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1THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
T H E PAT H TO E F F I C I E N T T R A D E P R O M OT I O N SFEBRUARY 2015
2 THE PATH TO EFFICIENT TRADE PROMOTIONS
THE PATH TO EFFICIENT TRADE PROMOTIONS Much like the media realm, the consumer product landscape is
becoming increasingly fragmented. Competition is rising, new channels
are developing and choice is rampant. The combination of these and
many other factors has retailers and manufacturers shuffling myriad
promotion options to best publicize their products and boost sales.
The results, however, are largely ineffective and often lead to losses
rather than gains. To make matters worse, few folks have realized that it
takes more than offering additional deep discount programs to increase
promotion efficiency.
From a business perspective, it’s critical that companies—manufacturers
and retailers—get in front of this plight facing America’s consumer
product goods (CPG) industry. That’s because they’re collectively
spending millions of dollars to promote products and getting little—or
negative—in return.
Is this a crisis for U.S. retail? The answer likely depends on your
definition of the word “crisis.” While the word is often used to describe
disasters like famine or disease, it’s possible that manufacturers and
retailers alike would describe their inability to at least break even on
their massive trade expenditures as something of a crisis—especially
since many seem ill-equipped to correct the problem.
THE BIG PICTURE First, let’s talk about the big picture. Manufacturers and retailers across
America spend inordinate amounts of money on trade promotions—the
marketing activities that these two partners use to entice customers to
buy their products. Price discounts are a common promotion tactic, but
other efforts include feature and display, demonstrations, value-added
bonus programs and no-obligation gifts.
3THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
ASSESSING TRADE PROMOTION PERFORMANCE
Over the past 10 years, companies around the globe have doubled the
amount of money they spend on their trade promotions. Today, they
spend about $1 trillion annually, and they show no sign of pulling back,
doing all they can to stay competitive in today’s challenging economy.
While trade promotions can increase product visibility and brand
awareness, they can also grow product categories, differentiate a
product to take market share from a competitor and enlarge a specific
product’s segment penetration. So what are the effects of these efforts?
Today, more than one-fifth of the consumer products in the U.S. are sold
under one type of promotion or another.
Now for the bad news. More than two-thirds of the trade promotions
that happen each year in the U.S. don’t break even. And what’s even
more telling is that eliminating 22% of trade promotions would actually
help companies increase sales revenue. Overall, a minority of the
promotions taking place today actually make money.
67%22%33% ELIMINATING
DON’T BREAK EVEN
OF PROMOTIONS WOULD INCREASE SALES REVENUEMAKE MONEY
Source: Nielsen Trade Promotion Landscape Analysis Database 2014 Q3
4 THE PATH TO EFFICIENT TRADE PROMOTIONS
It’s true. America is pretty bad when it comes to trade promotions—or
at least in terms of getting a positive return on that investment. And
what’s more, the problem is getting worse. That’s because in many
cases, companies are simply trying to regain their footing by increasing
the frequency of their promotions, cutting prices lower or offering
deep discounts more frequently. Unfortunately, these tactics, without
clear insight into what will and won’t work, are going to create a bigger
problem than exists right now.
While the aggregate picture is very telling, a comparison with ad
spending sheds a different light on the overall subject of trade
promotions. When it comes to spending, CPG companies spend more
than twice on trade promotion than they do on advertising. In terms of
actual expenditures, brands and companies typically spend about 19%
of their revenue on trade promotions, compared with about 7.5% on
advertising.
The interesting thing about this scenario—especially given the lackluster
efficiency rate among trade promotions—is that it’s rare to find studies
analyzing the return on trade spending. Comparatively, however,
advertising effectiveness is a constant focal point for marketers and
agencies around the globe.
Perhaps this suggests that the industry perceives advertising as being
easier to evaluate than trade promotions.
