Sunday, January 07, 2007

Is trade promo about to go into decline?

I read an interesting column in MediaPost by Joe Mandese a few days ago. It was one of those end-of-the-year-trend-prediction things, and among its points, it argued that trade promotion is in a period of decline:

Marketers bent so far backward in their promotional support that for a while it looked like advertising might take a subordinate role in the marketing mix.

Thankfully, that period ended in the 1990s as brand marketers came to their senses and began reinvesting in what actually drives consumers to their products: brands. The reign of trade promotion officially ended in the late 1990s …

Since this is a media trade publication, and the ad and media industries have long been beside themselves with frustration over the growth of trade promo budgets, I think there’s an element of wishful thinking to this analysis (as demonstrated by the use of the word “thankfully”).

But I don’t entirely dismiss the idea, although I don’t know of any evidence to support the idea that trade promo growth ended in the nineties, which would imply there has been some significant decline since. Based on both numbers from surveys and anecdotal data, the most I could say is that, after the incredible growth rates of that decade, in recent years the increases in trade promo budgets have slowed.

There are a couple reasons for this slowing: One is that the increasing scrutiny of the FASB/Sarbox initiatives has uncovered abuses and made everyone more cautious; the other reason – the main one – is that trade promo budgets have probably gone about as far as they can in some categories and channels, especially food/CPG.

With trade promo budgets already near (in some cases, over) 20% of sales, there simply is no more money to be spent. Already some analysts are downgrading food industry stocks because of concerns about margin erosion.

The question of how big trade promo budgets will be, though, is less important than the larger one of what our overall future will be. The future of trade promotion will be driven, as I see it, in large part by four big trends. The message these trends send today about the role of trade promo, and therefore of its share of the marketing budget, is mixed, but we’ll have to wait and see how they play out before the final answer is known.

Wal-Mart. No discussion of anything involving sales channels can be complete without weighing the effect of Wal-Mart. And today the question everyone is asking is, “What the #$%& is going on in Bentonville?” The very public scandals with Tom Coughlin and their strange ad agency review tell us clearly that this is no longer the company that Sam built. Throw in the embarrassing retreats from Germany and Korea and the continuing beatings they’re taking in UK and Japan; add on the loss of focus evident in the recent “we’re going upscale/no we’re not, we’re going back to basics” fiasco; mix in the whispers you hear from every side in the vendor community that Wal-Mart is simply not as sharp as they once were in every aspect – pricing, logistics, merchandising, execution; and, finally, top it all off with recent sales figures.

Clearly, the wild ride to the top is over. Just as trade promo budgets reached a point where they could go no higher, Wal-Mart has grown so large that further expansion (at least at the previous rates) is probably impossible. The question when growth slows and then stops, is whether decline is inevitable. Perhaps this recent spate of bad news is just a temporary thing, but to those of us who are getting on in years, Wal-Mart looks eerily like Sears in the sixties and seventies, when the former King of Retailing began its abdication with a series of missteps, loss of focus, and changes of direction.

It’s impossible to say what the effect of a floundering Wal-Mart will be on trade promotion; it is only clear that anything that happens at Wal-Mart will have a huge effect on everything involving retail.

Internet. Thus far, trade promotion has played a relatively small role in the growth of Internet retailing, but it would be very surprising if this were to continue. The application of many trade promotion tactics (slotting fees, shelf position, end caps, etc.) used in brick and mortar retailing have clear analogies in the virtual world.

Beyond in-store promotion, though, the analogies are less clear. It seems likely that, while trade promo’s role in Internet retailing will increase from what it is today, it will probably be less important than it is in the “real world”. Therefore, as the market share of Internet retailing grows, the role of trade promotion overall will decline.

Media fragmentation/in-store. One of the biggest drivers in the rise of trade promotion has been the growing awareness of the importance of in-store promotion. It’s your last chance (and your best chance) to get your message across (the moment of truth, as P&G calls it).

This is going to continue growing. Not only because in-store promotion is effective, but also because of the continuing (and accelerating) decline of traditional media.

I’ve written about the fragmentation of media before (see here), and nothing has happened to change my mind on the subject. It’s happening in every category of traditional media – TV, radio, magazines – but the effect on trade promotion is clearest in the precipitous decline of retail’s traditional #1 medium – newspapers. The news about the news biz gets worse with every passing day as the drops in newspaper circulation lead to layoffs in the newsroom and sell-offs of major papers (anybody want to buy the LA Times? If so, Tribune Company would love to hear from you).

The need for local promotion to replace newspaper advertising will create still more demand for in-store vehicles, and we’re seeing a resulting rush to create new vehicles; it seems at times that every square inch of retail space is an ad.

Once again, we will find that there is an upper limit – customers will rebel against the constant assault and will vote with their feet (and their pocketbooks) against retailers who overdo it. There will be a shakeout as the less-effective vehicles are abandoned. But overall, there will be a continuing growth in in-store spending, and therefore an increase in trade promotion budgets.

Analytics. The most important development in trade promotion in coming years will be the increasing use of analytics. Ever since the introduction of the first scanner, we’ve been aware that it is possible to tie sales-out to the promotions that drove them. But it has taken a long time (and increases in computing power and declines in the cost of disk storage) to assemble the massive databases of transactions and to develop lift tables from them.

The heavy lifting has been done now, and the numbers will keep getting more complete and the forecasts resulting from them will keep getting sharper through trial-and-error. The ubiquity of scanners in every channel, not just grocery, will mean the expansion of analytics from CPG/food into every category.

The result on trade promotion budgets? Mixed. There will be less resistance to big trade promotion budgets as the results of the spending are clarified (I can’t tell you how many times I’ve heard a CFO say something like, “I wouldn’t mind spending $150 million on trade promo if I just knew what we were getting for it.”)

The money will move around a lot, though. Some companies will decrease their trade promo spending and perhaps put the money back into national advertising, as Mr. Mandese suggests, as they learn that trade spending doesn’t work for them; others will increase the trade spend. Some channels will see less trade money coming in, others will get more. Some specific retailers who have been wasting (or pocketing) the money will get cut off. Promotional vehicles will change.

There will be very mixed results, by channel, by product category, by manufacturer, by retailer. The only constant will be change.

The net effect of these four big trends?

· One (media fragmentation/in-store) driving trade promo spending up.

· One (the Internet) driving it down.

· One (analytics) with mixed effects.

· One (the decline of Wal-Mart) unknown.

Add them all together, and the total is … unknown. And that should make life interesting.

1 comment:

Joseph Cauley said...

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