May 23, 2007
CPGmatters: It’s Time to Get Tough With Vendor Allowances
By Al Heller
Through a special arrangement, what follows is an excerpt of a current article from CPGmatters monthly e-zine, presented here for discussion.
CPG manufacturers should toughen up when dealing with retailers who don’t respect the true purpose of trade promotion.
In fact, CPGs should use Sarbanes-Oxley “as the excuse to put teeth into their position” when retailers look to trade promotion as a profit center, resist submitting trade promotion documentation costs, or intimidate CPG sales reps, urged Ray Wezner, COO and General Manager of the Tactical Promotion Administration (TPA), a division of MARS, speaking recently at the Trade Promotion Marketing Associates (TPMA) Financial Impact Conference in Tampa.
The
Sarbanes-Oxley law mandates that all trade payments (vendor allowances) be
counted as revenue reductions rather than marketing expense unless:
- The manufacturer
benefits; - Trade payments are clearly separable from the sale of the product;
- The benefit
could be purchased from a source other than the retailer; - The manufacturer
obtains proof of performance; - The manufacturer can reasonably estimate true
costs.
To arrive at “true value,” CPGs must know the costs of each promotional claim, the dollar value of each claim and ad, and proof of performance.
As an example, Mr. Wezner said one major vendor was forced to pay Kohl’s one percent of sales in exchange for media exposure of brands, yet the chain doesn’t provide proof of performance. TPA determined that 91 percent of the supplier’s 2006 spending allowance with Kohl’s had valid proof and could be moved to marketing expense.
In another example, a designer brand was able to reduce its retail overpayments of 46 percent by taking TPA’s “true value” pre-audit media cost estimates and “turning them into their rate card back to the retailer,” he noted.
“In preparation for top-to-top meetings, companies can see roll-up reports to know all of their trade promotion spending with that retailer, across all of their brands,” said Mr. Wenzer.
A third vendor used media cost insights in a way that kept it simple for salespeople.
“‘Let’s spend the same money, but get four ads instead of three,’ was their direction, and this enabled them to negotiate aggressively,” Mr. Wezner said.
“All along clients felt they were taken advantage of, but they just didn’t know how much, and they never had a tool to help them negotiate that with the retailer,” he stated. “Think about the amount of money thrown around in trade promotion and people just say ‘OK, we’ll do it.’ It’s incredible to me that salespersons aren’t better trained in media. The average salesperson knows a lot about product and little about buying media. Keep it simple for the sales force.”
Discussion Questions: What are some ways vendors and retailers are resolving trade promotion allowance issues? Are there methods to assure proof of performance that are practical for retailers? Do you agree that manufacturer salespeople need to know more about media buying?
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If there was no trade spending there wouldn’t have to be any verification. Trade spending began as a way to get around price controls back in the Jimmy Carter era and from that point in time they’ve escalated to become a significant part of the marketing plan for many brands. If companies are serious about trade spending then they would choose to spend more ad dollars to build the equity of their brands. The CPG industry is no different than the automobile industry; GM, and Ford are forced to offer price discounts due to their low brand equity. Lexus and others have created brand equity and therefore do not need to offer price discounts.
Have you ever heard the old story about the farmers who met and decided that they were not getting enough for their corn harvest to cover the cost? So they agreed to limit their production so that their price per bushel would go up. What was the result of this action? Each of the farmers went home and planted double what they agreed to plant. They all lost their behinds! Why? Because they were greedy! CPG suppliers are like those farmers, but they want sales, share, whatever–just more than they currently have. The cheap way to achieve increases is to suppress their competition. This is accomplished with discounts, ad allowances, coupons–anything but educating the consumer about the product. The retail grocers are not to be blamed for this dilemma. The CPG suppliers invented every marketing/advertising/couponing/incentive program that has ever been used at retail, not the retailers. The CPG suppliers just get upset when one of their programs is adopted by a retailer and competition is given a fair chance to compete. THEN–the retailer is twisting their arm! Give me a break!
