04-2367-2017-2

NOTE ON TRADE MARKETING

DEFINITION

Trade marketing is a discipline of marketing that relates to increasing the demand at wholesaler, retailer, or
distributor levels, while simultaneously increasing consumers’/shoppers’ engagement at the point of
purchase.

IMPORTANCE OF TRADE MARKETING

A lot of developments have taken place in the retailing environment of Pakistan in the last 10 years. One
major occurrence has been the arrival of international wholesalers/retailers such as Metro and Hyperstar
(Carrefour) etc. This has altered retail dynamics in Pakistan in a number of ways. Not only has there been a
major shift in channel power, but shopper buying behaviour has also been greatly influenced. With the
introduction of these international as well as a few local players, the shopper now receives a unique “shopping
experience” (with regards to availability of all items in one place, variety, options, assortment, service etc.).
Hence the shopper’s demands have now increased.

Having been “spoiled” by the experience of these “mega stores”, shoppers now expect improved shopping
experience in all retail channels. Hence, it has now become essential for consumer goods companies, in
particular, to invest in the in-store visibility tools and resources across channels to assist retailers in the
creation of such shopping experiences. Essentially retail channels (e.g., grocers, stores) have now become a
battleground for companies, since consumers’ shopping experience, while making a purchase decision, plays
a more important role than before.

In response to changing dynamics at the retail level, and the realisation that spending solely on above the line
marketing activities (mega TV ads) is no longer influencing shoppers at the retail channel, companies have
adapted by investing more on activities that would yield a better and more enriching experience for shoppers.
Hence, the trade marketing function came into being. More and more companies have shifted the focus of
their marketing efforts to maximum availability and visibility of their products at point-of-sales (POS) sites,
through trade marketing activities.

Upon realising its importance, companies have created and are further strengthening separate trade marketing
functions within their organisations so as to compete more strongly in this landscape. For instance, trade
marketing units in fast-moving-consumer-goods (FMCGs) seek to influence customers’ buying decisions in
the shop through various ways in addition to the BTL1 activities. Resultantly, FMCGs now allot significant
budgets, with more money being spent every year, for such trade marketing activities (to be discussed in
detail later). In addition to FMCGs, tobacco companies have been pioneers in trade marketing for a number
of years, primarily because the tobacco industry is highly regulated with limited avenues for marketing
activities; hence their trade marketing imprint is much larger, and has existed for longer than that of FMCGs.

STRUCTURE OF TRADE MARKETING FUNCTION

Trade marketing is a recent phenomenon and is currently going through an evolutionary phase. In companies
which have had this function for a long period of time (e.g., tobacco companies), the trade marketing function
operates autonomously, with the trade marketing head managing both the functional head of trade marketing
and head of sales. Trade marketing head then reports to the marketing head (see Exhibit 1).

1
BTL refers to below the line. BTL activation is one to one marketing where consumers are approached directly. It could also involve
product demonstrations and samplings at busy places like malls, market places, or residential complexes.

This note was written by Teaching Fellow Muhammad Luqman Awan at the Lahore University of Management Sciences to serve as
basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This material may
not be quoted, photocopied or reproduced in any form without the prior written consent of the Lahore University of Management
Sciences.

© 2017 Suleman Dawood School of Business, Lahore University of Management Sciences

Note on Trade Marketing 04-2367-2017-2

However, in companies where trade marketing is at the nascent stage, the head of trade marketing usually
reports to the head of sales or in some cases, the head of marketing (see Exhibit 2).

The trade marketing unit, operating independently of the sales function, is beneficial for companies in the
long run. Its activities are focused on ensuring sustainability of the channel, whereas sales departments often
prioritise spending on trade driven activities (trade discounts, short term targets achievement) over activities
that enhance the consumer shopping experience.

