TPMA: last-minute reminder

The latest TPMA conference, Achieving the Relative Gold Standard in Trade Promotion Optimization, will be held in San Antonio April 29-May 1. It is directed at sales and marketing personnel.

If you can get there, you should. Not only a good agenda, but the Riverwalk is a fun place. Info here.

Thoughts on ingredient marketing

I recently was reading an article in the LA Times about Seagate’s efforts to build brand identity as they enter the retail space. Inevitably, Intel Inside was brought up:

Seagate is trying to do what Intel Corp. did with its "Intel Inside" campaign — become a name that shoppers look for when they walk into Fry's Electronics or Best Buy stores. Today the semiconductor giant says its brand is valued at $38 billion, thanks in large part to the campaign it started in 1991.

The article goes on to quote an observer who says, "There's a lot of Intel envy."

Yes, there is. Also a lot of misunderstanding about the program and about what can be accomplished with ingredient marketing.

Intel’s website has a good history of the program, which explains a lot about why they deployed the program and what they were trying to accomplish.

A caveat about their website: It implies that the whole thing was dreamed up by Intel, which is not the way I remember it. The idea of applying ingredient marketing techniques to computer chips was presented to Intel by Medianet (now TradeOne), specifically by Rob Hand and Jay Koonce, more than a year previous to the roll-out, working from a proposal I had first made to Motorola several years previous and based on my department store experience working with fabric programs such as cotton. Rob, Jay and I reworked the Motorola proposal for Intel.

While Intel’s marketing people may not have come up with the original concept, they deserve full credit for recognizing a good idea when they saw it, and even more for building on it and enhancing it greatly.

I can’t count the number of times I’ve been asked in the past 10-15 years to design a program for somebody “just like Intel Inside”. The problem has been, generally, that their circumstances are very much different from Intel’s, most often in two important ways:

1) Money

Intel had about twenty tons of money that they threw behind the program (more about this below). Even at its outset it involved huge expenditures, and it’s probably well over a billion annually now.

I asked one of the computer components makers who told me they wanted a program “just like Intel Inside” how much they were budgeting for it. When they told me they had set aside three million dollars, I gently suggested that they consider alternative approaches.

Intel was trying to motivate companies like IBM, Compaq and H-P to do their bidding. It takes a lot of money to impress companies like that – don’t try it with a budget of three million.

Intel also backed their co-op advertising with a tremendous amount of national – especially TV. A confession: I’ve been guilty of trying to hype the importance of trade promo by pointing to Intel Inside as an example of using co-op advertising to build a brand name. While true to some extent, the effects of the national advertising were, obviously, vital as well. The big difference was that, in Intel’s case, the national advertising was in support of the co-op, rather than vice-versa.

2) Centrality of the product

When we applied the cotton example to chips, our thinking was that the chip was the defining element of the computer, just as cotton is the defining element of a garment. Styling and dyes may make a particular shirt more desirable than others, buttons may add to its utility, but without the fabric there is no shirt.

Similarly, NutraSweet has had success with ingredient marketing in conjunction with products such as Diet Coke because, while the cola would exist without it, it is NutraSweet that makes it a diet drink.

An ingredient marketing program can be a success with less-essential products, but I can’t think of any that have been anywhere near as successful. Window and appliance companies, for example, often subsidize ads by home builders who include their products, but these have minor impact, because the appliance is merely a feature – nobody is going to buy a house because of the dishwasher. The Intel Inside ads were arguing that the make of the chip should be the deciding factor in your purchase decision.

Further thoughts:
Why it should have failed (and why it didn’t)

Following up on that last sentence, in our discussions at Medianet, one of our concerns was that the program might fail because the computer manufacturers might recognize that buying into it was contrary to their own interests.

Intel Inside had the effect of commoditizing the computer industry (or, at least, speeding up tremendously a commoditization process that perhaps was inevitable). The message of the ads was that all the computers were pretty much the same – it was the chip that mattered.

I suspect that the computer company marketers were blinded by the piles of money Intel was throwing at them. In any case, none of them hesitated to cut their own throats – a lesson of sorts on the effects of greed.