To answer the last question: “Yes.” If trade promotions amount to media buys, they should be purchased and negotiated like media buys, with all requisite proofs of performance.
Demonstration of performance makes good business sense for both the retailer and manufacturer. If a particular promotion sells more product creating more profit for both parties, it is a desirable thing to do. Doing promotions because either “thinks,” “feels,” or “assumes” they are necessary or effective is foolish in today’s data rich environment.
The barrier suggested is that it takes more time and effort to demonstrate performance. Is it better to spend time finding out which promotions actually produce a better return or to just guess? Long term profitability of both sides would suggest the former.
It does take time and effort to demonstrate performance and both parties need to be involved in the execution, monitoring, and data analysis.
If the retailer does not want to cooperate, the manufacturer can begin with promotions that their delivery people can verify. For instance, in a vendor stocking program, the vendors can verify whether a specific display is set up (they may even have to be the people to set it up). Using scanner data from the retailer the manufacturer can demonstrate what lift occurs when that display is set up and what happens to sales when the display is gone.
Demonstrating the effectiveness of promotions is critical for long term success for both parties. The retailers may need to see some data before being convinced.
At the end of the day, it’s all about creating “win-win” situations through fact-based negotiations. When I was in the Trade Marketing seat it was about “Return on Investment” and eventually Customer Profitability. If I can show a retailer that their ROI is negative or sub-par to the industry, I have the opportunity to negotiate for improved performance or, if necessary, reduce the investment with that retailer with a goal of reinvesting the monies at a more acceptable rate with another retailer.
We also need to think about negotiating a trade plan over a period of time (e.g. 6 months). This allows the retailer to have a few events which lets him do his thing while the CPG can get support for some events that favor him–in the end we would hope to reach the ROI target!
The vendor trade allowance business is similar to the discussion about customer rebates: if the process is too complicated, it becomes a sales prevention tool. The repeated scandals and lawsuits regarding trade allowances stretching back decades indicates that these issues aren’t easily solved to everyone’s satisfaction. Traditionally, CPG firms used retailer media because retailers got the best prices for local media, much lower than CPG firms could get for themselves, using national rates. And the most powerful ads for immediate sales stimulation are run by retailers, showing great sale prices. Brand image advertising doesn’t have the same short-term impact.
“We have met the enemy and he is us.”
This cartoon quote is often the lament of manufacturers who try to track and evaluate their trade promotion activity.
The reality is that a lot of trade promotion spending is simply used to maintain distribution on products that might otherwise be dropped or support products that can’t sustain their prices.
Furthermore, in working with retailer partnerships, we also learn that the promise of performance is often out of their direct control and subject to the whim of operations or retail store managers.
That said, I certainly agree that we need to get better at planning, evaluating and improving trade promotion. However, I think the solution lies in working in partnership with the retailer rather than in legal threats.
How about “true” pay for performance? Ad to be run on a specific date, on a specific page for a specific price and specific size in the ad. If anything is different than specified by the retailer/vendor agreement to the ad, then the payment is $0!
Think of it this way. You are shopping for a car, a very nice car. There’s a Lexus you saw advertised on TV with a special promotion. You open the newspaper later the same day and see the same car, with a very different special promotion.
Which will you go for? Exactly–you won’t pay for the same item according the newspaper ad promotion. You want the better TV promotion.
Why would the manufacturer pay for the smaller promotion when they had agreed upon the bigger and better promotion?
Get real, retailers! Follow through on what you agree to do. Don’t expect compliance from vendors when you continually go back on your word (and signed contracts).
It’s all about the consumer who shops your stores, not about the amount of coop $$$ you can squeeze from your vendors.
Al Heller’s report on trade allowances is outstanding and offers a very truthful and frank perspective and goes where many trade journal writers would not dare. However, this is exactly the type of dialog that needs to happen for everyone’s true benefit–the manufacturer, the consumer, and also…and maybe most of all–the retailer. In an effort to be fair and balanced, here is the very short version of how I advise my own manufacturer-clients and employers to look at trade allowances and support:
1. Recognize that trade advertising and other programs that retailers “sell” does have significant value to the brand for lots of reasons–too many to list right here.