PROMOTION INEFFICIENCY IS GETTING WORSE
6.0%
6.5%
7.0%
7.5%
$0.60
$0.65
$0.70
$0.75
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% OF WEEKS ON PROMOTIONTRADE EFFICIENCY
TRAD
E EF
FIC
IEN
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% OF W
EEKS ON
PROM
OTIO
N
5THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
IDENTIFYING WHAT’S CAUSING THE INEFFICIENCIES In looking at the significantly subpar performance of trade promotions
across the U.S., it’s no wonder that only one in four Nielsen clients says
they’re happy with their promotional program outcomes. So why is that?
Based on learnings from our work with numerous CPG manufacturers,
Nielsen has identified four fundamental issues that are hindering trade
efficiency.
MEASUREMENT CHALLENGESMeasurement is no easy feat, and grappling with understanding the
effectiveness of trade promotions is something that plagues many
across the CPG landscape. While manufacturers know what they spend,
determining what they make on that spend is less clear-cut. For starters,
the data they receive about what consumers buy comes from multiple
sources. While manufacturers have access to retail sales data, they must
cope with a different set of product identifiers from each retail data
source, as well as differences in the unit of measure (such as case vs.
consumer unit).
Compound this problem with aligning the dates of the promotion
between the manufacturer and the retailers across the tens of thousands
of promotions a big CPG company runs each year, and you get some
sense of the scale of the challenge. Further, manufacturers have to
separate out sales that would have occurred anyway, if the product had
not been promoted, from the incremental sales driven by the promotion,
as well as adjusting for other drivers (including the weather).
STRATEGIC PLANNING VS. TACTICAL REALITYIt’s not just about data and metrics. It’s also about the difference
between a CPG company’s plan and what happens on the ground. Most
CPG companies strategically plan for price and promotion once or twice
a year. Many use sophisticated predictive analytic tools to figure out how
alternative promotional programs would do in the market and decide on
the “best” course of action.
6 THE PATH TO EFFICIENT TRADE PROMOTIONS
Then, they relay these decisions as guidelines out to the account
teams, who work directly with the retailers. At that point, a thousand
negotiations begin—at which point the link between the view at the
strategic level and the key account level has already been broken. As the
year progresses, the sum of the thousand negotiations is likely to be very
different from the strategic plan sent down from headquarters at the
beginning of the year.
Manufacturers need to integrate strategic planning tools at headquarters
with tactical negotiation processes at the key account level—so that each
retailer negotiation can be optimized while also remaining aligned with
the overarching intent of the strategic plan.
PROMOTIONAL PLAN MANAGEMENT AND EXECUTIONGiven the large number of promotional programs that manufacturers
execute across categories, retailers and geographies, it’s critical that
they use a consistent approach in order to ensure that the right products
are at the store at the right time—even if a retailer changes its mind at
the last minute and chooses to change the time, scope and support of
a promotion. Nielsen research has found that more than half of out-of-
stocks are caused by poor price and promotion management.
In short, promotional optimization and management tools have to link
reliably into the supply chain and financial management systems of the
manufacturer.
MANAGEMENT PROCESSMuch like anything, optimizing and managing promotional activity
relies on a dedicated, consistent process. CPG manufacturers will not be
effective or efficient in their trade promotions if they use them in an ad
hoc fashion or have a small group of analysts operate them in a silo.
Truth be told, companies need powerful, integrated software applications
that enable a wide range of managers to optimize and execute
promotional activities on an end-to-end basis so that a consistent
process is used pervasively throughout the organization, for all
categories, retailers and geographies.
7THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
A DEEPER DIVE INTO THE PROBLEM Knowing that the rubber meets the road when consumers start buying
and that trade promotion efficiency is lackluster, Nielsen recently
conducted a widespread analysis of the retail landscape to better
understand the aggregate situation.
At the onset, the benchmark analysis* covered 340 categories, 15
departments, 1 million UPCs, 125 million event weeks and $1.6 trillion
in retail sales. We then narrowed the analysis to eliminate some of the
extreme skews. Specifically, we wanted to focus on the businesses that
were promoting regularly and exclude promotional activity that was
minimal and infrequent. The analysis also excluded activities around
tobacco, alcohol, and a few kitchen staples: eggs, milk and bread.
