A Winning Strategy for Trade Promotion Management

Consumer Products and Retail the way we see it

A Winning Strategy for Trade Promotion Management

Leveraging Trade Promotions for Profitable Revenue Growth

Trade promotions - the complex array of deals that manufacturers offer retailers tofeature, display, or offer promotional discounts on their products to consumers -are at an all time high. Consumer packaged goods (CPG) firms' trade promotionbudgets have escalated to 15% or more of net sales - making this the secondlargest P&L item after Cost of Goods Sold. For most CPG manufacturers tradepromotion spend in 2005 accounted for over 60% of the marketing budget andexceeded the combined spend on advertising and consumer promotions.

Yet trade promotions continue to be largely ineffective and unprofitable. Studiessuggest that over 90% of trade promotions have negative ROI when issues likecannibalization and execution costs are considered. And here comes the badnews…given the on-going consolidation of retailers, trade promotion spending isexpected to grow not decrease.

CPG manufacturers therefore need a carefully considered plan of action to addresspromotional spend if they want to stay competitive.

Drivers of the Trade Promotion Problem: Low ROI and Limited Collaboration between Manufacturers and Retailers

Promotional Profitability: The majority of manufacturers and certainly mostretailers don't even measure profitability for every promotional event. Performancemeasurement in key areas such as "effectiveness analysis" is truly appalling andfew manufacturers do a good job in this critical area. In fact most promotionsoften fail from both a financial and strategic perspective. Here's why :

A Winning Strategy for Trade Promotion Management 1

A Winning Strategy for TradePromotion Management


Studies suggest that over 90%of trade promotions havenegative ROI when issues likecannibalization and executioncosts are considered. And herecomes the bad news…given theon-going consolidation ofretailers, trade promotionspending is expected to grownot decrease.

Most Trade Promotions Are Unprofitable For CPG Manufacturers

Many companies mistakenly

assess ROI based on simple lift

analysis…

…ignoring cannibalisation across

categories and through time…

…and failing to include the

substantial costs of execution…

* Lake Group Staff, ROI from Trade Promotion Management Systems, The Lake Group, January 2003

Supply chain execution costs

Finance execution costs

$0

Net Apparent liftCannibalization (time)Cannibalization (category)Pantry loading (category)

Marketing execution costsSales execution costs

Gross Apparent lift

Retailer cost (trade spend: TPR etc)

Valu

e to

CPG

Com

pany

Promotional Profitability Analysis

1

2

3

1 2 3

• Inventory increases

• Lost production time

• Expediting costs

• Additional overtime charges

2

■ Push Versus Pull - From a marketing viewpoint trade promotions rely on pricediscounting and deal-based push efforts versus pulling in true consumerdemand for the brand. Poorly executed trade promotions that are notcoordinated with advertising and consumer promotions often end up dilutingthe brand’s consumer message and reduce differentiation over competitors. Moreoften than not they end up attracting consumers who buy only on deal or switchbetween promoted products. Manufacturers need to refine their tradepromotions and strike a balance between their trade and consumer marketingspending - or they will be unable to sustain their brand’s differentiated valuepropositions. Worse manufactures could be using their trade funds to sponsorprivate label development efforts by retailers.

■ Missing Costs -Trade promotions have far reaching impacts across every elementof a manufacturers supply chain. A typical trade promotion causes spikes indemand that impact manufacturing costs, inventory carrying costs,transportation, as well as sales and marketing. Yet manufacturers lack thevisibility to track and develop a truly integrated picture of total trade promotioncosts. Unfortunately you can't manage what you don't measure - and mostsupply chain costs associated with trade promotions fall into the un-managedcategory.

■ Systems - Most manufacturers lack comprehensive and integrated software toolsto measure and manage trade promotion performance. Several manufacturersuse localized tools like Microsoft Excel spreadsheets or point solutions that donot link into their ERP systems to provide online access and visibility across thesupply chain. This limited view of promotional effectiveness could lead tomisplaced investments and negative ROI on trade promotion spending.

Lack of Collaboration both Internally and with Retailers: Developing a truly collaborative business experience to manage trade promotionsinvolves fine tuning both internal functions as well as external processes.Internally manufacturers need to integrate the information flow as well as thedecision making and execution processes between their marketing, sales,operations and innovation functions. Externally, manufacturers need to provideretailers with insights into their costs and work jointly with them to develop a setof metrics to measure promotional profitability both parties can agree upon.

