Consumer Products and Retail the way we see it

A Winning Strategy for

Trade Promotion Management
Leveraging Trade Promotions for Profitable Revenue Growth

Studies suggest that over 90%
of trade promotions have
negative ROI when issues like
cannibalization and execution
costs are considered. And here
comes the bad news…given the
on-going consolidation of
retailers, trade promotion
spending is expected to grow
not decrease.
A Winning Strategy for Trade Promotion Management
Consumer Products and Retail the way we see it
A Winning Strategy for Trade
Promotion Management
Trade promotions - the complex array of deals that manufacturers offer retailers to
feature, display, or offer promotional discounts on their products to consumers -
are at an all time high. Consumer packaged goods (CPG) firms' trade promotion
budgets have escalated to 15% or more of net sales - making this the second
largest P&L item after Cost of Goods Sold. For most CPG manufacturers trade
promotion spend in 2005 accounted for over 60% of the marketing budget and
exceeded the combined spend on advertising and consumer promotions.
Yet trade promotions continue to be largely ineffective and unprofitable. Studies
suggest that over 90% of trade promotions have negative ROI when issues like
cannibalization and execution costs are considered. And here comes the bad
news…given the on-going consolidation of retailers, trade promotion spending is
expected to grow not decrease.
CPG manufacturers therefore need a carefully considered plan of action to address
promotional spend if they want to stay competitive.
Drivers of the Trade Promotion Problem:
Low ROI and Limited Collaboration between Manufacturers and Retailers
Most Trade Promotions Are Unprofitable For CPG Manufacturers
Promotional Profitability Analysis
1 2 3
Gross Apparent lift
Many companies mistakenly
1 assess ROI based on simple lift
Retailer cost (trade spend: TPR etc)
Value to CPG Company
analysis…
Net Apparent lift
Cannibalization (time) …ignoring cannibalisation across
categories and through time…
Cannibalization (category) 2
Pantry loading (category)
Sales execution costs
Marketing execution costs
Supply chain execution costs
$0
• Inventory increases …and failing to include the
• Lost production time 3
substantial costs of execution…
• Expediting costs
• Additional overtime charges
Finance execution costs
* Lake Group Staff, ROI from Trade Promotion Management Systems, The Lake Group, January 2003
Promotional Profitability: The majority of manufacturers and certainly most
retailers don't even measure profitability for every promotional event. Performance
measurement in key areas such as "effectiveness analysis" is truly appalling and
few manufacturers do a good job in this critical area. In fact most promotions
often fail from both a financial and strategic perspective. Here's why :
1
 ■ Push Versus Pull - From a marketing viewpoint trade promotions rely on price
discounting and deal-based push efforts versus pulling in true consumer
demand for the brand. Poorly executed trade promotions that are not
coordinated with advertising and consumer promotions often end up diluting
the brand’s consumer message and reduce differentiation over competitors. More
often than not they end up attracting consumers who buy only on deal or switch
between promoted products. Manufacturers need to refine their trade
promotions and strike a balance between their trade and consumer marketing
spending - or they will be unable to sustain their brand’s differentiated value
propositions. Worse manufactures could be using their trade funds to sponsor
private label development efforts by retailers.
■ Missing Costs -Trade promotions have far reaching impacts across every element

of a manufacturers supply chain. A typical trade promotion causes spikes in

demand that impact manufacturing costs, inventory carrying costs,
transportation, as well as sales and marketing. Yet manufacturers lack the
visibility to track and develop a truly integrated picture of total trade promotion
Most manufacturers lack
costs. Unfortunately you can't manage what you don't measure - and most
comprehensive and integrated
supply chain costs associated with trade promotions fall into the un-managed
software tools to measure and
category.
manage trade promotion
■ Systems - Most manufacturers lack comprehensive and integrated software tools
performance. Unfortunately you
can't manage what you don't to measure and manage trade promotion performance. Several manufacturers
measure - and most supply use localized tools like Microsoft Excel spreadsheets or point solutions that do
chain costs associated with not link into their ERP systems to provide online access and visibility across the
trade promotions fall into the supply chain. This limited view of promotional effectiveness could lead to
un-managed category. misplaced investments and negative ROI on trade promotion spending.
Lack of Collaboration both Internally and with Retailers:
Developing a truly collaborative business experience to manage trade promotions
involves fine tuning both internal functions as well as external processes.
Internally manufacturers need to integrate the information flow as well as the
decision making and execution processes between their marketing, sales,
operations and innovation functions. Externally, manufacturers need to provide
retailers with insights into their costs and work jointly with them to develop a set
of metrics to measure promotional profitability both parties can agree upon.

