Sales Promotion and the Role of Trade Promotions CHAPTER 15 Sales Promotion and the Role of Trade Promotions © 2010 South-Western, a part of Cengage Learning All rights reserved.

Chapter Objectives After reading this chapter you should be able to: Understand the nature and purpose of sales promotions. Know the factors that account for the increased investment in promotions, especially those that are trade oriented. Recognize the tasks that promotions can and cannot accomplish. Appreciate the objectives of trade-oriented promotions and the factors critical to building a successful trade promotion program. © 2010 South-Western, a part of Cengage Learning. All rights reserved. 15–2

Chapter Objectives (cont’d) After reading this chapter you should be able to: Comprehend the various forms of trade allowances and the reasons for their use. Be aware of forward buying and diverting and how these practices emerge from manufacturers’ use of off-invoice allowances. Appreciate the role of everyday low pricing (EDLP) and pay-for-performance programs as means of reducing forward buying and diverting. Understand nine empirical generalizations about promotions © 2010 South-Western, a part of Cengage Learning. All rights reserved. 15–3

The Nature of Sales Promotion Is any incentive that is additional to the basic benefits provided by the brand and temporarily changes its perceived price or value Is short-term oriented and capable of influencing behavior because it offers buyers superior value and can make them feel better about the buying experience © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Nature of Sales Promotion (cont’d) Purposes of Sales Promotion To induce the trade (wholesalers and retailers) or consumers to buy a brand To encourage the manufacturer’s sales force to sell a brand aggressively To encourage immediate, desired shopping and purchasing behaviors from their consumers To encourage people to increase their donations to nonprofits now rather than later © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Brand-Level Promotion Targets Figure 15.1 Brand-Level Promotion Targets © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Increased Budgetary Allocations to Promotions Advertising Spending Advertising expenditures have declined in recent years while promotion spending has increased Push Strategy Using promotional efforts to push product through the selling chain Pull Strategy Using consumer advertising to pull product through the channel of distribution © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Push and Pull Strategies Table 15.1 Push and Pull Strategies © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Shift in manufacturer versus retailer balance of power Table 15.2 Developments Underlying the Growth in Promotions Shift in manufacturer versus retailer balance of power Increased brand parity and price sensitivity Reduced brand loyalty Splintered mass market and reduced media effectiveness Emphasis on short-term results in corporate reward structures Increase in responsiveness of consumers to promotion © 2010 South-Western, a part of Cengage Learning. All rights reserved.

A Consequence of the Increase: New Accounting Rules Financial Accounting Standards Board (FASB) Emerging Issues Task Force Regulations EITF 00-14 and 00-25 require that price discount sales promotion—including those directed to retailers and consumers—must be treated as reductions in sales revenue. Adherence to the new rules will cut reported net sales for CPG companies by 8.5% on average. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Illustration of “Old” and “New” Accounting Procedure Table 15.3 Illustration of “Old” and “New” Accounting Procedure © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Sales Promotions Can Tasks That Promotions Can and Cannot Accomplish Table 15.4 Tasks That Promotions Can and Cannot Accomplish Sales Promotions Can Stimulate sales force enthusiasm for a new, improved, or mature product Invigorate sales of a mature brand Facilitate the introduction of new products to the trade Increase on- and off-shelf merchandising space Neutralize competitive advertising and sales promotions Obtain trial purchases from consumers Hold current users by encouraging repeat purchases Increase product usage by loading consumers Preempt competition by loading consumers Reinforce advertising © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Sales Promotions Cannot Table 15.4 Tasks That Promotions Can and Cannot Accomplish (cont’d) Sales Promotions Cannot Compensate for a poorly trained sales force or for a lack of advertising Give the trade or consumers any compelling long-term reason to continue purchasing a brand Permanently stop an established brand’s declining sales trend or change the basic nonacceptance of an undesired product © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Role of Trade Promotions Trade Promotions’ Scope and Objectives Introducing new or revised products Increasing distribution of new packages or sizes Building retail inventories Maintaining or increasing manufacturer’s share of shelf space Obtaining displays outside normal shelf locations Reducing excess inventories and increasing turnover Achieving product features in retailers’ advertisements Countering competitive activity Selling as much as possible to final consumers © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Ingredients for a Successful Trade Promotion Program Correct Timing Financial Incentive Improved Retailer Performance Quick Results Minimize Retailer’s Effort and Cost © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Illustration of Forward Buying and Diverting Table 15.5 Illustration of Forward Buying and Diverting In preparation for a huge promotional event in 2009 surrounding the Cinco de Mayo celebration of Mexican independence on May 5, Beauty Products Inc.—a hypothetical manufacturer of personal-care products—extends an off-invoice offer to grocery chains in the Los Angeles area. This promotion is a 15 percent off-invoice allowance on all orders placed for SynActive shampoo (a hypothetical brand) during the week beginning April 3, 2009, and extending through the week beginning April 24, 2009. Assume that FB&D Supermarkets of Los Angeles (a hypothetical chain) orders 15,000 cases of SynActive—many more cases than it typically would sell in its own stores during any four-week period. Beauty Products Inc. has offered the 15 percent off-invoice allowance to FB&D Supermarkets with the expectation that FB&D will reduce SynActive’s retail price to consumers by as much as 15 percent during the week of Cinco de Mayo festivities. FB&D sells at the discounted price only 3,000 of the 15,000 cases purchased. (The remaining cases include some that are forward bought and some that will be diverted.) FB&D resells 5,000 cases of SynActive to Opportunistic Food Brokers—a company that services grocery retailers throughout the West. (This is the practice of diverting.) FB&D later sells the remaining 7,000 cases of SynActive to shoppers in its own stores but at the regular, full price. (These 7,000 cases represent forward buys.) © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Trade Allowances Trade Allowances Are used because manufacturers hope to increase purchases of the manufacturer’s brand by wholesalers and/or retailers Augment consumers’ purchases of the manufacturers’ brand from retailers Foster the expectation that retailers will pass along their savings to consumers © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Trade Allowances (cont’d) Off-Invoice Allowances Bill-Back Allowances Slotting and Deslotting Allowances Major Forms of Trade Allowances © 2010 South-Western, a part of Cengage Learning. All rights reserved. 18

