Monthly Archives: July 2012

Weaning the Sales Force and Retailer off Price Promotions


In a recent blog post entitled “Partners in Profit” I suggested we as Marketers needed to revisit our dependence on trade marketing and price promotions in particular.  If we were going to focus on brand building I argued we needed to be able to divert current resources from trade marketing into consumer marketing and I deplored the almost total reliance today in CPG on trade spending.  I stated we need to rebalance our trade and consumer spending if we are going to build long term consumer brand loyalty.  I quite rightly was criticized in a subsequent response to this post for failing to offer a solution to the situation.  In fact the poster commented, perhaps somewhat unfairly, that I was taking “a trip through fantasyland with yearnings of what has been lost.”


 


In response let me start by saying I am a realist and in that respect I recognize there are some components of trade marketing/spending with retailers that we as marketers are not going to be able to change.  First and foremost is the fact they are going to expect and require that we continue to grow payments to them for advertising and display activity.  Whether they are called co-op advertising funds, volume rebate programs, key account marketing programs or whatever those funds are necessary to continue to promote brands in the key retail chains and frankly to ensure their continued listing.  They are a cost of doing business and why in most cases they don’t even show up in a marketing budget but are put into the sales budget or in some cases are simply shown as part of the cost of goods.  Equally in most cases they are managed by the sales team and not the marketing team. 


 


What I know can be changed is the discretionary part of trade promotions, particularly price promotions but first we need to understand if there is a problem and the magnitude of the problem.  To do that we need to do something most marketers don’t do and that is evaluate the success or failure of all of our promotions, not just price.  In short did they pay back or would we have been better served not to have run them at all.


 


I’m sure most marketers have been faced with the proposition from sales of “Let’s cut the marketing programs in the last 3 months and give me the money to run a large discount and load up the trade.  That way we can all make our numbers for the year.”  Inevitably the CEO and CFO agree to this and off sales goes and loads up the trade and the company makes the number but at what cost? 


 


No one stops to calculate what the impact of the proposed price promotion has on future sales and profitability.  Yes you get a huge bump in sales during the period of the discount but what happens afterwards?  Often what happens is there is a huge drop-off in sales in the first quarter of the following year, sales that don’t happen because the retailer is still working off the stock he bought in at the end of the year.  If you were to do an analysis showing the average rate of sale and corresponding profit before during and most importantly after the promotion would you in fact show that you generated incremental profit versus a lower discount and/or no discount at all?


 


As marketers we need to start doing this type of analysis on all our promotional programs regardless of the time of year and determine if they are adding to our brand’s bottom line or in fact subtracting from it.


 


In addition we should be testing the depth, the length and the frequency/timing of our price promotions.  All too often we simply repeat what we have done in the past without looking at whether or not changes are required to our trade promotional strategy and execution in these three areas.  I will address what can be done in each of these variables in turn starting with depth.


 


How many times have the sales team run a price discount to the trade for the same amount X dollars off per case with the trade.  The argument usually when questioned about the amount is “this is what we did in the past so this is what the minimum is going forward”.  But is that really the case?  Do we know that $3.00 per case off invoice would not work as well as $5.00 per case?  We also have moved away from proof of performance deals for the most part in CPG.  The argument used to be it was too difficult to work out how many cases a chain sold when the brand was on feature but this was before UPC codes, scanners and daily sales reporting were generally available.  There is no reason now why you can’t negotiate an arrangement with the chain to pay them one discount for the duration of the promotion and a second higher rate for sales to consumers during the time period in which they have a feature price in store.


 


This highlights the second area we as Marketers need to examine, the duration of the price promotion programs.  In most cases we run price promotions for a minimum 4 week period and I have seen them as long as 8 weeks but are they really effective? 


 


In an analysis I did a number of years ago I found that our accounts were buying in heavily during the first week and they ran their price feature in the first two weeks.  The next few weeks’ sales were relatively slow but there was a sudden burst of orders in the final week as the accounts stocked up on discounted stock prior to the end of the deal.  In fact in one market we found that over 90% of the most popular size of the total years sales were being done at the same discounted price.  This analysis highlighted two things we needed to change; first we needed to go to a two stage discount program (off invoice and proof of performance) and second that our promotions ran too long and we should cut them back to two week programs.  This we did and we improved both profitability and were able to fund more consumer directed programs, both advertising and promotion and still deliver the bottom line.