Supplies down, prices up, sales down

Recent hurricanes and other problems have drastically cut orange juice production in Florida, which has led to rising prices in grocery stores, which has led to declining sales. None of this should be a surprise, but this AP story seems to treat it as such.

Juice makers like Atlanta-based Coca-Cola Co., which makes Minute Maid orange juice, and PepsiCo Inc. of Purchase, N.Y., the maker of Tropicana orange juice, were forced to raise prices to offset the cost of oranges - a cost that has gone up at the same time crop yields have gone down.

Journalist meets supply-and-demand, is shocked. AP goes on to tell us that "A smaller number of crops typically translate into higher raw material costs for juice makers since the cost of oranges usually rises with a smaller harvest." No kidding.

Enough snark. Apparently yield have dropped from 220 million boxes of oranges per year prior to the 2004-05 hurricanes to an anticipated 132 million boxes this year. Prices are up 20-25% percent, with sales down about 10% or so -- which translates into a bit of a revenue gain:

But Florida Department of Citrus spokesman Andrew Meadows said even though consumption might be down, revenue from orange juice as a category has gone up in March.

According to the AC Nielsen figures, revenue is up 9 percent across all brands, mainly due to the higher prices companies are charging for their products.

One guesses that Coke and Pepsi will take this lesson to heart, and that prices will not drop all the way back when production revives. It appears that the price increases are being accomplished in large part through less promotion -- not surprising, given the supply constriction -- why promote if all it will do is create an out-of-stock?

Van Brugge said PepsiCo and Coca-Cola are raising prices by increasing the list price slightly and cutting back on promotions, like in-store discounts and coupons.

Tropicana spokesman Pete Brace said the company is "making the necessary adjustments to ensure supply and meet consumer demand."

AMC recommends repeal of Robinson-Patman

As expected (we reported it here a month ago), the Antitrust Modernization Commission has recommended to Congress that the Robinson-Patman Act should be repealed.

The commission, which has been meeting and deliberating for three years, said lawmakers should put an end to the Robinson-Patman Act, which bars suppliers from engaging in anticompetitive price discrimination.

"The act has really outlived its usefulness and is better put to rest," said Jonathan Jacobson, an antitrust lawyer with the firm Wilson Sonsini Goodrich & Rosati and a member of the commission.

The Washington Post provides the arguments against R-P, which has never been popular with econmists.

When it came to the Robinson-Patman Act, however, the commission recommended repeal. Congress passed the act in 1936 with the idea of leveling the playing field between small businesses and chain discount stores.

Enforcement of the Robinson-Patman Act has been in decline since the 1990s as the statute has come under increasing criticism from economists, who say it works against the interest of consumers by discouraging legitimate discounting.

Critics say the act actually hurts small businesses because some suppliers choose to avoid selling to them altogether to avoid running afoul of the law. "It makes price competition more difficult and complicated," Jacobson said.

I very much question the last paragraph -- a "problem" I have literally never even heard of in more than three decades in this business. But, nonetheless, I agree that R-P is a far-from-perfect piece of legislation (I presented a short form of my proposed fixes in the previous post, and I think I will flesh out the argument a bit more in the next few days).

It seems to me, though, that given the importance of this issue to our trade, that this is something on which we should present a group position to Congress. Even if there are differing opinions within the TPM community (as there surely will be), we can present to Congress our collective wisdom and experience, complete with differing views.

I've suggested to Mike Kantor that this is an appropriate issue for TPMA to take a leadership role.

Note: The full report is here (warning: it's 540 pages -- if anybody bothers to read the whole thing, please let me know).

Internet up, radio down, newspapers downer

Every month is bad in the traditional media these days, but February was particularly awful for the newspaper folks:

• Gannett's ad revenues were down 3.8% (USA Today down 10%)
• New York Times Company down 6% (the Times itself down 7.5%)
• Tribune Company down more than 5%
• McClatchy down more than 5%
• Media General down 5.8%

If these were one-time blips, explainable by bad weather or some outside event, it would be no big deal, but the problem is that the news just seems to get worse and worse.

