1. Trade and Consumer Promotion Retailing MKTG 6211 Professor Edward Fox Cox School of Business/SMU

2. 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

3. Growth of Sales Promotions Trade Promotion grows with roughly with manufacturers’ dollar sales Source: A.C. Nielsen

4. How Important Are Promotions? Total Advertising and Promotion Budget % by Spending type -2000 Source: A.C. Nielsen Trade promotion is 12% of gross dollar sales for packaged goods manufacturers

5. 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

6. Consumer Promotions Short-term incentives by the manufacturer to encourage purchase of a product or service Point-of-Purchase Displays Point-of-Purchase Displays Premiums Price Packs Cash Refunds Coupons Samples Consumer-Promotion Objectives Consumer-Promotion Tools Patronage Rewards Games Sweepstakes Contests Advertising Specialties Advertising Specialties Patronage Rewards Entice Consumers to Try a New Product Entice Consumers to Try a New Product Lure Customers Away From Competitors’ Products Lure Customers Away From Competitors’ Products Get Consumers to “Load Up’ on a Mature Product Get Consumers to “Load Up’ on a Mature Product Hold & Reward Loyal Customers Hold & Reward Loyal Customers Consumer Relationship Building Consumer Relationship Building Source: Adapted from Prentice Hall

7. Trade Promotions Short-term incentives by the manufacturer that are directed to retailers and wholesalers Specialty Advertising Items Specialty Advertising Items Contests Free Goods Buy-Back Guarantees Buy-Back Guarantees Allowances Price-Offs Trade-Promotion Objectives Trade-Promotion Tools Patronage Rewards Push Money Discounts Premiums Displays Allowances Persuade Retailers or Wholesalers to Carry a Brand Persuade Retailers or Wholesalers to Carry a Brand Give a Brand Shelf Space Promote a Brand in Advertising Promote a Brand in Advertising Push a Brand to Consumers Source: Adapted from Prentice Hall

8. Effects of Consumer and Trade Promotions on Consumer Behavior Expand category volume Cause brand switching  Cannibalization Change purchase timing Cause stockpiling

9. Considerations in Executing a Trade Promotion Size of the incentive (depth of discount) What are the conditions for participation? How to evaluate success of the program Structure and distribution of the promotion program Length of the program (limited time) Source: Adapted from Prentice Hall

10. 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

11. Trade Promotion Accountability Dollars for buying or selling?  Off-invoice allowances  Scan-backs or bill-backs Forward buying Diverting / grey markets

12. 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?

13. 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

14. 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

15. 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

16. 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

17. 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?

18. 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

19. 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