■ Internal Collaboration - Trade Promotion success in retail is maximized when a

consumer sees a consistent and integrated set of messages between brand
advertising, consumer promotions, and in-store trade promotions. Unfortunately
a lack of coordination between consumer marketing and trade promotions
negatively impacts brand equity and does not drive category growth. From a
supply chain perspective integrating sales and marketing initiatives with supply
chain processes could cut supply chain costs by as much as 15% while reducing
out-of-stocks for promoted products.
■ Manufacturer and Retailer Relationships - It often seems that CPG manufacturers

and retailers are totally out of synch when it comes to trade promotions.
Manufacturers complain - perhaps correctly - that trade spending has gotten
totally out of hand and yet retailers keep negotiating for higher trade funds.
However, when it comes to the consumer, retailers and manufacturers are really
not that far apart :
-- Manufacturers want to attract loyal and profitable consumers to their
brands. To achieve this objective they would like their trade promotion
programs well executed on the retail side and coordinated with other
elements of their marketing spend, like advertising and consumer
promotions

-- Retailers would like to use promotional activity to attract loyal

consumers into their stores and grow category profitability by driving
sales of higher margin brands.

2

From both a manufacturers and
retailer’s perspective successful
promotions must drive the
consumer into the retail store
and promote purchase over
competitive brands at a
profitable price point.
A Winning Strategy for Trade Promotion Management
Consumer Products and Retail the way we see it
So there is considerable room for collaboration and joint planning between
manufacturers and retailers. The problem is that retailers often lack an
understanding of the costs associated with an in-store promotion including labor
costs, inventory carrying costs, and other operating expenses on a store basis. The
absence of good metrics often leads to poor decision making with regards to
promotions as well as suboptimal practices like diverting.
Changing the Rules of the Game:
Four Principles for Successful Trade Promotion Management
A successful approach to managing trade promotions must enable CPG
manufacturers to be built around four key principles
■ Plan trade promotions upfront to maximize effectiveness
■ Manage execution of the promotion across all organizational functions
impacted
■ Measure promotional success - track performance versus plan
■ Close the loop - implement software solutions that provide enterprise wide
visibility into promotional performance and are integrated into your ERP
systems
Principles For Successful Promotion Management
Re-design
Based
on Learnings Plan
Promotion
Integrated
Systems
to Close The Loop
Measure
Promotional Manage
Success Execution
Planning Trade Promotions To Maximize Effectiveness
Start with the consumer and the brand strategy: From both a manufacturers and
retailer’s perspective successful promotions must drive the consumer into the
retail store and promote purchase over competitive brands at a profitable price
point. Understanding the drivers of consumer behavior towards your brand and
designing the right promotion is therefore critical. Key questions to answer must
include:
■ Why do they buy your brand? Understanding consumer buying behavior and
how your brand is perceived by different consumer segments is critical.
Consumer loyalty to your brand and the extent to which it is differentiated from
3

Integrating past promotional
performance history into your
promotion designs prevents you
from making the same mistakes
twice and provides you with
ammunition with regards to
what tactics worked best at
which retailer.
4
its competitors and the private label products will determine how consumers
will respond to the trade promotion and what promotional tactic makes most
sense. Measures of consumer price sensitivity and switching behavior should
determine the depth of the promotional discount and the promotional tactic
used whether it is a feature, display, or a temporary price reduction.
■ Where do they buy? Segmenting promotional offerings by retailer type is also
critical. A promotion that works at a retailer with a hi-lo promotional strategy
may not succeed with a retailer with an EDLP strategy. Consumers have also
become increasingly savvy with regards to shopping between different retail
formats and different products. The same consumer may shop at Costco to stock
up, Wal-Mart for the low-prices, and at Whole Foods for the organic selection.
Tailoring different promotions by channel makes most sense.
■ How do they buy? One key issue to resolve is whether the consumer bought
more per visit during the promotional period only or if they actually ended up
buying more of your brand over an extended period of time. Pantry loading by
consumers for a deeply promoted brand only ends up creating peaks and valley
across the supply chain. In designing the promotion also consider both potential
substitutes and complements to your product - and the impact on the overall
category sales.
■ When do they buy? Seasonality issues and timing issues drive response to your
promotion as well as how much you should be willing to pay for exclusivity
during a particular promotional period. For example no matter how high the
promotional discount it is unlikely that consumers in Chicago will buy lawn
fertilizer in November. Monitoring sales during the season and planning
promotions to encourage consumer purchases prior to the end of the season is
critical to both manufacturers and retailers.
Build on Past Trade Promotion Performance - By Brand and Retailer
Integrating past promotional performance history into your promotion designs
prevents you from making the same mistake twice and provides you with
ammunition with regards to what tactics work best at which retailer. Actions to
undertake include:
■ Develop volume and spending forecasts based on which promotional campaigns
generated the highest profit and which elements of these campaigns really
worked
■ Examine the value gained through past promotional tactics used at retailers
including end-caps, features, displays and so forth to establish the value and
effectiveness of each element of the program and how much you should be
willing to pay for them
■ Consider your marketing mix and what works for the brand and integrate with
other promotional media and consumer spend
■ Develop retailer-specific plans after segmenting retailers by pricing strategy,
region of country, their customers, their objectives for the category and how
your product fits into the category
■ Finally design the promotion based on value or ROI potential as opposed to
taking a volume-based approach to driving sales at all costs
Project Costs Across the Supply Chain by Promotional Program and Element
Broaden your perspective on promotional costs from merely evaluating direct
promotional payments to retailers to include the actual execution costs for the
promotion and include all elements of costs including:
■ Direct Promotion Costs: Cover all allowances paid to retailers for their
promotion

