Trade Dollars Not Very Loyal

Discussion
Mar 21, 2005
George Anderson

By John Hennessy

PROMO Xtra ran an item on March 17th covering the Trade Promotion 2005 study by Cannondale Associates. The study measured a decline in the money consumer packaged goods companies spend on trade promotions (down to 48 percent of total marketing budgets from 49 percent in 2002 and 51 percent in 2001) and an increase in their spending on advertising (now 25 percent of total budgets up from 24 percent where it has been since 2000).

Cannondale attributes the shifts to changes in accounting practices rather than actual decreases. They also chide CPGs for ignoring that retailers’ need to focus on categories and consumers rather than short-term, brand-level growth.

Retailers ranked Kraft (cited by 36 percent), Procter & Gamble (32 percent) and General Mills (19 percent) as the CPGs that are best at trade promotion overall. But all three slipped from their 2003 ratings.

CPGs ranked Wal-Mart Stores (cited by 69 percent), Publix (28 percent) and Kroger (26 percent) as the retailers with the best strategic vision for trade promotion.

Moderator’s Comment: Why do you think packaged goods trade spending is in decline? What can be done to reverse the trend? Should it be reversed?

The decline in trade spending says it isn’t working. If trade promotions were delivering superior returns, more money would be flowing into them, not seeking
better performing alternatives.

On the one hand, Cannondale chides manufacturers for focusing on short-term brand growth at the expense of category and consumer strategies. On the other
hand, retailers are expanding private label programs, thus engaging in brand-focused initiatives of their own.

All parties would be better served by gaining a better understanding of the preferences of the customers buying their products and shopping their stores.

George Anderson – Moderator

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14 Comments on "Trade Dollars Not Very Loyal"


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M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
15 years 11 months ago

Why are we leaping to the conclusion that packaged goods trade spending is in decline? Am I the only one who noticed Cannondale’s attributing “the shifts to changes in accounting practices rather than actual decreases?” (Nope, BrandManager caught it.) With all of the recent scandals having to do with co-op dollars, plus the government’s announced interest in the practice, is it so hard to believe that both CPGs and retailers are scrambling to clean up their accounting systems? I’m unconvinced that there’s a trend.

But then, none of this matters if you buy into Michael Richmond’s sweeping assertion that neither trade spending nor traditional advertising is effective.

Bernice Hurst
Guest
15 years 11 months ago

Perhaps I’m oversimplifying but it seems pretty obvious to me. If you advertise to consumers and create demand then obviously retailers will want to satisfy demand and stock your products. If you advertise to the trade and they have to make their own decisions, working in the dark, with little or no indication of whether the products will sell, then you are not necessarily going to get the same level of interest. This particularly applies if your name brand product is vying for shelf space with the retailer’s own brand. Get the customers in there looking for what you make.

J. Peter Deeb
Guest
15 years 11 months ago

Many prominent CPGs are decreasing trade spending since high/low promotions are losing favor with consumers as alternate channels and SuperCenters with EDLP formats are gaining share. Many of them, however, are increasing opportunities for retailers to tie into consumer advertising and promotions by customizing programs for retailers that tie into CPGs strategic marketing plans. Savvy retailers are taking advantage of these programs to offer customers better merchandising and more targeted promotions. Most CPGs are not reducing spending but spending strategically and offering retailers the opportunity to build their business by communicating with consumers on a level other than further reduced price.

Laurence Aronson
Guest
Laurence Aronson
15 years 11 months ago

I think many of you are missing the notion that there is a whole new and emerging segment of spending which is targeted advertising done through retailers. Several manufacturers have recognized this as an opportunity to get brand messages to a very carefully selected audience. Should this be funded by trade money only? I think not.

Andrew Casey
Guest
Andrew Casey
15 years 11 months ago

Trade spending can be almost as important as advertising in driving a brand image and certainly so in driving immediate sales. The problem is that too often what passes for trade spending is really nothing more than a bribe offered by the manufacturer to the retailer to get (or keep) a product on the shelf or something similar. Too many trade dollars are wasted supporting inferior products which should just be allowed to die. This inefficiency, sadly, taints the balance of trade spending with a dirty brush.
What is needed is a new paradigm where manufacturers and retailers work together to use trade dollars efficiently to market directly to their common customer. Recognizing common goals and using objective sales data to determine targets and judge results forms the basis for the trust and cooperation between manufacturers and retailers needed to ensure trade dollars are spent wisely. Although it doesn’t always have to be price oriented, that is exactly what Wal-Mart does.

Mark Hunter
Guest
Mark Hunter
15 years 11 months ago

Absolutely not! The trend should only continue… decrease trade spending even more. Trade dollars are nothing more than a way for retailers to make money through the back door. Spending should be done on building brand equity through advertising and marketing. Trade spending that buys inventory and price reduction does very little to build long-term equity. The role of trade spending should be to complement as the final leg of reaching the consumer by reinforcing the advertising message and the equity the brand has established.

