Food and beverage manufacturers spend about 16% of their gross sales on trade promotions, according to Nielsen’s 2007 Trade Promotions Practices survey. On average, trade promotions represent 60% of a manufacturer’s advertising and promotion budget with the remainder divided equally between consumer promotion and media advertising (see Ad Spending sidebar).

According to the survey, more than half (56%) of all retailers surveyed claimed that their share of trade funds is “not enough,” with the remaining 44% indicating that funding from manufacturers is “sufficient”. This is a positive change from the previous year, when only 22% of retailers called their share of trade funds “sufficient”.

Smart choices
In a delicate balance of art and science, decisions are made about which products to promote, when to promote them, and at what price point they should be promoted in order to drive the optimum mix of profit and case sales. Other factors include competitive activity, synchronizing with free standing inserts (FSI) or advertising, and the type of store promotion. Promotion types generally grouped as feature ads, displays and temporary price reductions (TPRs).

By separating unit volume into “baseline” vs. “incremental” sales, smart manufacturers routinely measure the “lift” generated by every retail promotion to measure its effectiveness. This “lift” measurement is then used to set expectations when planning future promotion events. By factoring in the product line, price point, type of deal, type of retailer, and event timing, manufacturers can work with category managers to forecast sales and avoid both over-stocks and out-of-stocks.

Pump up the volume
Across all categories and channels, a stand-alone TPR is the most common type of promotion, representing 18% of all CPG unit sales. While TPR is the most frequently used, it generates much less incremental volume than features and displays, delivering a typical sales lift of just 86% on average.

Feature ads (without display support), on the other hand, account for 11% of sales, but generate an average unit lift of 145%. And displays (usually on an end cap or secondary location) elevate sales an average of 118% and represent just 7% of volume. The most effective trade promotion, however, is a combined feature with display. Timing feature ads with displays generates an average spike of 316% - over four times the amount of baseline sales. These combined promotions represent less than 5% of sales. These numbers vary across channels and markets, with grocery stores typically running more TPRs and drug stores utilizing more feature ads.

Different strokes
All categories are not alike and therefore respond differently to various trade promotion strategies. Factors such as shelf life, seasonality, and price should be considered when deciding on the optimum strategy to deploy. For example, office/school supplies, canning/freezing supplies, and other seasonal products lead all categories in display effectiveness, with average lifts exceeding 200%. These seasonal items benefit from displays since they offer important cues that are often top of mind during a particular time of year. Their seasonal sales also lead to placement in alternative, off-the-shelf locations.

Food categories with the highest volume lift from feature ads include canned seafood (+317%), canned fruit (+293%), and flour (+250%). In general, consumers are more likely to stock up on products with a long shelf life. Some food categories with the lowest feature lift (70% or less) include milk, diapers, and cough & cold. Consumers seem to avoid stocking up on these and other categories, perhaps due to a lack of space in the fridge, diaper bag and medicine cabinet. For these routine categories, an EDLP strategy may work best.

Best bang for the buck
A key opportunity for both retailers and manufacturers is to identify the categories that earn high volume lifts from features and displays, but receive very little trade promotional dollar support. For example, flour and baking supplies receive very little feature ad support, but generate high lifts. On the other hand, wine, sodas and snacks all receive strong display support yet deliver only modest lifts of <100%. By measuring and monitoring lift, retailers can fine-tune their feature and display effectiveness across categories.

Two key opportunities for driving more efficient promotions are dependant on feature pricing and event timing. The lowest price is not always the best price, and many feature events leave money on the table. On high-ring items, deep discounts can lead to out-of-stocks – a sure-fire way to lose shopper loyalty. Feature ads without a significant discount may be a waste of trade spending for some products. In the worst cases, high feature prices reflect poorly on the retailer. As a new rule of thumb, some retailers may refuse feature prices that are higher than their competitors’ everyday prices.

Making it work
The vast majority of manufacturers use programs or processes to measure and manage trade promotions. According to Nielsen’s 2007 Trade Promotions Practices survey, only 18% of these manufacturers use standard, off-the-shelf software tools to manage funds, while 59% use internally-created tools, and the remaining manufacturers use custom software. Such a diverse set of tools for managing trade funds can only limit the level of cooperation with retailers. With all the uniform standards used in the CPG industry, there is a clear opportunity for trade promotion systems to speak a common language across manufacturers, retailers and brokers.

The industry is ready for standardization. Real efficiency will begin when retailers and manufacturers can collaborate using a single set of numbers to both plan promotion events and then evaluate their performance. The industry isn’t there yet, but the potential for this type of collaboration is promising.

Cooperation is key
Category management is the essence of cooperation, whereby manufacturers, retailers and broker partners work synergistically to the benefit of all parties. While manufacturers and retailers rank various reasons for practicing category management differently, it’s encouraging that more than 80% of both retailers and manufacturers agree that optimizing product mix is a primary goal of collaboration, since this also benefits the consumer.

Top Three Reasons for Practicing Category Management:

Source: Nielsen 2007 Annual Trade Promotion Practices Survey

In addition, more than half of manufacturers (58%) consider the investment of being category captain a “Good Value”, and 19% consider it an “Excellent Value”. Twenty-two percent reported that the outlay was a “Fair Value,” and none believed it to be a “Poor Value”. Interestingly, 35% of retailers reported that they do not select category captains, which is higher than at any time in the past seven years. It is important to note that the intersection of manufacturer and retailer critical issues reflects areas of mutually beneficial collaboration.

The future of trade promotions
Efficiency and effectiveness are key drivers to future success. Retailers who demonstrate the most efficient and effective promotion events will get more than their fair share of trade funds. Expect that manufacturers will focus their promotion efforts on retailers that can be measured. With so much being spent on promotions, it is only logical that it will be closely monitored. Look for manufacturers to revisit the comparison of ROI on trade spending vs. FSIs, traditional advertising, and even product websites.

Look for an improvement in promotion event timing to lead to a better return on trade spending. This may include a better understanding of the top sales weeks for a category or a better synchronization with TV ads or FSI drops. In many cases, manufacturers may stop promoting on historically low sales weeks. Also, look for more manufacturers to demand feature ad exclusivity within their category. Running a feature on both Coke and Pepsi during the same week may be fine for the retailer, but a waste of trade funds for the manufacturer.

Retailers will also set expectations for each feature ad or display. As the industry shifts to more “pay-for-performance” promotions, smart retailers will want to know how their promotions compare to competitors – not just in volume and lift, but in ROI for the manufacturer. Retailers will continue to gain a better understanding of the need to compete for trade dollars based on vendor ROI. They will compete vs. each other, vs. FSIs, and vs. consumer advertising.

Lastly, with all the flat panel screens already installed in stores, look for 2008 to be a breakout year for in-store advertising. This exciting medium is new to most retail chains, and has the potential to blur the lines between consumer and trade promotions.