ROLE AND RESPONSIBILITIES OF TRADE MARKETING FUNCTION

Within the trade marketing function, there are multiple levels of planning and activities conducted i.e.,
strategic, operational, and executional. Below is an overview of the types of decisions taken at the three levels:

Strategic

 Trade marketing strategy

 Consumer behavioural research at POS
 Trade analytics (dashboard) – KPIs evaluation

Operational

 Cascading trade marketing strategy

 Tactical decisions on trade investment planning
 Category management in collaboration with brand teams

Executional

 Trade events and relations

 Merchandising
 Information technology usage

For example, at a leading FMCG company, strategic decisions may involve making decisions relevant to
channel prioritisation. An example can be deciding which retail channel (departmental store, large grocers,
etc.) will be the primary focus of trade marketing activities in the coming year, on the basis of channel growth,
channel display prowess, intensity of competition, etc., - with the end goal being optimising the shopper’s
experience.

Operational decisions then involve allocation of budgets, category management, etc. Once the company has
decided (at a strategic level) which channels are to be prioritised, it then further matches the product categories
with the respective channels. The objective here is to enhance visibility and availability of the correct product
to the correct shopper via the correct channel.

While strategic and operational planning is essential, without the correct executional activities, companies
can fail to capture value. Executional activities are generally outsourced by most companies. The main reason
for outsourcing is that outside firms enjoy economies of scale with their merchandising labour force, which
the companies have no real interest in developing as it is not part of their core business. Since most activities
are outsourced, control is essential to ensure objectives are being met. Companies are now adopting
information technology to monitor their trade marketing activities.

TRADE AND SHOPPER MARKETING ACTIVITIES

Trade marketing function is an emerging function, but its importance cannot be overstated enough as it deals
with both trade and shopper marketing2 simultaneously, which is a very critical task.

There are different criteria for determining the mix of spending on trade driven and shopper marketing
activities. Within retail, one of the major considerations is the “channel size”: the larger the channel (e.g.,
large grocers), the more the activities become consumer centric as it attracts high customer traffic which
companies want to capitalise on.

2
Shopper marketing is marketing to shoppers (meaning customers). It is the process of defining and executing a marketing mix, the
purpose of which is to change shopping behaviour in order to drive the consumption of a brand.
-2-
Note on Trade Marketing 04-2367-2017-2

Small sized channels have activities focused on the retailer. The primary consideration is to “push” the
product through the channel. Engaging in customer-centric activities in small channels may not make sense
as there would be limited exposure of any marketing spending (as customer traffic is low).

Shopper marketing is geared towards influencing the retailers’ and shoppers’ purchase decisions. Usually
companies use four sales levers at retail outlets: Merchandising, Assortment, Pricing and Shelving (MAPS)3.
Merchandising refers to the featuring of products in circulars advertised and distributed to customers and to
get product displays on prominent end of aisles. Moreover, assortment refers to the maintenance of an
appropriate mix of SKUs4 to generate maximum sales. Pricing refers to the seasonal price reductions for
retailers as well as price promotions for consumers to achieve maximum sales volume. Lastly, shelving
activity refers to the shelves where products must be placed and on exactly which shelf each SKU must be
placed.

At one of the leading FMCGs, retailers enjoy roughly 70% of the trade marketing activities whereas
distributors/wholesalers get 30% of the share. This proportion of spending is increasingly favouring retailers
as by spending on retail, companies are able to directly influence shoppers.

Distributors are primarily incentivised using target achievements. These targets can be category-wise, brand-
wise or numeric distribution5. Distributors become eligible for these incentives upon achieving such numeric6,
& weighted coverage targets.

The fact that retailers are getting a bigger share of trade marketing spending compared to other channel
partners can be attributed to various reasons. Firstly, the shopper interacts with the company at the point of
sale and hence, an objective of increasing shopper marketing would mean that spending at retail level would
increase subsequently. Secondly, there is an ever increasing demand of retailers from brand owners. Due to
increase in retail power, retailers now demand higher shelf rentals, gondola placing charges, etc. Hence, a
company’s trade marketing spending increases accordingly with regard to the retailers. Companies have
developed criteria for deciding the types of trade marketing activities to be executed with different channel
partners (see Exhibit 3). There exist various key channels in retail such as international modern trade, local
modern trade, small retail and online sellers. However, many companies define such channels according to
their own criteria, based on current monthly sales and potential future sales. Channel classification done by a
leading market research firm is given in Exhibit 4.