Warren Thayer
Guest
15 years 11 months ago

Mark said it all. And, remember not that many years ago when the pendulum was swinging away from advertising to trade promo? All sorts of alarm bells and fears of doom. Just another cycle, that’s all. But one I am happy to see. With what’s going on, vendors have to find ways to build back some brand equities. If we ever got down to one brand and one private label in every category, it wouldn’t be pretty.

Gene Hoffman
Guest
Gene Hoffman
15 years 11 months ago

CPGs and retailers constantly pursue more NEW sales than might be available out there at any given time. So when CPGs can’t generate enough new sales to meet their periodic goals, they examine how to alter sales-producing dollars to capture them from competitors. As they plan their spending, CPGs hear
The Call Of The Wild, a plaintive wail which originates from the Wolves on Wall Street, which always calls for evermore business and profits. So one usually does whatever seems to be the most likely – or even expedient – thing to do to spur sales somehow in some specific time frame even with retailers who have varying degrees of responsiveness.

Thus dollars spent on the trade, which might bring varied results, are kept on the table, deservedly or not. After all, retailers don’t like to see an empty table. So the seesawing on percentages occurs and no one has yet acknowledged that you can’t put ten-pounds of HOPE in a five-pound sack.

Art Williams
Guest
Art Williams
15 years 11 months ago

There is a place for both trade spending and advertising, but the advertising should be well established ahead of trade spending, in my opinion. There is also a good case to be made for increasing ad spending to help counter the retailer’s current private label blitzes.

Michael Richmond, Ph.D.
Guest
Michael Richmond, Ph.D.
15 years 11 months ago

All well said, but neither trade spending nor traditional advertising is effective. The move to viral and word of mouth marketing is continuing and the idea is to tout the product benefits and win consumers. After all, consumers are more savvy than ever before. More ad/trade dollars need to be spent on packaging performance and shelf impact benefits. The consumer will understand and appreciate the change and – everyone wins! It really is that simple.

John Rand
Guest
John Rand
15 years 11 months ago

Since there are seismic shifts in share of consumer spending between channels, especially from grocery to clubs and supercenters, it would be odd indeed if there wasn’t a shift in spending as well.

Most of the share-gaining channels are Sell side oriented, not Buy side, and tend to encourage more discounts in the COGS more rather than revenue from trade marketing, so it makes sense. I am surprised it isn’t a larger shift, frankly, and would expect it to continue.

Another poorly-discussed reality at work here is that many retailers have simply not kept their end of the trade spending bargain – the execution of promotions is erratic and often at less than 50%. Why should a CPG company spend trade dollars with a retailer that doesn’t execute?

David Mallon
Guest
David Mallon
15 years 11 months ago
Everyone seems to have overlooked that this shift probably isn’t real, because it’s probably an effect of Sarbanes-Oxley. Much of it is probably simply a change in how the expense is reported, but some of it could be real behavior change. Under SOX rules, when loading product to meet quarterly goals, the CPGs must deduct the trade spend from revenue. Loading doesn’t pump up the revenue line as much, so there may be less of it going on. That said, CPGs have been working for some time to improve their ability to analyze and manage trade spending. Most companies are allocating funds to each trade account in order to gain control and ensure that spending doesn’t grow. Some may finally be ceding unprofitable promotion events to their competitors. Smart retailers should be building their fact/data based arguments for increasing their allocated funds from CPGs. It will be a shrinking pool of funds and the funds will flow to the best ROI. Unfortunately, most retailers are ill prepared to make a convincing case for more funds.
Bob Houk
Guest
Bob Houk
15 years 11 months ago

I wonder if there has been any change at all. The numbers mentioned are infinitesimal — trade promo down from 51% to 48% over two years; advertising up from 24% to 25%. With all due respect to Cannondale, I doubt that even they would claim that their survey is so precise that these numbers can with assurance be said to be anything other than statistical noise.

Add in the accounting changes mentioned previously, and I think this is much ado about (probably) nothing.

Salvatore J LaMartina
Guest
Salvatore J LaMartina
15 years 11 months ago
Trade Dollars have long been a tool with two very sharp cutting edges. On one side, the retailer, motivated to grow his/her overall business and market share, has aggressively used these funds to support products and their brand building focus. On the other, however, retailers driven to improve their short term bottomlines have fallen victim to the nearsighted use of these funds to improve their profitability exclusively. Oftentimes this has occurred while these same retailers have invested in efforts to create private label products that compete directly with those same brands paying the trade promotion dollars. Manufacturers, on the other hand, find themselves using trade dollars to buy retail space and, hopefully, market share during times of limited industry growth. They then complain about the practice once they no longer need to do so from their perspective, but are still held hostage by the practice. The answer lies in the rhetoric so easily spouted by many of the more “progressive” retailers and manufacturers, but so rarely practiced. Partnering, true partnering, between retailers and their suppliers… Read more »
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