Transcript CATEGORY MANAGEMENT: The Merchandising Tool of the Future

Retailing
MKTG 6211
Trade and Consumer
Promotion
Professor Edward Fox
Cox School of Business/SMU
Types of Manufacturer Sales Promotions
 Consumer Promotions
 Objective is to influence consumer to purchase product/service
 Trade Promotions
 Objective is to influence retailer/wholesaler to purchase product,
and to promote it to the consumer in turn
 Business Promotions
 Manufacturer to business buyer
Growth of Sales Promotions
 Trade Promotion grows with roughly with
manufacturers’ dollar sales
16%
14%
12%
10%
8%
6%
4%
2%
0%
1990
1995
2000
2005
Source: A.C. Nielsen
How Important Are Promotions?
Total Advertising and Promotion Budget
% by Spending type -2000
28%
52%
20%
Trade Promotion
Consumer Promotion
Media Advertising
Trade promotion is 12% of gross dollar sales for packaged
goods manufacturers
Source: A.C. Nielsen
Why the Prominence of Sales
Promotions?
 Product managers face pressure to increase current
sales
 Companies face competition in mature markets
 Advertising efficiency has declined
 Consumers have become more deal-oriented
Consumer Promotions
 Short-term incentives by the manufacturer to
encourage purchase of a product or service
Consumer-Promotion
Objectives
Entice Consumers to
Try a New Product
Lure Customers Away
From Competitors’ Products
Get Consumers to “Load Up’
on a Mature Product
Hold & Reward Loyal
Customers
Consumer Relationship
Building
Source: Adapted from Prentice Hall
Consumer-Promotion
Tools
Samples
Coupons
Cash Refunds
Advertising
Specialties
Patronage
Patronage
Rewards
Rewards
Contests
Price Packs
Sweepstakes
Premiums
Games
Point-of-Purchase
Displays
Trade Promotions
 Short-term incentives by the manufacturer that are
directed to retailers and wholesalers
Trade-Promotion
Objectives
Trade-Promotion
Tools
Persuade Retailers or
Wholesalers to Carry a Brand
Price-Offs
Premiums
Give a Brand Shelf Space
Allowances
Promote a Brand in
Advertising
Displays
Patronage
Allowances
Rewards
Buy-Back
Guarantees
Discounts
Push a Brand to Consumers
Free Goods
Contests
Push Money
Specialty
Advertising
Items
Source: Adapted from Prentice Hall
Effects of Consumer and Trade
Promotions on Consumer Behavior
 Expand category volume
 Cause brand switching
 Cannibalization
 Change purchase timing
 Cause stockpiling
Considerations in Executing a Trade
Promotion
Size of the incentive (depth of
discount)
What are the conditions for
participation?
Structure and distribution of the
promotion program
Length of the program (limited time)
How to evaluate success of the
program
Source: Adapted from Prentice Hall
Issues in Trade Promotion
 Accountability
 Profitability
 Long-term effects of promotions
These issues boil down to whether or not trade
promotion represents a good investment
Trade Promotion
Accountability
 Dollars for buying or selling?
 Off-invoice allowances
 Scan-backs or bill-backs
 Forward buying
 Diverting / grey markets
Trade Promotion
Profitability
 What proportion of trade promotion dollars are passed
through to consumers?
 What proportion end up in the retailer’s pocket?
 Do the additional sales from a trade promotion offset the
reduced margins and the allowances paid out?
Trade Promotion
Profitability Example
Consider the following trade promotion example …
 Sales for Starkist light meat in-water tuna 6.5 ounces
average one case (48 units) per store in a retailer
having 100 stores
 The regular shelf price is $.79; the retailer pays the
manufacturer’s price of $.70 per unit (gross profit is $.09
per unit); Starkist’s production and transportation cost is
$.42 per unit (unit contribution is $.28)
 The retailer’s gross profit during a normal week is 48 x
100 x $.09 = $432
 The retailer can sell an average of five cases per store
during a promoted week if the discounted retail price is
$.59 and the product is advertised and displayed
Trade Promotion
Profitability Example
Starkist offers the following trade deal:
 Price-off - 20% off the manufacturer’s regular price for
all product sold during the week (scan-back) yields a
case price of $26.88 or a discount of $6.72 off the
regular case price
 Display allowance - $2.00 per case
 Advertising allowance - $1,500
Trade Promotion
Profitability Example
Retailer profitability…
 Sales for the promoted week are 5 x 100 = 500 cases or
24,000 units
 Revenues for the promoted week are $.59 x 24,000 =
$14,160
 Costs for the promoted week
 With the price-off, the cost of goods is 500 x $26.88 =
$13,440
 Allowances are 500 x $2.00 = $1000 for display and
$1,500 for advertising
 The promoted item’s weekly contribution is therefore
$14,160 - $13.440 + $1000 + $1,500 = $3,220, much
more than the normal weekly contribution of $432
Trade Promotion
Profitability Example
Starkist’s profitability…
 For a normal week
 Revenues are $.70 x 100 x 48 = $3,360
 Costs are $.42 x 100 x 48 = $2,016
 Contribution is $3,360 - $2,016 = $1,344
 For the promoted week
 With the 20% price-off, revenues are 500 x $26.88 = $13,440
 Costs
 Production and distribution is 500 x 48 x $.42 = $10,080
 Allowances are 500 x $2.00 = $1000 for display + $1,500 for
advertising
 Contribution of the promoted item is therefore $13,440 $10,080 - $1,000 - $1,500 = $860; less than the normal
weekly contribution of $1,200
Trade Promotion
Profitability Example
 So assessing the profitability of a trade promotion
requires determining what would have been sold had
the promotion not occurred
 But what about the effect on other brands (e.g., Chicken
of the Sea) and types (e.g., white meat tuna)?
 But what about stockpiling – borrowing from future tuna
purchases?
Trade Promotion
Long-Term Effects
 Detrimental to brand health?
 Builds the habit of switching
 Teaches shoppers to buy on price
 Takes resources away from media advertising
 Builds brands?
 Encourages trial
Though there is little evidence of promotion
enhancing brand equity, results are inconclusive
about harming brand equity
Why Not Reduce Trade Promotions?
If a manufacturer reduced trade promotions …
 What would competitors do?
 Reduce, maintain or increase promotional levels
 What would retailers do?
 Punish or not punish the manufacturer
Example - Procter & Gamble adopted value pricing
and lost roughly 5% market share