Most of the numbers were worse than January’s and came after a difficult year in which many newspapers continued to pare costs by laying off employees, shrinking the physical size of their print publications and reducing benefits. Several newspapers also tried raising revenue by accepting advertising in prominent spaces that they had long reserved for news.

And still the numbers were bad. Collectively, the February sales were “the worst group performance to date,” Steven Barlow, an analyst at Prudential Equity Group, wrote to his clients.

And of course, it isn't just newspapers, though they're the worst:

“It’s fundamental, what’s going on with newspapers,” he said. “The younger groups, the most desired demographics, are just not reading them. They aren’t listening to traditional radio either, but I tell radio broadcasters that they’re lucky not to be in newspapers.”

Speaking of which, ZenithOptimedia says that Internet advertising will surpass radio on a world-wide basis by 2008 -- a revision of previous estimates which said it wouldn't happen until 2009. Internet advertising will increase 28.2% this year, compared with an overall increase of 3.7%.

And bringing up the Internet takes up back to newspapers, where we learn that in the UK, the Internet has passed up newspapers in ad spending:

Advertising spending online overtook national newspapers' share of the pie for the first time in 2006 as companies continued to chase a growing web audience.

According to data from the Internet Advertising Bureau out today, online spending smashed through the £2bn barrier in 2006 while television revenues fell and press barely budged.

Tough times.

Monday Quick Notes

Nielsen's Trade Dimensions predicts 94,000 new retail outlets in the next five years -- many of them restaurants of one type or another. Thirteen thousand new fast-food places! You know, I was saying to myself just the other day that there are nowhere near enough burger joints.

Cadbury is reportedly looking into buying Hershey. As we noted a couple weeks ago, they are splitting up the confectionary and beverage businesses. The boss says he wants "the biggest and best confectionery company in the world." Hershey would be a big step in that direction.

VF Corporation has sold off the part of the business that provided its initials. They sold the intimate apparel division (Vanity Fair, Vassarette, etc) to Fruit of the Loom.

Can "MSRP" be mandatory?

There was an interesting case argued at the US Supreme Court last week -- Leegin Creative Leather Products v. PSKS Inc. -- which raises the question of whether manufacturer-dictated pricing constitutes a per se antitrust violation.

Leegin is a small manufacturer of quality leather goods, which had sought to create a niche by selling only through boutiques:

Leegin's marketing strategy for finding a niche in the highly competitive world of small leather goods was to sell its Brighton line through small boutiques that could offer personalized service.

Retailers were required to accept its no-discounting policy. Leegin did not dispute that this amounted to price fixing, but argued that consumers benefited from the extra care that the retailers' guaranteed margin enabled them to give to promoting and servicing the products.

Leegin cut off Kay's Kloset for cutting prices -- Kay's parent company sued and won in the lower courts. The issue before the Supremes is whether having mandatory pricing is always illegal ("the per se rule") or whether it may be legal if it makes sense under certain circumstances ("the rule of reason").

If the court does use this case ... to overturn the per se rule, resale price maintenance would not automatically be legal. Rather, any challenge to an agreement between a manufacturer and retailer to forbid discounting would be subject to the "rule of reason," a familiar concept in antitrust law under which courts evaluate the anti-competitive effects of a marketing restriction case by case.

The results of this case could have significant ramifications for marketers, and it will be interesting to see the outcome.

The death of Life (v3.0)

Life magazine, once among the most important media outlets in the world, has been closed down yet again.

Three years after relaunching Life magazine as a newspaper supplement, its third incarnation, Time Inc. announced it would fold the title with the April 20 issue, citing the decline in the newspaper business and outlook for ad revenue in the newspaper supplement category.

This time, instead of its original death as a mass-market magazine that couldn't compete with TV, Life's death is a part of the ongoing decline in the newspaper business. Somewhat ironic.

Circulation was up, because they had added the LA Times, Chicago Tribune, NY Daily News, Washington Post, and several other papers. Ad pages were down 10% this year, however.