 


Finally we all have a tendency to be creatures of habit.  This point was driven home to me a number of years ago when I went on a call to a head office with one of our Key Account Managers.  Because I was there the Key Account Manager tried to get the buyer to order some more of my brands.  The buyer looked at his calendar and said no, not at this time.  When I asked him why he pointed to his calendar and said your next promotion starts in 6 weeks time and I have enough stock to last me until then.  I then asked him how he knew that (he was correct by the way) and he showed me his calendar with all our promotions set out for the year on it saying you guys have run the same program at the same time every year for the last 3 years so I just wait and buy on deal because I know when the next one is coming. 


 


When was the last time you changed the timing of one of your promotional programs?  I recognize there are times when we have to be on promotion but there are also times when I question why we chose to promote based on price.  For example I have spent a number of years in the beverage alcohol business and the key selling period for spirits is between December 1 and December 31.  Over 30% of a premium/ultra premium brand’s sales can occur during this one month period that includes both Christmas and New Years.  People are predisposed to trade up in terms of their purchases so why do brands such as Patron or Johnny Walker Black whisky that are iconic brands, chose to price promote during this period?  Yet they do, just as Coke and Pepsi run huge price discounts during this period that offset one another at a time when consumers would probably spend a little extra on soft drinks.   Yes they need to be front and center in the retail chains but at the lowest price of the year?   Consumer directed promotions such as gift packs or added value could have just as big an impact here as price but often what happens is that we give the consumer both, added value and price.


 


None of these proposed modifications are silver bullets that can overnight move a brand from predominantly trade promotion activity to consumer driven activity nor should they be implemented without testing and evaluation.  However they are options that marketers need to consider in their search for funds to undertake long term brand building.

It’s Time to Change Marketing’s Image


 


As marketers we are all involved with building our brands image with others be they consumers, customers, vendors, employees or other stakeholders but why is it that we have done such a poor job of building our profession’s image?


 


This was driven home for me in the recent past by the following incidents:


 



  • A senior purchasing/procurement manager said to me that “marketers do nothing but sit in their ivory towers and build plans that go nowhere.  It is guys like me and the sales people that bring the reality of the situation to bear for Senior Management.”

  • Another colleague told me of a presentation made by the head of his company’s HR Department presenting his rationale as to why he should take over as the Chief Marketing Officer of the company.  In essence his argument was he understood human relations and as such would be ideally suited to understand what motivates consumers to buy the company’s brands.  The CEO actually gave it serious consideration before deciding to combine the Marketing and Sales role into one with a VP of Sales and Marketing headed up by the former VP of Sales.

  • I saw a statistic that said only 14% of CEO’s in Fortune 500 companies in North America had come from a marketing background.  Most had either a Finance (number 1) or Sales background.  This is a far cry from 25 years or more ago when the majority of corporate leaders came from Marketing and Marketing was seen as the area of leadership in the company, at least as far as packaged goods was concerned.

 


So how has it come to this?  First of all in my opinion despite the fact we are all supposed to be great communicators we have failed to communicate what Marketing is and what we as Marketers do, particularly in regard to Brand Marketing.  In a lot of cases we have allowed others to define Marketing for us and have failed to delineate reasonable expectations for Marketing plans and programs. 


 


One example is the change several of years ago by the Direct Marketing Association to the Canadian Marketing Association.  Now I have nothing against direct mail/response but it is not Marketing!  It is a useful tool in the marketing mix but it is not the be all and end all.  Yet when the Direct Marketing Association made this change to the best of my knowledge no marketer stood up and objected, including me.  One needs to look no further today than the agenda for their AGM to see how the association now pays lip service to any topic beyond direct response which leaves the impression with outsiders that only direct response is Marketing.


 


We have also failed to communicate the need for long term brand building by a company.  The net result is one of the first things to go in any budget review are consumer brand building items; advertising, consumer promotion, sponsorship, PR etc in favour of short term volume building items such as price discounts.  In addition we have seen the shift away from consumer programs to trade directed programs.  In fact it is often cited that now over 80% of a CPG brand’s marketing budget is directed towards trade marketing programs and it is continuing to grow.  As a result you see brand awareness, repeat purchase and loyalty all declining along with the price gap between private label/store brands and national brands.