2. Know and be completely educated that some types of products in certain categories respond to retail ads better than others, while other retailer programs, besides ads, work more effectively for others. Know what truly drives your product or brand and make recommendations accordingly to your retail partners.
3. Recognize that in some instances retailers make more profits from “selling” programs than they make from “selling” products off the shelves. This is not meant to be judgmental as much as in many instances, it’s reality. As manufacturers, we need to consider and deal with it, as necessary.
4. Refrain from making black and white policies about your trade advertising strategies. Instead, make excellent judgments on a case by case basis.
5. Do not patronize programs that have no clear objectives to drive more business for the retailer and your brand. To do so will hurt your brand and other retailers that compete with a greater or more conscientious degree of ethics and purpose.
6. Try to sit down with the retailer once or twice each year to have a comprehensive dialog and planning session with the goal in mind of building each other’s mutual business in a dynamic manner so that all the planning, spending and commitments made are dynamic, interactive, and purposeful to achieve ultimate objectives and goals. Contrarily, the piecemeal approach is usually not impactful or effective.
7. Look at your projected or predicted ROI, not from one event to the next but comprehensively over a period of one, three, and five years.
Everyone should also keep in mind that expectations should differ between what retailers expect from different types of brands and products. Every day name brands should bear the majority of trade funding because the name recognition and feature prices are what drives traffic, and these brands are unique to no retailer, so price is what drives traffic. However, niche brands and specialties should be promoted uniquely and creatively, with points of differences offered even in the promotions, and in most cases, private label and store brands should be promoted at the expense of the retailer, not the manufacturer.
Here we go again. While vendor allowances have been a controversial issue for decades there has been no practical, widely applicable solution to the problem because no one has found a credible substitute for the traditional transaction. Many grocers maintain that they break even on operations: their profit comes from vendor allowances. No vendor allowance, no business. So, let’s offer grocers a satisfactory substitute before dreaming of eliminating vendor allowances and their many guises.
Why do you need to “get tough” with retailers? The only thing manufacturers need is good data, and that is readily available through the syndicated data services and the numerous companies that track trade performances. The thesis of this article implicitly supports a paradigm that is prevalent in the industry: that is, manufacturers cannot make money through retailer promotions. That belief is false, and vendors that use good data to show retailers how both sides can make money on a specific promotional plan will have no problem with Vendor Allowances.
Ideally, proof of performance should be a routine matter, built in to the everyday in-store implementation and monitoring process. This fundamental activity should better support all forms of merchandising and marketing actions – from display promotions, to routine re-stocking, to TPRs, to weekly ads and shopper media.
Absent this level of clarity and certainty, even so-called “proof” of a temporary price reduction may fail to deliver results due to un-corrected out of stocks, missing signage or other un-monitored breakdowns, to cite one scenario. This prevents reliable diagnosis of the problem and permits the finger-pointing to persist.
For too long, retailers and manufacturers have been groping in the dark for point solutions to narrowly-defined promotion performance challenges. The lasting solution begins when we shine a light on at-retail implementation, increase transparency, and make everyday implementation monitoring part of our routine business process.
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If there was no trade spending there wouldn’t have to be any verification. Trade spending began as a way to get around price controls back in the Jimmy Carter era and from that point in time they’ve escalated to become a significant part of the marketing plan for many brands. If companies are serious about trade spending then they would choose to spend more ad dollars to build the equity of their brands. The CPG industry is no different than the automobile industry; GM, and Ford are forced to offer price discounts due to their low brand equity. Lexus and others have created brand equity and therefore do not need to offer price discounts.