Trade promotions are not just a
sales issue - their impacts
reverberate across all functional
areas including marketing,
finance and the supply chain.
A Winning Strategy for Trade Promotion Management
Consumer Products and Retail the way we see it
■ Operating Costs: Integrate and track each project and investment across the
supply chain and include increased manufacturing, distribution, and inventory
spoilage costs
■ Overhead Costs: Account for soft costs like increased order entry, sales force,
and marketing department costs and include labor time spent on planning and
executing the promotion
■ Financial Costs: Calculate the added financial costs such as increased inventory
carrying costs and depreciation of fixed assets used in the promotion
Trade Promotions Impact Multiple Organizational Functions
Marketing Head Office Sales
Promotions often lack
targeting and timing to be truly Trade Promotional
effective at enhancing brand inefficiencies causes huge
equity…drive volume versus Category Customer planning and reconciliation
value and often attract planning Planning issues for headquarters staff
un-profitable consumers
Promotion
Evaluation
Finance Promotions Retailer
Planning
Accounting rule changes and
Promoted products… are nearly
Sarbanes-Oxley requirements
twice as likely to be out-of-stock
have created an urgent Promotion at the retail shelf than non-
imperative for better control and Admin promoted items3
compliance
Supply
Chain
Planning
Supply Chain Retail
Field Sales
Synchronising internal sales Execution Supply chain …time and resources
and marketing initiatives with execution consumed in executing and
demand management and monitoring TPM have been
supply chain processes will increasing without a
reduce supply chain costs corresponding increase in
significantly effectiveness
1. “An Enterprise Approach to Maximising Promotion Effectiveness”, Demantra, June 2003
2. “Count the Money When Sales & Marketing Work with Logistics”, AMR Research, 2001
3. “Full Shelf Satisfaction – Reducing Out-of-stocks in the Grocery Channel, GMA 2002
Manage Execution of the Promotion
Trade promotions are not just a sales issue - their impacts reverberate across all
functional areas including marketing, finance and the supply chain. An integrated
approach towards promotion management is therefore essential. Functional areas
that require careful management include retail sell-in, supply chain management
and marketing.
■ Retail sell-in: A key issue for retail sell-in is not just getting buy-in to the
promotion from the retailer - but getting your retail partners to jointly agree to a
set of measures for promotional success. Simply put does the promotion meet
the joint definition of promotional success from a manufacturers and a retailer's
perspective? Questions to consider while setting up your joint evaluation :
Consumers:: Does the promotion attract the right types of consumers to the
brand and the store, increase the overall market basket of purchases, and
increase the stores market share over its competitors?
Category:: Did the promotion increase overall category profitability? Did it
drive up sales of higher margin brands? Was the impact sustained over a
period of time or did it just cause a spike in demand followed by a decline?
Store Costs: Were additional store labor, equipment and signage costs
incurred during the promotion accounted for? Who pays for these
additional costs incurred?
5