The final analysis, which aimed to identify what drives performance,
ultimately zeroed in on 92 million event weeks over nearly three years
and totaling $213 billion in sales across 75 retail banners. To hone in
on performance, the analysis identified the weeks where prices were
lower than the everyday cost for an item and then isolated the expected
volume from the actual volume sold during that period.
We also used assumptions about the cost to execute and margins for
manufacturers and retailers.
211 13 811k 92MM 213BCATEGORIES DEPARTMENTS UPCs EVENT WEEKS US RETAIL SALES
8 THE PATH TO EFFICIENT TRADE PROMOTIONS
CATEGORY EFFICIENCY RATES AND AREAS OF OPPORTUNITYWhile there are clear departments that would benefit from increased
promotion efficiency more than others, the entire store is ripe with
opportunity. That’s because the top effectiveness rate across the entire
store is only 50%. So even manufacturers and retailers that have
managed to crack part of the trade promotion code by excelling to some
degree can improve their efforts and boost efficiency rates.
TRADE PROMOTION EFFECTIVENESS RANGES FROM 25%-50% ACROSS DEPARTMENTS
% OF WEEKS WHERE PROMOTIONS DON’T BREAK EVEN
EFFICIENCY OPPORTUNITIES EXIST THROUGHOUT THE STORE
Read as: 74% of the promotion weeks for the produce category don’t break even.
Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3
DAIRYMEAT62%
DELI
PRODUCE
72%
74%
BEAUTY CARE
HEALTH PET CARE BAKERY
GROCERY
PER
SON
AL
HO
USE
HO
LD C
AR
E
GEN
ERA
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ERC
HA
ND
ISE
FRO
ZEN
FO
OD
S
59% 66% 73%
73%50%
50%
50%
50%
50%
50%
75%
9THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
The interesting thing about trade promotion efficiency is that
effectiveness can vary significantly within a single department. For
example, 73% of the promotion weeks in the grocery department don’t
break even, yet promotions for coffee are among the strongest in the
store. In fact, for every dollar spent on promoting coffee, retailers will
get more than a dollar back in return 70% of the time.
And some categories that are begging for proper trade promotions
aren’t delivering. Take the seasonal area, for example, which exists
solely to feature items that will be promoted, is falling short, delivering
positive returns only 24% of the time.
UNDERSTANDING WHERE YOUR EFFICIENCIES ARE IS VALUABLE CONTEXT
PROMOTION EFFICIENCY VARIES SIGNIFICANTLY WITHIN CATEGORIES
Read as: For every $1 spent on promotions for frozen toaster pastries, the promotions deliver more than $1 in returns 32% of the time.
Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3
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TRADE EFFICIENCY >= 100
0 < TRADE EFFICIENCY < 100
10 THE PATH TO EFFICIENT TRADE PROMOTIONS
PROMOTION EFFICIENCY CAN BE ACHIEVED THROUGHOUT THE STORE
CATEGORY SIZE DOES NOT DICTATE PERFORMANCE
In addition to finding notable variances in efficiency across products,
Nielsen’s benchmark study found that there is no relationship between
category size and promotion effectiveness. In short, category size does
not dictate performance.
For example, when we look across the store, it doesn’t get much
bigger than salty snacks—a $10.5 billion category. Despite consumers’
immense love for their chips and pretzels, promotions in the category
didn’t break even more than 75% of the time during the study period.
On the flipside, the dips for salty snacks category is much smaller ($331
million), yet promotions for them broke even more than 70% of the
time.
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Read as: Soft drinks represent a $9.8 billion category, yet promotions in this space don’t break even 76% of the time.
Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3
11THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
AVERAGE CATEGORY TRADE EFFICIENCY
% OF TOTAL EVENTS PROMOTING DEEPER THAN 25% DEPTH OF DISCOUNT
SELECTIVELY USE DEEP DISCOUNTS TO MAXIMIZE PROMOTION EFFICIENCY
Read as: When 0-5% of promotions involve deep discounts, the average trade efficiency rate is 74.3%.