Companies have designed different trade marketing activities in accordance to the industry they operate in.
For example, one of the leading international beverages company in Pakistan also conducts a loyalty
programme for trade partners who buy above a certain threshold, benefiting traders with financial and non-
financial rewards.

Similarly, players in Pakistan’s tobacco industry, bound by law not to advertise outside shops, conduct ATL7
and consumer promotions, relying mainly on its trade marketing function to engage shoppers and channel
partners. Additionally, an interesting thing to note is that tobacco companies enjoy a unique position as
cigarettes are considered to be a “must-have” for retailers. Hence, retailer power is much more diluted when
it comes to interacting with tobacco companies. Other companies need to learn from this and build stronger
brands in order to weaken the channel power currently enjoyed by the retailers.

TRADE MARKETING PERFORMANCE EVALUATION

As companies increase their trade marketing spending (due to its rising importance), they must also keep
robust evaluation systems to measure the return on investment on such trade marketing spending. Different
organisations use diverse evaluating metrics in accordance with the nature of the industry they operate in.
Some of the key performance indicators used by companies for evaluating the results of trade marketing are
(not an exhaustive list):

3
Framework drawn from Das Narayandas and Alison Berkley Wagonfeld, “Kingsford Charcoal,” Harvard Business School Case 506-
020, (Boston: Harvard Business School Publishing, 2005).
4
Stock keeping units: An item that is unique because of some characteristic (such as brand, size, colour, model) and must be stored and
accounted for separately from other items.
5
Numeric distribution is based on the number of outlets that carry a product. It is defined as the percentage of stores that stock a given
brand or SKU, within the universe of stores in the relevant market.
6
Weighted distribution is the % of stores sells your product but weighted by the importance of the outlets.
7
ATL: Above the line. ATL advertising is where mass media is used to promote brands and reach out to the wide target consumers or
masses in general. These include conventional media such as television, radio advertising, print as well as internet.
-3-
Note on Trade Marketing 04-2367-2017-2

Type of KPI Description

Shelf space o How much space (in cm) is occupied by company products on shelves
as opposed to competitor products?
Product availability o Was the company able to maintain product presence? Each channel is
allotted a minimum number of company product types and SKUs that
must be present at all times.
Planogram o Product wise assortment and display of company merchandise.
Cold availability o Primarily used by beverage companies to ensure the customer gets
access to chilled product

There are different ways in which KPIs are usually monitored and evaluated. For instance, a market leading
beverages company uses IOT (internet of things) technology, through an electronic chip, to monitor cold
availability. On the other hand, FMCG companies tend to outsource their planogram compliance audits to
third party merchandisers. This compliance information, at retail level, is usually integrated through the use
of mobile applications and online web portals.

EMERGING TRENDS

As the trend towards self-service retail grows, more and more decisions are made by shoppers at the point-
of-sale; hence, even small companies are now starting to develop trade marketing functions to capitalise on
the opportunities that the growing retail universe provides.

Furthermore, as decision making becomes based on analytics and the business intelligence department
develops, the role of the trade marketing function grows as it essentially is becoming the “custodian” of
information.

The role of IT has pretty much grown in every industry and across different business functions in the
organisation, and trade marketing is no different. The implementation of information technology in everyday
trade marketing operations has allowed for better planning, monitoring and analysis of trade marketing
activities by companies.

In order to monitor the results of these activities, leading companies monitor progress of product availability,
planogram and shelf space through the use of mobile applications or apps. As an example, the merchandiser
takes pre and post assortment pictures of products and sends it to the HQ8 for monitoring. Similarly, the
progress and effectiveness of each merchandiser can be tracked via GPS by arming the merchandiser with a
portable mobile device that has such an application installed on it (see Exhibit 5).