Have you ever heard the old story about the farmers who met and decided that they were not getting enough for their corn harvest to cover the cost? So they agreed to limit their production so that their price per bushel would go up. What was the result of this action? Each of the farmers went home and planted double what they agreed to plant. They all lost their behinds! Why? Because they were greedy! CPG suppliers are like those farmers, but they want sales, share, whatever–just more than they currently have. The cheap way to achieve increases is to suppress their competition. This is accomplished with discounts, ad allowances, coupons–anything but educating the consumer about the product. The retail grocers are not to be blamed for this dilemma. The CPG suppliers invented every marketing/advertising/couponing/incentive program that has ever been used at retail, not the retailers. The CPG suppliers just get upset when one of their programs is adopted by a retailer and competition is given a fair chance to compete. THEN–the retailer is twisting their arm! Give me a break!
To answer the last question: “Yes.” If trade promotions amount to media buys, they should be purchased and negotiated like media buys, with all requisite proofs of performance.
Demonstration of performance makes good business sense for both the retailer and manufacturer. If a particular promotion sells more product creating more profit for both parties, it is a desirable thing to do. Doing promotions because either “thinks,” “feels,” or “assumes” they are necessary or effective is foolish in today’s data rich environment.
The barrier suggested is that it takes more time and effort to demonstrate performance. Is it better to spend time finding out which promotions actually produce a better return or to just guess? Long term profitability of both sides would suggest the former.
It does take time and effort to demonstrate performance and both parties need to be involved in the execution, monitoring, and data analysis.
If the retailer does not want to cooperate, the manufacturer can begin with promotions that their delivery people can verify. For instance, in a vendor stocking program, the vendors can verify whether a specific display is set up (they may even have to be the people to set it up). Using scanner data from the retailer the manufacturer can demonstrate what lift occurs when that display is set up and what happens to sales when the display is gone.
Demonstrating the effectiveness of promotions is critical for long term success for both parties. The retailers may need to see some data before being convinced.
At the end of the day, it’s all about creating “win-win” situations through fact-based negotiations. When I was in the Trade Marketing seat it was about “Return on Investment” and eventually Customer Profitability. If I can show a retailer that their ROI is negative or sub-par to the industry, I have the opportunity to negotiate for improved performance or, if necessary, reduce the investment with that retailer with a goal of reinvesting the monies at a more acceptable rate with another retailer.
We also need to think about negotiating a trade plan over a period of time (e.g. 6 months). This allows the retailer to have a few events which lets him do his thing while the CPG can get support for some events that favor him–in the end we would hope to reach the ROI target!
The vendor trade allowance business is similar to the discussion about customer rebates: if the process is too complicated, it becomes a sales prevention tool. The repeated scandals and lawsuits regarding trade allowances stretching back decades indicates that these issues aren’t easily solved to everyone’s satisfaction. Traditionally, CPG firms used retailer media because retailers got the best prices for local media, much lower than CPG firms could get for themselves, using national rates. And the most powerful ads for immediate sales stimulation are run by retailers, showing great sale prices. Brand image advertising doesn’t have the same short-term impact.
“We have met the enemy and he is us.”
This cartoon quote is often the lament of manufacturers who try to track and evaluate their trade promotion activity.
The reality is that a lot of trade promotion spending is simply used to maintain distribution on products that might otherwise be dropped or support products that can’t sustain their prices.
Furthermore, in working with retailer partnerships, we also learn that the promise of performance is often out of their direct control and subject to the whim of operations or retail store managers.
That said, I certainly agree that we need to get better at planning, evaluating and improving trade promotion. However, I think the solution lies in working in partnership with the retailer rather than in legal threats.
How about “true” pay for performance? Ad to be run on a specific date, on a specific page for a specific price and specific size in the ad. If anything is different than specified by the retailer/vendor agreement to the ad, then the payment is $0!
Think of it this way. You are shopping for a car, a very nice car. There’s a Lexus you saw advertised on TV with a special promotion. You open the newspaper later the same day and see the same car, with a very different special promotion.
Which will you go for? Exactly–you won’t pay for the same item according the newspaper ad promotion. You want the better TV promotion.
