proper situation, for getting the right coupons into the hands of the right consumer.

But she also said FSIs are not about to go away fully anytime soon, or even relinquish their position as the No. 1 coupon promotional vehicle.

"Retailers would like us to do as many of these types of [targeted couponing and sampling] programs as we can. It only assists their sales. It brings in new users to categories and it helps trade people up. It also increases purchase frequency. Period," Sheahan said.

"But I don't think any one system is necessarily stronger than the other. National FSIs are always going to be No. 1. But what there is going to be is continued use of FSIs along with the newer systems. If we close our eyes [to the new systems], we're just kind of skirting the inevitable," she said.

The key strategy Tropicana is seeking to develop is using the more targeted dispensing programs in conjunction with FSIs and other print advertising.

In past years, "you could really see a dramatic impact on your business with national FSI drops. You could assign that sales jump specifically to an FSI drop. That no longer happens in the same way. Instead, what you are going to see more and more of is a layering of different systems for different situations," Sheahan said.

Indeed, while the use of electronic POS and shelf-based dispensing systems is clearly on the upswing, FSIs, as a total percentage of coupons distributed, are showing no signs of fading away.

According to figures from CMS, Winston-Salem, N.C., 88% of the total number of coupons distributed were through FSIs in 1992, up from 86% the year before. So the commanding role of FSIs is still not diminishing, sources said, despite a manufacturer trend toward offering shorter expiration periods for redeeming coupons and the appeal of more targeted systems for promoting products.

"Retailers would much rather see money spent on in-store couponing directed right at their customers. That's the first choice. Long-term, that is the direction the industry will be moving in. Over time there will be fewer FSIs and more targeted couponing programs. But I don't see much let-up on the FSI yet," Fleming's Austin said.

"There is a lot of discussion about changing things," said an industry observer who asked not to be named. "But the targeted in-store vehicles are more expensive, and so far, when push has come to shove, manufacturers have still mainly gone with what they know delivers at a cheaper price."

It is too early to tell whether or not the industry is going to move away from FSIs, the observer continued. "What manufacturers are looking for now are ways to measure the effectiveness of the various promotional vehicles. To the extent that FSIs show their value on a performance basis, that will determine how strong the they remain," the observer added.

Another source said, "It will be interesting to see what happens [with redemption rates] this year. But so far there has not been a huge migration away from FSIs. FSIs are still a big business and an efficient buy for manufacturers. Sometimes a mini van is more utilitarian than a fast, fancy sports car. It all depends on the marketing needs the manufacturer is looking for."