In the trade marketing function, IT has drastically increased the effectiveness and efficiency of planning trade
marketing activities and analysing various trends, by providing and displaying information on a digital portal,
on real-time-basis. For example, for analysis and planning purposes at a leading FMCG, a monthly digital
dashboard is prepared that uses information from the Trade Marketing App, AC Nielson Research Team and
Sales Department. This provides an outlook on planograms compliance statistics and market execution trends
related to trade marketing activities.

CHALLENGES

The changing trends in Pakistan’s retailing industry present various challenges to the companies. Firstly, as
consolidation in the retail industry increases, so does retail channel power, which means that they are able to
charge higher rentals and discounts from manufacturers. This results in a “shelf space war” as different
manufacturers fight for the same shelf space. This means higher trade marketing spending is required by
manufacturers in order to keep engaging their customers. Manufacturers should take appropriate steps, such
as measures to build a strong brand, to increase their channel power in the value chain.

Secondly, it is believed that trade marketing activities have channel sustainability in the avenues they have
targeted. Unfortunately coverage of trade marketing activities is at a minimum. As an example, a leading
FMCG company is only able to cover about 3% of the retail universe. Companies need to realise the important
role of trade marketing in tapping the un-exposed section of the market. When conducting a cost-benefit
analysis of trade marketing activities, it should be kept in mind that qualitative factors should also be used

8
Refers to headquarters.
-4-
Note on Trade Marketing 04-2367-2017-2

(e.g., brand promise, channel sustainability, shopper experience) while taking the final decision regarding
activities’ expansion.

Thirdly, as trade marketing is an emerging function, it is still going through an evolutionary process which
means it is facing friction from the sales and marketing functions. Essentially the sales function views trade
marketing as trying to invade its territory, since trade marketers decide the margins to be given to channel
partners. Execution of activities of differing departments is not aligned and since synchronisation is key to
effective execution, a lot of friction is generated between marketing, trade marketing and sales business
functions. Organisational alignment can be learned from companies having established trade marketing
functions, like tobacco companies which have evolved and perfected their function through trial and error
over the passage of time.

SUMMARY

Overall, the trade marketing function is still in its infancy stage (in most leading companies). However, it has
established its importance and will continue to grow, expand and stamp its own authority within organisations
as the retail landscape changes in the coming years. Additionally, trade marketing can play a pivotal role in
providing a liaison between the sales and marketing functions, so as to ensure better alignment and more
effective execution of the business strategy.

-5-
Note on Trade Marketing 04-2367-2017-2

Exhibit 1: Trade Marketing Organogram for a Leading Tobacco Company

Head of
Marketing

Strategic
Brand
Trade Marketing Planning &
Management
Insights

Central Trade Sales and

Team Distribution

Shopper Insights RSM 1 RSM 2 RSM 3 RSM 4

Channel
ASMs ASMs ASMs ASMs
Development

Skill
TEs TEs TEs TEs
Development

Distributor
Development

*Each RSM Manages 6 ASMs

*Each ASM Manages 5 TEs.
*RSM: Regional Sales Manager
*ASM: Area Sales Manager
*TE: Territory Executive

Source: Company Documents of Leading Tobacco Company

-6-
Note on Trade Marketing 04-2367-2017-2

Exhibit 2: Trade Marketing Organogram for a Leading FMCG

SPM SPM SPM

North Centre South

ZSM: Zonal Sales Manager

RSM: Regional Sales Manager
ASM: Area Sales Manager
Asst. and Assist. : Assistant

Source: Company Documents of Leading FMCG

-7-
Note on Trade Marketing 04-2367-2017-2

Exhibit 3: Channel Classification Criteria used by a Leading FMCG

Channels
Features
Self-Service Large Groceries Small Grocers

Size Medium Size 200-300 & Large Size 300- Medium Size 16 x 20 sq.ft &
400 sq.ft Large Size 20 x 30 sq.ft
Outlook & Products available on open shelves in Products available in racks over
Characteristics Navigable Isles & organised to Category the counter.
Avg. Turnover
Rs 0.25 Mio Rs 0.06 Mio
(Monthly)
Target Shoppers Monthly grocery shopping or Stock ups. Daily grocery shopping or Top
Shopping ups.
Missions
Shopping Time Shoppers mostly visit between 3-10 pm Shoppers visit throughout the
day
General Specializes in Personal Care, Home Care Specializes in Smaller SKUs and
Assortment & Semi prepared Food Products Impulse Products
Product All Product Categories Included Dairy (UHT & Chilled), Culinary,
Categories Tea Whiteners, Infant Nutrition,
GUMS & Juices
Chillers / Freezers 2-3 At least 1
USP Wide Range Product Availability & Proximity & Relationship
Product Interaction