■ Internal Collaboration - Trade Promotion success in retail is maximized when aconsumer sees a consistent and integrated set of messages between brandadvertising, consumer promotions, and in-store trade promotions. Unfortunatelya lack of coordination between consumer marketing and trade promotionsnegatively impacts brand equity and does not drive category growth. From asupply chain perspective integrating sales and marketing initiatives with supplychain processes could cut supply chain costs by as much as 15% while reducingout-of-stocks for promoted products.

■ Manufacturer and Retailer Relationships - It often seems that CPG manufacturersand retailers are totally out of synch when it comes to trade promotions.Manufacturers complain - perhaps correctly - that trade spending has gottentotally out of hand and yet retailers keep negotiating for higher trade funds.However, when it comes to the consumer, retailers and manufacturers are reallynot that far apart :

-- Manufacturers want to attract loyal and profitable consumers to theirbrands. To achieve this objective they would like their trade promotionprograms well executed on the retail side and coordinated with otherelements of their marketing spend, like advertising and consumerpromotions

-- Retailers would like to use promotional activity to attract loyalconsumers into their stores and grow category profitability by drivingsales of higher margin brands.

Most manufacturers lackcomprehensive and integratedsoftware tools to measure andmanage trade promotionperformance. Unfortunately youcan't manage what you don'tmeasure - and most supplychain costs associated withtrade promotions fall into theun-managed category.

So there is considerable room for collaboration and joint planning betweenmanufacturers and retailers. The problem is that retailers often lack anunderstanding of the costs associated with an in-store promotion including laborcosts, inventory carrying costs, and other operating expenses on a store basis. Theabsence of good metrics often leads to poor decision making with regards topromotions as well as suboptimal practices like diverting.

Changing the Rules of the Game:

FFoouurr PPrriinncciipplleess ffoorr SSuucccceessssffuull TTrraaddee PPrroommoottiioonn MMaannaaggeemmeenntt A successful approach to managing trade promotions must enable CPGmanufacturers to be built around four key principles

■ Plan trade promotions upfront to maximize effectiveness

■ Manage execution of the promotion across all organizational functionsimpacted

■ Measure promotional success - track performance versus plan

■ Close the loop - implement software solutions that provide enterprise widevisibility into promotional performance and are integrated into your ERPsystems

Planning Trade Promotions To Maximize EffectivenessStart with the consumer and the brand strategy: From both a manufacturers andretailer’s perspective successful promotions must drive the consumer into theretail store and promote purchase over competitive brands at a profitable pricepoint. Understanding the drivers of consumer behavior towards your brand anddesigning the right promotion is therefore critical. Key questions to answer mustinclude:

■ Why do they buy your brand? Understanding consumer buying behavior andhow your brand is perceived by different consumer segments is critical.Consumer loyalty to your brand and the extent to which it is differentiated from



From both a manufacturers andretailer’s perspective successfulpromotions must drive theconsumer into the retail storeand promote purchase overcompetitive brands at aprofitable price point.

Principles For Successful Promotion Management

Re-design Based

on Learnings

Manage Execution

Measure Promotional

Success

Plan Promotion

Integrated Systems

to Close The Loop

4

its competitors and the private label products will determine how consumerswill respond to the trade promotion and what promotional tactic makes mostsense. Measures of consumer price sensitivity and switching behavior shoulddetermine the depth of the promotional discount and the promotional tacticused whether it is a feature, display, or a temporary price reduction.

■ Where do they buy? Segmenting promotional offerings by retailer type is alsocritical. A promotion that works at a retailer with a hi-lo promotional strategymay not succeed with a retailer with an EDLP strategy. Consumers have alsobecome increasingly savvy with regards to shopping between different retailformats and different products. The same consumer may shop at Costco to stockup, Wal-Mart for the low-prices, and at Whole Foods for the organic selection.Tailoring different promotions by channel makes most sense.

■ How do they buy? One key issue to resolve is whether the consumer boughtmore per visit during the promotional period only or if they actually ended upbuying more of your brand over an extended period of time. Pantry loading byconsumers for a deeply promoted brand only ends up creating peaks and valleyacross the supply chain. In designing the promotion also consider both potentialsubstitutes and complements to your product - and the impact on the overallcategory sales.

■ When do they buy? Seasonality issues and timing issues drive response to yourpromotion as well as how much you should be willing to pay for exclusivityduring a particular promotional period. For example no matter how high thepromotional discount it is unlikely that consumers in Chicago will buy lawnfertilizer in November. Monitoring sales during the season and planningpromotions to encourage consumer purchases prior to the end of the season iscritical to both manufacturers and retailers.

