Wednesday, June 27, 2007

Private equity and TPM

Over the past year or so, I’ve noted with increasing wonder the number of acquisitions of major brands by private equity and hedge funds, including both major retailers and their suppliers. I won’t bother with a list here, but I imagine you’ve been noting the same thing.

The question I’ve had (not surprisingly, given my focus) is what effect this will have on trade promotion practices. Here is an article in Brandweek that addresses the issue from a related marketing point – is such a buy-out good or bad for brands?

Although the tone of the article seems to me somewhat biased against private equity, nonetheless it seemed to come down to the classic non-answer: “It depends.” In this case, it depends on the reason for the buy-out and the strategy of the buyers.

Unsatisfying as that answer always is, I suspect it probably applies equally well to trade promotion. As many buy-outs as are happening, it’s safe to assume that they are happening for a variety of reasons and will therefore have a variety of effects.

Where I think buy-outs will have an effect on trade promo practices is in taking some emphasis off short-term results. I know I’m not alone in criticizing business for short-term thinking – it is, in fact, a bit of a cliché – but it has led to some of the worst abuses in trade promotion. Ahold is, of course, the poster child here, but we all are aware of many similar (though less egregious) cases from similar experience – a great many companies have used trade promotion funding to pad quarterly figures, to stuff the channel, and to hide problems in a variety of ways.

Being allowed to do more long-term thinking might also allow channel marketers to focus some funding on building up promising smaller accounts, rather than directing everything toward the largest accounts, who can often provide the greatest incremental lift in the shortest time. I've advocated such practices for years, in the belief that suppliers need to keep smaller channel players healthy as a defense against the effects of consolidation. My pleas have generally fallen on deaf ears, however.

All this, of course, presumes that private equity investors are willing to build a company up before making their profit on a resale, and that’s where the “it depends” comes in. Some will take that view, and some will just want to provide some quick fixes in a “buy and flip” operation – they’ll be no more interested in trade promo best practices than the antsiest Wall Street analyst.

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