Source: Company Documents of Leading FMCG

-8-
Note on Trade Marketing 04-2367-2017-2

Exhibit 4: Channel Classification by a Leading Marketing Research Firm* (p 1 of 3)

Channel Name Definition

General Stores General stores handle food, drug and other items. Normally sell branded Fast
Moving Consumer Goods (FMCGs), Packed branded food & drug items occupy
more than 50% of total selling area. Mostly they are privately owned, served
over the counter.
Medical/General Combination of medical and general store items, They handle prescription drugs
Stores along with FMCGs. FMCGs cover at the most 80% of the total selling area and
prescription drugs range from 20% to 50% of selling area. Privately owned,
fixed structure, counter service.
Super/Departmental Predominantly large stores with selling area of more than 1000 sq. ft. Must have
Stores 2 or more cash machines. They are normally self-service, but mixed type of
service can be met as well. They are modern shops, well organised and with a
wide assortment of food, drug and other products (household, personal
products, gifts, kitchen utensils, small electrical appliances, cosmetics,
detergents, souvenirs and clothes).
Utility Stores Predominantly government owned stores. Rates are usually subsidised by the
state so are lower than privately owned stores. They have a similar profile as
general stores. They handle FMCG, foodstuff, small electrical appliances,
kitchen utensils etc.
Kiryana Stores Traditional stores mainly selling loose bulk food (pulses, ghee, flour, spices,
and sugar etc.). Branded FMCGs items are also sold but relatively in less
quantity. Loose bulk food occupies more than 50% of shop’s selling area.
Pan Shops Outlets with main business of pan/cigarettes or niswar (powdered
tobacco)/cigarettes. Besides pan/cigarettes, confectionary items (biscuits,
candies, chewing gums, chips etc.), cold drinks are also available.
Corner Stores Shop may or may not sell juices, cold drinks, milk shakes, traditional handmade
mixed lemonade/orangeade or tea. This outlet type may include tea stalls
handling at least one item from cigarettes, packed juices and CSD.
Eateries Traditional eating place, locally known as hotel or as a restaurant as well. Meal
menu is usually described orally, self-service is not there. Meal served at the
table with bread (Roti) or rice, breakfast, tea, cold drinks also available.
Bakeries Bakeries are stores selling bread, biscuits, chips, soft drinks, eggs, butter, jam
and other foodstuff. Bakery may also sell sweets but to be a bakery it should
have more than 50% of selling area reserved for bakery items.
Exclusive Medical Stores selling prescription drugs, over the counter medicines and limited
Stores quantity of FMCG’s. Medical section must be greater than 50% of total selling
area.
Top End Retailers These are very large retail outlets (Minimum selling are 900 sq. ft.) that are few
in number but their contribution to the total sales of FMCG categories is quite
significant. These are usually self-serviced with multiple departments.
* Please see pictures of these retail outlets on next page:

-9-
Note on Trade Marketing 04-2367-2017-2

Exhibit 4: Channel Classification by a Leading Marketing Research Firm (p 2 of 3)

General Store

Medical/General Store

Super Departmental Store Utility Store

Kiryana Store Pan Shop

- 10 -
Note on Trade Marketing 04-2367-2017-2

Exhibit 4: Channel Classification by a Leading Marketing Research Firm (p 3 of 3)

Corner Store Eateries

Bakery Exclusive Medical Stores

Top End Retailer

Source: Company Documents of a Leading Marketing Research Firm

- 11 -
Note on Trade Marketing 04-2367-2017-2

Exhibit 5: Use of IT in Trade Marketing

Source: Company Documents

- 12 -