1 8 th Annual IAABD Conference May 29-June 2, 2007 When Retailers are More Powerful Simon Pierre Sigué

2 Outline Context and motivations Research questions Model Assumptions Findings Implications Future research

3 Context and motivations More than 60% of marketing communication expenses Focus on immediate results Availability of scanner data Lack of product differentiation Intensive competition in mature industries Promotions: A new marketing weapon?

4 Context and motivations Increase short-term sales No impact on long-term sales Generate repeat-purchase and improve the brand equity Generate stockpiling, decrease long- term sales, and damage the brand equity Promotions: What to expect?

5 Context and motivations Retailer promotions: displays, features, price-cuts - Sales increase of the promoted brand - Sales increase of complementary products - In-store traffic increase * May harm manufacturers’ brand images

6 Context and motivations Consumer promotions: coupons, rebates,contests, and premuims - Can coordinate channel - Aim exclusively at increasing sales of the promoted brand * Retailers may increase retail prices during consumer promotions

7 Context and motivations Trade promotions: cooperative advertising and advertising allowances - Retailers invest more in promotions and advertising - Both manufacturers’ and retailers’ profits improve

8 Context and motivations The conventional wisdom in channel literature is that manufacturers’ profitability has deteriorated to the benefit of retailers because of the extensive use of consumer and trade promotions

9 Context and motivations Empirical evidence does not always support the conventional wisdom (e.g. Srinivasan et al. 2004) Analitycal models on tarde promotions claim that some of them are winning-winning mechanisms that improve channel profits There is no proof that other trade promotions such as slotting allowances do not first benefit retailers

10 Context and motivations The main drive of my research is that the apparent contradictions in the current literature may stem from the failure to take into account the long-term effects of consumer and retailer promotions and the bargaining over who should control promotions targeted at consumers.

11 Research questions Who should control promotional activities targeted at consumers? How channel members’ decisions compare under manufacturer-controlled and retailer- controlled promotions? How the acknowledgement of the long-term effects of promotions influences the distribution of channel profits? What is the impact of consumer and retailer promotions on cunsumer welfare?

12 Model 1 Period 1Period 2 Retailer’s control Manufacturer’s controls Demand function Retailer’s profit Manufacturer’s profit

13 Model 2 Period 1Period 2 Retailer’s control Manufacturer’s controls Demand function Retailer’s profit Manufacturer’s profit

14 Assumptions Manufacturer’s profit during the whole game Retailer’s profit during the whole game Long-term effects of consumer promotions

15 Findings Model 1: Subgame perfect equilibrium. Stage 1 Stage 2 Stage 3 Stage 4

16 Findings Model 2: Subgame perfect equilibrium. Stage 1 Stage 2 Stage 3 Stage 4

17 (i) The first-period wholesale price is higher if manufacturers, instead of retailers, control promotional activities. (ii) The first-period retail prices are higher (lower) under manufacturer-controlled promotions than retailer- controlled promotions if the long-term effects of promotions are positive (negative). Otherwise, if promotions do not impact long-term sales, the first- period retail prices are identical under both promotions. manufacturer-controlled and retailer-controlled. Proposition 1: First-period prices

18. Second-period wholesale and retail prices are higher (lower) if the manufacturer, rather than the retailer, controls promotional activities and the long-term effects of promotions are negative (positive). Proposition 2: Second-period prices

19 (i) Regardless of whether the long-term effects of promotions are positive or negative, retailers always invest in retailer promotions, while manufacturers may not invest in consumer promotions if the long-term effects of their promotional activities become very damaging for future sales, i.e. Proposition 3: Promotion rates (ii) Manufacturers invest less in consumer promotions than retailers do in retailer

20. The manufacturer undertakes extensive (minor) investments in brand-image advertising under manufacturer-controlled promotions than under retailer-controlled promotions if the long-term effects of promotions are negative (positive). Proposition 4: Brand-image advertising

21. Players’ profits in Model 1

22. Players’ profits in Model 2

23. Retailer’s profits

24. Manufacturer’s profits

25. The bargain of promotions (1)When the long-term effects of promotions are very negative, manufacturers prefer Model 1 and retailers prefer Model 2. (2)When the long-term effects of promotions are significantly positive, manufacturers favour Model 2, while retailers are better off with Model 1. (3)Without long-term effects or when they are moderate, both manufacturers and retailers prefer Model 2.

26. Consumers’ preference Negative long- term effects Positive long-term effects Promotional pricesManufacturerRetailer Post promotional prices RetailerManufacturer PromotionsRetailer Band-image advertising ManufacturerRetailer

27 Implications Contrary to the conventional wisdom, manufacturers enjoy higher economic power when promotions damage their brand images, but should avoid these types of promotions when their effects are very significant. The power does shift from manufacturers to retailers when consumer promotions expand significantly future sales.

28 Implications Retailers may undertake promotions against the will of manufacturers if they substantially damage future sales. The retail extortion view of trade promotions can be supported when channel promotions aim at expanding the market base. When promotions have no long run effects or these effects are relatively small, manufacturers and retailers are better off under retailer-controlled promotions and manufacturers take advantage of their economic power.

29 Future research Combine retailer, consumer, and trade promotions Introduce competition