CATEGORY MANAGEMENT: The Merchandising Tool of the Future
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Transcript CATEGORY MANAGEMENT: The Merchandising Tool of the Future
Retailing
MKTG 6211
Trade and Consumer
Promotion
Professor Edward Fox
Cox School of Business/SMU
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
Growth of Sales Promotions
Trade Promotion grows with roughly with
manufacturers’ dollar sales
16%
14%
12%
10%
8%
6%
4%
2%
0%
1990
1995
2000
2005
Source: A.C. Nielsen
How Important Are Promotions?
Total Advertising and Promotion Budget
% by Spending type -2000
28%
52%
20%
Trade Promotion
Consumer Promotion
Media Advertising
Trade promotion is 12% of gross dollar sales for packaged
goods manufacturers
Source: A.C. Nielsen
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
Consumer Promotions
Short-term incentives by the manufacturer to
encourage purchase of a product or service
Consumer-Promotion
Objectives
Entice Consumers to
Try a New Product
Lure Customers Away
From Competitors’ Products
Get Consumers to “Load Up’
on a Mature Product
Hold & Reward Loyal
Customers
Consumer Relationship
Building
Source: Adapted from Prentice Hall
Consumer-Promotion
Tools
Samples
Coupons
Cash Refunds
Advertising
Specialties
Patronage
Patronage
Rewards
Rewards
Contests
Price Packs
Sweepstakes
Premiums
Games
Point-of-Purchase
Displays
Trade Promotions
Short-term incentives by the manufacturer that are
directed to retailers and wholesalers
Trade-Promotion
Objectives
Trade-Promotion
Tools
Persuade Retailers or
Wholesalers to Carry a Brand
Price-Offs
Premiums
Give a Brand Shelf Space
Allowances
Promote a Brand in
Advertising
Displays
Patronage
Allowances
Rewards
Buy-Back
Guarantees
Discounts
Push a Brand to Consumers
Free Goods
Contests
Push Money
Specialty
Advertising
Items
Source: Adapted from Prentice Hall
Effects of Consumer and Trade
Promotions on Consumer Behavior
Expand category volume
Cause brand switching
Cannibalization
Change purchase timing
Cause stockpiling
Considerations in Executing a Trade
Promotion
Size of the incentive (depth of
discount)
What are the conditions for
participation?
Structure and distribution of the
promotion program
Length of the program (limited time)
How to evaluate success of the
program
Source: Adapted from Prentice Hall
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
Trade Promotion
Accountability
Dollars for buying or selling?
Off-invoice allowances
Scan-backs or bill-backs
Forward buying
Diverting / grey markets
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?
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
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
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
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
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?
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
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