Major Forms of Trade Allowances Off-Invoice Allowances Most frequently used form Deals offered to trade that permit wholesalers and retailers to deduct a fixed amount from the invoice Retailers may not pass along discounts to consumers Bill-Back Allowances Retailers receive allowances for featuring the manufacturer’s brand in advertisements or for providing special displays Slotting Allowances Fees that manufacturers pay retailers for access to the slot, or location Fees paid by a manufacturer to get its new brand accepted by retailers—a form of bribery? or legitimate cost of doing business? Exit Fees (Deslotting Allowances) If brand does not meet an average weekly sales volume, the retailer can assess a deslotting charge for removing the item from its distribution center, © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Undesirable Consequences of Off-Invoice Allowances: Forward Buying and Diverting Retailers purchase enough products on deal to carry them over until the manufacturer’s next regularly scheduled deal Retailers’ savings from forward buying often are not passed on to consumers Actions leads to increased distribution costs Manufacturers experience reduced margins due to price discounts Diverting Occurs when a manufacturer restricts a deal to a limited geographical area Retailers buy large quantities at the deal price and then resell the excess quantities in other geographical areas Product quality potentially suffers due to delays and serious problem could result from product tampering © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Efforts to Rectify Trade Promotion Problems Everyday Low Pricing (EDLP) Pay-for- Performance Account-Specific Marketing Reducing the Negative Effects of Trade Allowances © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Trade Promotion Activities Everyday Low Pricing (EDLP) or Value Pricing When a retailer charges the same price for a particular brand day in and day out EDLP(M) A form of pricing whereby a manufacturer charges retailers the same price for a particular brand day in and day out. Pay-for-Performance Programs Reward retailers for selling the brands supported with trade allowances rather than merely buying these brands. Produce win-win-win situations Provide incentives to the retailer only for the items that are sold to consumers during the agreed-upon time period Benefit all parties: consumers, retailers, and manufacturers © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Scanning Agents Activities that scanning agents profit from: Collecting scanner data from retailers Verifying the amount of product movement that meets the manufacturer’s promotional requirements and warrants compensation Paying the retailer Collecting funds from the manufacturer along with a commission for services rendered © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Trade Promotion Activities (cont’d) Account-Specific Marketing (Co-Marketing) Creates promotional and advertising activities that a manufacturer customizes to specific retail accounts—local radio tie-in advertising, loyalty programs Relatively recent innovation Requires much effort and can be costly The future of this practice is uncertain © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Nine Empirical Generalizations about Promotions Table 15.6 Nine Empirical Generalizations about Promotions Temporary retail price reductions substantially increase sales. The greater the frequency of deals, the lower the height of the deal spike. The frequency of deals changes the consumer’s reference price. Retailers pass through less than 100 percent of trade deals. Higher-market-share brands are less deal elastic. Advertised promotions can result in increased store traffic. Feature advertising and displays operate synergistically to influence sales of discounted brands. Promotions in one product category affect sales of brands in complementary and competitive categories. The effects of promoting higher- and lower-quality brands are asymmetric. © 2010 South-Western, a part of Cengage Learning. All rights reserved.