 


One of the biggest problems in trying to convince management to go for brand building programs is the fact they seldom payback in a very short time.  In an environment where management’s perspective of the short term is 3 months (the next fiscal quarter) and the long term is a year there is tremendous pressure to deliver a payback in less than a year.  I find this strange in that if it was a capital expenditure such as new plant or even a new piece of equipment management would be looking at a 3 to 5 year payback on their investment but a marketing investment has to pay back in a year or less.  I recently was involved in a relaunch of a brand with an extensive consumer marketing campaign incorporating new advertising, new social media, trial generation and experiential programs all designed to re-engage our core consumers with the brand.  However 3 months after the launch the program was cut because Senior Management hadn’t seen a big sales increase.  They therefore cut the program to fund price discounting instead to make their number for the year.


 


What we as Marketers need to do is better manage Senior Management’s expectations in terms of payback for marketing programs.  A number of years ago I was responsible for Black Velvet Canadian Whisky on a worldwide basis and our most important market was the US where we did around 2.5 million cases a year in sales and generated an operating profit of more than $25 million US a year.  We had a major consulting firm come in and do a detailed analysis of the brand by a bunch of very bright financial consultants.  In one of their presentations they went through each element of our marketing mix and did a financial analysis that to them demonstrated that nothing paid back.  Not our advertising, not our consumer promotion programs, not our big PR program, nothing except for price discounting.  To which my first question was “If that is the case how did we get to 2.5 million cases and over $25 million operating profit per year – serendipity?”  Their problem was they were looking for an immediate short term (less than a year) payback rather than looking at the long term success we had in brand building.


 


In summary we need to do a much better job in communicating how brands are built and what an appropriate time frame is for a payback.  Back when I started in Brand Management with Unilever we looked at a loss in the test market and a Year 1 loss in the rollout of the test.  We broke even in Year 2 and recovered all our losses and made a small profit in Year 3.  That to me is a reasonable model but I also believe it is one that is seldom employed today in most companies.  Additionally we used to run test programs on existing brands of heavy up expenditures in things like advertising or consumer promotion in a market to see if we could increase sales to the point they paid back for us.  Normally this was a one to two year test program but when is the last time any of us have either undertaken such a test or heard of one being done?


 


In short we need to better communicate and better manage people’s expectations if we are to improve the image of Marketing in the coming years.  Failure to do so will result in a continuing decline for both the image of Marketing and the value of the brands for which we are responsible.

Partners in Profit?

The recent announcement by Unilever that they are shifting most of their marketing resources for Knorr and possibly other brands such as Becel to in store merchandising activity completes the shift of marketing funds away from consumer directed out of store activity such as advertising to virtually 100% of spending occurring in store.  See the link here for the full story.  Is this the way of the future for CPG brands and if so are we as marketers abdicating our role to the retailer and the more important question is, should we?


 


In the age of Mad Men right through the 70’s and into the early 80’s Marketers focused on developing consumer demand by utilizing consumer advertising to drive listings in retail outlets.  You followed the classic consumer adoption model of generating awareness then trial followed by repeat purchase of a new brand.   CPG marketers launched new brands with massive advertising campaigns and their presentations to retailers basically said “You need to carry this item because we are going to create so much consumer awareness for it your customers are going to demand it”.  Yes there was an introductory discount but this was generally in the 10% – 15% range and was limited to a 4 week introductory period.  If the retailer didn’t list the brand in that time they didn’t get the discount.  


 


Trade spending for the most part was limited to co-op advertising and a volume rebate program for key accounts that was tied directly to their purchases of the various company brands.  Total spending in this area was around 5% to 7% of net sales of a brand and was tied directly to advertised promotions of the brands in the account.


 


Of course there were trade oriented promotions over and above this amount but for the most part they were things like bonus packs, buy one get one free etc. and price discounts were relatively few and far between.  Those discounts that happened were often based on proof of performance that is the retailer had to prove they passed the discount onto the consumer before they could claim the full discount.  It was common for the discount to be 50% up front and 50% based on the number of cases moved through to the consumer, not purchased during the deal period.