Why would the manufacturer pay for the smaller promotion when they had agreed upon the bigger and better promotion?
Get real, retailers! Follow through on what you agree to do. Don’t expect compliance from vendors when you continually go back on your word (and signed contracts).
It’s all about the consumer who shops your stores, not about the amount of coop $$$ you can squeeze from your vendors.
Al Heller’s report on trade allowances is outstanding and offers a very truthful and frank perspective and goes where many trade journal writers would not dare. However, this is exactly the type of dialog that needs to happen for everyone’s true benefit–the manufacturer, the consumer, and also…and maybe most of all–the retailer. In an effort to be fair and balanced, here is the very short version of how I advise my own manufacturer-clients and employers to look at trade allowances and support:
1. Recognize that trade advertising and other programs that retailers “sell” does have significant value to the brand for lots of reasons–too many to list right here.
2. Know and be completely educated that some types of products in certain categories respond to retail ads better than others, while other retailer programs, besides ads, work more effectively for others. Know what truly drives your product or brand and make recommendations accordingly to your retail partners.
3. Recognize that in some instances retailers make more profits from “selling” programs than they make from “selling” products off the shelves. This is not meant to be judgmental as much as in many instances, it’s reality. As manufacturers, we need to consider and deal with it, as necessary.
4. Refrain from making black and white policies about your trade advertising strategies. Instead, make excellent judgments on a case by case basis.
5. Do not patronize programs that have no clear objectives to drive more business for the retailer and your brand. To do so will hurt your brand and other retailers that compete with a greater or more conscientious degree of ethics and purpose.
6. Try to sit down with the retailer once or twice each year to have a comprehensive dialog and planning session with the goal in mind of building each other’s mutual business in a dynamic manner so that all the planning, spending and commitments made are dynamic, interactive, and purposeful to achieve ultimate objectives and goals. Contrarily, the piecemeal approach is usually not impactful or effective.
7. Look at your projected or predicted ROI, not from one event to the next but comprehensively over a period of one, three, and five years.
Everyone should also keep in mind that expectations should differ between what retailers expect from different types of brands and products. Every day name brands should bear the majority of trade funding because the name recognition and feature prices are what drives traffic, and these brands are unique to no retailer, so price is what drives traffic. However, niche brands and specialties should be promoted uniquely and creatively, with points of differences offered even in the promotions, and in most cases, private label and store brands should be promoted at the expense of the retailer, not the manufacturer.
Here we go again. While vendor allowances have been a controversial issue for decades there has been no practical, widely applicable solution to the problem because no one has found a credible substitute for the traditional transaction. Many grocers maintain that they break even on operations: their profit comes from vendor allowances. No vendor allowance, no business. So, let’s offer grocers a satisfactory substitute before dreaming of eliminating vendor allowances and their many guises.
Why do you need to “get tough” with retailers? The only thing manufacturers need is good data, and that is readily available through the syndicated data services and the numerous companies that track trade performances. The thesis of this article implicitly supports a paradigm that is prevalent in the industry: that is, manufacturers cannot make money through retailer promotions. That belief is false, and vendors that use good data to show retailers how both sides can make money on a specific promotional plan will have no problem with Vendor Allowances.
Ideally, proof of performance should be a routine matter, built in to the everyday in-store implementation and monitoring process. This fundamental activity should better support all forms of merchandising and marketing actions – from display promotions, to routine re-stocking, to TPRs, to weekly ads and shopper media.
Absent this level of clarity and certainty, even so-called “proof” of a temporary price reduction may fail to deliver results due to un-corrected out of stocks, missing signage or other un-monitored breakdowns, to cite one scenario. This prevents reliable diagnosis of the problem and permits the finger-pointing to persist.
For too long, retailers and manufacturers have been groping in the dark for point solutions to narrowly-defined promotion performance challenges. The lasting solution begins when we shine a light on at-retail implementation, increase transparency, and make everyday implementation monitoring part of our routine business process.