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? 

3 thoughts on “Partners in Profit?

  1. Peter

    Interesting article and indeed worth reading but it offers no solution on how to “wean our retail “partners” off the current trade deals”? Given the Canadian retailers concentrated hold on the marketplace coupled with our ‘commoditized’ brand reality and challenged by engaged competitors, the article feels more like a trip through fantasyland with yearnings of what has been lost. When strong brands like Knorr owned by multinational players like Unilever are capitulating to shifting their marketing resources towards the retailer….well what hope do we have to stem that tide?”

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  2. Peter

    Cool perspectives. Thanks for sharing.

    Not sure if it’s a fad or a trend in the US…but LCL/WM/Metro is certainly eager to have us spend money!

    If this is the right way to get consumers and if strong brands like Knorr “give in” and others block us out. Then what?

    Knorr will be able to tie the lift on sales as a result. But if it’s not profitable it won’t be sustainable…but it then again – seems that Knorr felt the current way wasn’t much better.

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  3. Andrew Stodart

    Peter,

    Thanks very much for both of your comments and you are right that I did not offer a solution.  While there is no easy solution I believe, based on my experience, it is possible to reduce but not eliminate trade spending.  There will always be a need for some “base” level of spending to support in store activity and co-op advertising and no retail chain is going to look kindly on any proposal that reduces the money they generate in this area.  You therefore have to look beyond this to find ways of reducing price/trade promotion activity.

    The key is to evaluate your promotional activity, something a lot of companies fail to do these days, to ensure you are getting a payback on your investment.  In addition you can test the various components of your pricing activity which in my mind are three; the depth of the discount offered, the duration of the discount offered and the frequency of the discount offered.  In addition for a number of brands the time of year can be important as well.  For example a number of years ago I worked on an iced tea business and we had to offer our best deal of the year in the April/May time period as that was when both the trade and consumers stocked up for the summer.  Moving the promotion to June or July resulted in a huge drop in sales and more importantly distribution.  Likewise the soft drink companies know they have to be on promotion immediately prior to holiday weekends and the Christmas period to maximize sales.

    More on all this to come in a new post shortly.

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