Build on Past Trade Promotion Performance - By Brand and RetailerIntegrating past promotional performance history into your promotion designsprevents you from making the same mistake twice and provides you withammunition with regards to what tactics work best at which retailer. Actions toundertake include:

■ Develop volume and spending forecasts based on which promotional campaignsgenerated the highest profit and which elements of these campaigns reallyworked

■ Examine the value gained through past promotional tactics used at retailersincluding end-caps, features, displays and so forth to establish the value andeffectiveness of each element of the program and how much you should bewilling to pay for them

■ Consider your marketing mix and what works for the brand and integrate withother promotional media and consumer spend

■ Develop retailer-specific plans after segmenting retailers by pricing strategy,region of country, their customers, their objectives for the category and howyour product fits into the category

■ Finally design the promotion based on value or ROI potential as opposed totaking a volume-based approach to driving sales at all costs

Project Costs Across the Supply Chain by Promotional Program and ElementBroaden your perspective on promotional costs from merely evaluating directpromotional payments to retailers to include the actual execution costs for thepromotion and include all elements of costs including:

■ Direct Promotion Costs: Cover all allowances paid to retailers for theirpromotion

Integrating past promotionalperformance history into yourpromotion designs prevents youfrom making the same mistakestwice and provides you withammunition with regards towhat tactics worked best atwhich retailer.

■ Operating Costs: Integrate and track each project and investment across thesupply chain and include increased manufacturing, distribution, and inventoryspoilage costs

■ Overhead Costs: Account for soft costs like increased order entry, sales force,and marketing department costs and include labor time spent on planning andexecuting the promotion

■ Financial Costs: Calculate the added financial costs such as increased inventorycarrying costs and depreciation of fixed assets used in the promotion

Manage Execution of the PromotionTrade promotions are not just a sales issue - their impacts reverberate across allfunctional areas including marketing, finance and the supply chain. An integratedapproach towards promotion management is therefore essential. Functional areasthat require careful management include retail sell-in, supply chain managementand marketing.

■ Retail sell-in: A key issue for retail sell-in is not just getting buy-in to thepromotion from the retailer - but getting your retail partners to jointly agree to aset of measures for promotional success. Simply put does the promotion meetthe joint definition of promotional success from a manufacturers and a retailer'sperspective? Questions to consider while setting up your joint evaluation :

Consumers:: Does the promotion attract the right types of consumers to thebrand and the store, increase the overall market basket of purchases, andincrease the stores market share over its competitors?

Category:: Did the promotion increase overall category profitability? Did itdrive up sales of higher margin brands? Was the impact sustained over aperiod of time or did it just cause a spike in demand followed by a decline?

Store Costs: Were additional store labor, equipment and signage costsincurred during the promotion accounted for? Who pays for theseadditional costs incurred?



Trade promotions are not just asales issue - their impactsreverberate across all functionalareas including marketing,finance and the supply chain.

Trade Promotions Impact Multiple Organizational Functions

Promotions often lack targeting and timing to be truly

effective at enhancing brand

equity…drive volume versus

value and often attract

un-profitable consumers

Supply Chain

Synchronising internal sales

and marketing initiatives with

demand management and

supply chain processes will

reduce supply chain costs

significantly

Finance

Marketing Head Office Sales

Field Sales

Retailer

1. “An Enterprise Approach to Maximising Promotion Effectiveness”, Demantra, June 2003

2. “Count the Money When Sales & Marketing Work with Logistics”, AMR Research, 2001

3. “Full Shelf Satisfaction – Reducing Out-of-stocks in the Grocery Channel, GMA 2002

Accounting rule changes and

Sarbanes-Oxley requirements

have created an urgent

imperative for better control and

compliance

Promoted products… are nearly

twice as likely to be out-of-stock

at the retail shelf than non-

promoted items3

Trade Promotional

inefficiencies causes huge

planning and reconciliation

issues for headquarters staff

…time and resources

consumed in executing and

monitoring TPM have been

increasing without a

corresponding increase in

effectiveness

Promotions Planning

SupplyChain

Planning

Supply chain execution

RetailExecution

PromotionAdmin

PromotionEvaluation

Category planning

CustomerPlanning

6

Execution: Was the execution of the promotion smoothly coordinated from themanufacturer to the retail headquarters to the region, distribution centers and stores?