Ultimately the hallmark of a well
planned and executed
promotion is if it make strategic
and financial sense from both
the manufactures and retailers
perspective - versus being
viewed a financial drain.
6
Execution: Was the execution of the promotion smoothly coordinated from the
manufacturer to the retail headquarters to the region, distribution centers and stores?
■ Supply Chain Management: Promotions impact every element of the supply
chain. However, few manufacturers have been able to integrate the impacts on
marketing, sales and operations that results from breakdowns, out-of-stocks and
large spikes in inventory and manufacturing costs. It is critical to integrate the
information between the manufacturer’s sales force negotiating the promotion,
the corporate headquarters approving it and the operations unit fulfilling the
order. Planning for additional promotional inventory and spikes in demand - at
both the manufacturer and retailers - is important to address problems like un-
planned demand spikes and resultant stock-outs at retail
■ Marketing: Finally, if the promotion is going to have maximum impact it needs
to be coordinated with every element of your marketing mix in terms of both
content and as timing. Not being in synch with consumer promotions and
advertising dilutes the impact of the promotion on the final consumer and can
lead to less than optimal results at retail. For example, a marketer needs to
coordinate the timing of his/her FSI coupons with TV advertising and the in-
store promotional offer - to hit the consumer thrice with the same message
versus treating them as isolated events.
Measures of Promotional Success - Tracking the Promotion for
Performance versus Plan
Ultimately the hallmark of a well planned and executed promotion is if it makes
strategic and financial sense from both the manufacturers and retailers perspective
- versus being viewed a financial drain. Issues that must be addressed include:
■ Execution Issues - Manufacturers often fail to ask the most basic question - did
the promotion occur as planned? Very often wide gaps exist between what the
promotion planner envisioned and what actually occurred at the retail store
level. Specific issues to follow up on include whether the planned ad actually
ran in the circular, was the display visible at stores, did the price reduction occur
and was it at the right level versus competitive price points. Tactical execution at
the retail store level is the key to a promotions success - so make sure things
happen as planned!
■ Costs - Tracking how much the promotion ended up costing versus what was
planned is critical to evaluating its success. Accounting for both the direct
promotional costs and the soft costs associated with additional inventory held
will provide a much better picture of promotional costs. Finally, associating a
dollar amount with promotional breakdowns like lost sales due to stockouts or
manufacturing overtime and higher distribution costs paid due to un-expected
sales spikes will provide a much better handle on total costs.
■ Revenue Drivers - Since the primary objective of all promotional activity is
revenue and market-share growth, manufacturers need to be willing to answer
two tough questions:
1. Did the promotion really do what it was supposed to do - grow the brand’s
sales and market share over a sustained period of time?
2. Were we able to capture incremental sales over baseline for a sustained
period of time after accounting for cannibalization at both the brand and
the category level?
■ True Profitability by Promotions - Since all manufacturers are in business to turn
a profit be ready to answer detailed questions on:
1. Did we make a profit on the promotion?
2. When we calculated both the hard and the soft costs associated with the
promotion did the incremental sales over baseline justify the investment?
 Consumer Products and Retail the way we see it

Closing the Loop With the Right Systems

Given the complexity and cross-functional impact of trade promotions, it is close
to impossible to track their performance and make improvements if you lack the
right systems. Despite several advancements in the field, most manufacturers still
use spreadsheets or point solutions to measure trade promotion effectiveness. The
problem is that trade promotions impact every element of the supply chain - and
point solutions could end up giving you not just a limited but an erroneous view
of the promotions cost.

Software used for trade
promotions must provide
enterprise-wide visibility and be
linked into your enterprise
planning systems. Ultimately it
must enable you to plan,
manage and measure the
effectiveness of your trade
promotions spends.
Software used for trade promotions must provide enterprise-wide visibility and be
linked into your enterprise planning systems. Ultimately it must enable you to
plan, manage and measure the effectiveness of your trade promotions spends.
Most importantly any system you consider should not only enable you to measure
what went well this year but also help you reconfigure your promotional process
and plan for next year’s promotional planning cycle.
Only then can you transform your trade promotion from a necessary expense to
an investment!

About Capgemini and the

Collaborative Business Experience

Capgemini, one of collaboration-focused methods and tools.

the world’s foremost
providers of Consulting, Technology
and Outsourcing services, has a unique
way of working with its clients, called
the Collaborative Business Experience.
Through commitment to mutual success
and the achievement of tangible value,
we help businesses implement growth
strategies, leverage technology, and thrive
through the power of collaboration.

Backed by over three decades of industry Capgemini employs approximately 61,000

and service experience, the Collaborative people worldwide and reported 2005
Business Experience is designed to global revenues of 6,954 million euros.
help our clients achieve better, faster,
MW041106_C_TPM

more sustainable results through More information about our services,

seamless access to our network of offices and research is available at
world-leading technology partners and www.capgemini.com.

A Winning Strategy for Trade Promotion Management 7

 www.capgemini.com

North America
Dave Holloman
Leader, North American Consumer
Products Sector
david.holloman@capgemini.com
+1 312.395.5107

Worldwide North America

Brian Girouard Donald Soares
Leader, Global Consumer Products & Principal, North American Consumer
Retail Sector Products Sector
brian.girouard@capgemini.com donald.soares@capgemini.com
+1 952.212.0417 +1 312.395.5384