 


The brand owner clearly dominated the retail channel to the point where they could virtually dictate retail pricing.  In fact in the mid 70’s Coca-Cola Ltd. in Canada embarked on what they called a “Value Pricing” strategy whereby they pre-priced all their large size containers with a suggested retail price printed on the label.  When some retail chains balked at this plan they were told it was a take it or leave it proposition and if they didn’t agree to take the pre-labeled product they would not get a substitute.  A leading chain representing about 20% of grocery sales refused and delisted Coke brands.  The company responded with newspaper ads telling consumers that they were pre-pricing their brands to ensure the consumer was getting the best value and that to look for stores that carried pre-priced Coke as it was a sign that they were getting the best value for their shopping dollar.  After about 4 weeks without Coke in their stores the chain agreed to relist the brands because of the damage the newspaper campaign was doing to their image and reputation as having competitive prices.


 


It is tough to imagine anyone, even Coca-Cola being able to do this today given the concentration of retail grocery chains in Canada and elsewhere.  In Canada it is estimated that 5 chains/groups control over 80% of the grocery sales.  Equally the estimates of the cost of listing fees etc. for a new item run between $500,000 and $1,000,000 in order to secure complete national distribution, well out of reach of most small to medium sized firms.


 


So what is the future?  Well I have seen one possibility and it is disconcerting from a brand owner’s standpoint.  I have been a beverage alcohol market for a number of years now which in Canada means for the most part dealing with a single retailer, a government liquor board.  I once presented a new item to one of the largest liquor boards that included a complete program involving consumer advertising, trial generation programs both in their outlets and in bars and clubs along with an array of bought promotional programs from them.  Their reaction to the presentation was “why don’t you just give us all your money (over $350,000) and we will allocate it amongst our various programs”.  Their argument was that they had their own consumer magazines and their own in store sampling program so why did we need to go to any outsider for this.  Their contention was that they would use the funds more effectively and efficiently than I would on programs that they would devise to meet their needs.  It was only when I pointed out to them that by doing this they potentially opened themselves up to adverse publicity from other advertising mediums and bar and club owners that they backed off.  Their concern was for their image with their political masters, not because they thought there was anything wrong with what they were proposing. 


 


It is doubtful that a private retailer would have the same qualms.  This was driven home when I presented an innovative new juice product from a small supplier to a major chain who agreed to list it on the understanding that we would produce a private label item of similar quality just for them.  When we refused we were not listed and in the end had to pay a significant listing fee for the right to be in their stores.


 


The question then is what to do now?  It has been said that over 85% of CPG marketing budgets is now being spent on trade/shopper marketing programs and in a lot of cases, including Knorr now it is approaching 100%.  However is this new model sustainable or even feasible for most companies or brands?


 


The short answer is no.  The Unilever plan for Knorr calls for 4 different displays throughout the perimeter aisle of the store.  If you add Unilever’s major competitors you rapidly run out of available display locations which then means they become subject to bidding. 


 


Equally what do you do in the case of a new item?  Knorr is an established brand with a certain level of consumer awareness but putting all your money into in store activities for a new brand launch has the potential of reducing awareness for your brand, the first step in consumer adoption.  Yes people will find it in store and if you have sampling, recipe and other in store programs to create trial but will you build lasting awareness for your brand?  In short we as marketers need to find ways of building awareness and trial while continuing to support the necessary in-store activities but how?


 


Clearly there needs to be a rebalancing of marketing spending from where it is today but it is also clear that we cannot go back to the “good old days” of the 60’s and 70’s.  For years now I have been part of numerous “Partners in Profit” presentations to chains by suppliers particularly in regard to shopper marketing.  A partnership however is generally a 50/50 proposition and clearly this is not the case currently.  There needs to be greater emphasis on consumer branding activities at the expense of trade marketing.  Note I make a distinction between shopper marketing which involves specific brand promotion to shoppers in a given chain as opposed to the straight discounts and listing/maintenance fees we are now paying to the chains. 


 


It will be a slow process to wean our retail “partners” off the current trade deals but if we are to build consumer franchises for our brands we must begin to do this.  If can’t do this we are going to continue to concentrate power in the retailer’s hands and run the risk of either being delisted or not listed because we can’t pay the necessary promotion costs to them.  Alternatively our brands become nothing more than price brands as we all move down to the lowest possible price but at what cost?