■ Supply Chain Management: Promotions impact every element of the supplychain. However, few manufacturers have been able to integrate the impacts onmarketing, sales and operations that results from breakdowns, out-of-stocks andlarge spikes in inventory and manufacturing costs. It is critical to integrate theinformation between the manufacturer’s sales force negotiating the promotion,the corporate headquarters approving it and the operations unit fulfilling theorder. Planning for additional promotional inventory and spikes in demand - atboth the manufacturer and retailers - is important to address problems like un-planned demand spikes and resultant stock-outs at retail

■ Marketing: Finally, if the promotion is going to have maximum impact it needsto be coordinated with every element of your marketing mix in terms of bothcontent and as timing. Not being in synch with consumer promotions andadvertising dilutes the impact of the promotion on the final consumer and canlead to less than optimal results at retail. For example, a marketer needs tocoordinate the timing of his/her FSI coupons with TV advertising and the in-store promotional offer - to hit the consumer thrice with the same messageversus treating them as isolated events.

Measures of Promotional Success - Tracking the Promotion forPerformance versus PlanUltimately the hallmark of a well planned and executed promotion is if it makesstrategic and financial sense from both the manufacturers and retailers perspective- versus being viewed a financial drain. Issues that must be addressed include:

■ Execution Issues - Manufacturers often fail to ask the most basic question - didthe promotion occur as planned? Very often wide gaps exist between what thepromotion planner envisioned and what actually occurred at the retail storelevel. Specific issues to follow up on include whether the planned ad actuallyran in the circular, was the display visible at stores, did the price reduction occurand was it at the right level versus competitive price points. Tactical execution atthe retail store level is the key to a promotions success - so make sure thingshappen as planned!

■ Costs - Tracking how much the promotion ended up costing versus what wasplanned is critical to evaluating its success. Accounting for both the directpromotional costs and the soft costs associated with additional inventory heldwill provide a much better picture of promotional costs. Finally, associating adollar amount with promotional breakdowns like lost sales due to stockouts ormanufacturing overtime and higher distribution costs paid due to un-expectedsales spikes will provide a much better handle on total costs.

■ Revenue Drivers - Since the primary objective of all promotional activity isrevenue and market-share growth, manufacturers need to be willing to answertwo tough questions:

1. Did the promotion really do what it was supposed to do - grow the brand’ssales and market share over a sustained period of time?

2. Were we able to capture incremental sales over baseline for a sustainedperiod of time after accounting for cannibalization at both the brand andthe category level?

■ True Profitability by Promotions - Since all manufacturers are in business to turna profit be ready to answer detailed questions on:

1. Did we make a profit on the promotion?

2. When we calculated both the hard and the soft costs associated with thepromotion did the incremental sales over baseline justify the investment?

Ultimately the hallmark of a wellplanned and executedpromotion is if it make strategicand financial sense from boththe manufactures and retailersperspective - versus beingviewed a financial drain.



Closing the Loop With the Right Systems Given the complexity and cross-functional impact of trade promotions, it is closeto impossible to track their performance and make improvements if you lack theright systems. Despite several advancements in the field, most manufacturers stilluse spreadsheets or point solutions to measure trade promotion effectiveness. Theproblem is that trade promotions impact every element of the supply chain - andpoint solutions could end up giving you not just a limited but an erroneous viewof the promotions cost.

Software used for trade promotions must provide enterprise-wide visibility and belinked into your enterprise planning systems. Ultimately it must enable you toplan, manage and measure the effectiveness of your trade promotions spends.Most importantly any system you consider should not only enable you to measurewhat went well this year but also help you reconfigure your promotional processand plan for next year’s promotional planning cycle.

Only then can you transform your trade promotion from a necessary expense toan investment!

Software used for tradepromotions must provideenterprise-wide visibility and belinked into your enterpriseplanning systems. Ultimately itmust enable you to plan,manage and measure theeffectiveness of your tradepromotions spends.

Capgemini, one of the world’s foremost

providers of Consulting, Technology and Outsourcing services, has a uniqueway of working with its clients, called the Collaborative Business Experience.

Backed by over three decades of industryand service experience, the CollaborativeBusiness Experience is designed to help our clients achieve better, faster,more sustainable results through seamless access to our network of world-leading technology partners and

collaboration-focused methods and tools.Through commitment to mutual successand the achievement of tangible value,we help businesses implement growthstrategies, leverage technology, and thrivethrough the power of collaboration.

Capgemini employs approximately 61,000people worldwide and reported 2005global revenues of 6,954 million euros.

More information about our services, offices and research is available atwww.capgemini.com.

About Capgemini and the Collaborative Business Experience

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www.capgemini.com

WorldwideBrian GirouardLeader, Global Consumer Products &Retail [email protected]+1 952.212.0417

North AmericaDave HollomanLeader, North American ConsumerProducts [email protected]+1 312.395.5107

North AmericaDonald SoaresPrincipal, North American ConsumerProducts [email protected]+1 312.395.5384

Documents

A Winning Strategy for Trade Promotion Management