Source: Nielsen Trade Promotion Benchmark Database 2014 Q3
EVENT FREQUENCY, DISCOUNTING AND EFFICIENCYThe other important thing for companies to understand when they plan
their trade promotions: more events do not equate to more returns. In
fact, the two are negatively correlated. According to Nielsen’s research,
over-promoting actually dilutes efficiency.
Over-using deep discounts is another way to kill promotion efficiency.
According to Nielsen data, using deep discounts—those where the price
is 25% lower than normal—the effectiveness at driving sales significantly
degrades for 50% or more of the total promotional activity.
69.0%
0% 0-5% 0-5% 25-50% 50-100% 100%
74.3%
60.6% 53.2%
40.8% 37.0%
12 THE PATH TO EFFICIENT TRADE PROMOTIONS
In addition to knowing how much to promote, it pays to know when to
promote. For example, there’s an overabundance of promotional activity
between Thanksgiving and Black Friday, but knowing how effective they
are can help retailers understand if they’re just spinning their wheels as
the holidays approach. Despite the findings about the diluting nature
of deep discounts, a Nielsen study at the end of 2014 found that price
cuts of 30%-60% work better for U.S. retailers around Thanksgiving and
Black Friday than at other times of the year.
In looking at the trends over the past two years, retailers have boosted
their deep discount promotions by 3% around Thanksgiving, and the
majority don’t fall victim to common promotional pitfalls. In fact,
consumers have been so receptive to deep discounts around this time
of year that trade promotions can drive as much as a 22% higher-
than-normal return, as has been the case in the general merchandise
category, which includes small appliances, photo supplies, and
telephones and accessories.
13THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
THANKSGIVING VS. YEAR-ROUND AVERAGE
DEEP-DISCOUNT PROMOTION INCREASES AND CHANGES IN PROMOTION EFFICIENCY
-0.8%
-0.4%
-3.7%
-2.6%
-1.8%
-1.1%
0.9%
1.8%
2.1%
3.9%
4.2%
4.4%
7.2%
10.4%
21.9%
-1.2%
6.4%
0.4%
0.0%
4.4%
8.4%
1.6%
1.1%
2.3%
1.7%
12.6%
DEEP DISCOUNT VOLUME CHANGE
DEEP DISCOUNT TRADE EFFICIENCY CHANGE
HOUSEHOLD CARE
FROZEN FOODS
HEALTH CARE
DELI
GROCERY
PET CARE
BAKERY
DAIRY
PRODUCE
PERSONAL CARE
MEAT
BEAUTY CARE
GENERAL MERCHANDISE
Read as: Deep discounts for the general merchandise category have been nearly 22% more efficient during the holiday season over the last two years than during the rest of the year.
Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3
14 THE PATH TO EFFICIENT TRADE PROMOTIONS
STRATEGIES TO AVOID AND STRATEGIES TO EMBRACEWhen we look at the overall picture, it’s clear that the majority of the
retail market needs to improve the efficiency of its promotions. There
are, however, a handful of success stories—those that illustrate an
effective balance of promotion type, frequency and category to drive
effective performance.
As we’ve detailed, some departments do better than others, and
we’ve seen notable variations even within a category. Contrary to what
might be viewed as beneficial from a strategy perspective, Nielsen has
identified several common misconceptions when it comes to program
efficiency:
CATEGORY SIZE DOES NOT DICTATE PERFORMANCEOpportunities exist across the store in all categories. A range of
categories—ranging from $100 million to $10 billion in size—fall in the
65%-75% inefficiency range, so size is a relative non-issue.
CATEGORY HEALTH IS NOT DISCRIMINATINGInefficiency can plague both rising and falling stars. Nielsen research
has found high degrees of performance variation among categories with
increasing and decreasing sales. Trade efficiencies among categories
with declining sales of more than 5% ranges from -$0.41 to $1.76, and
effectiveness among categories growing by more than 5% ranges from
-$0.12 to $1.50.
OVER-PROMOTING ERODES EFFICIENCYAcross categories, every 5% in additional time on promotion is
associated with nearly 10% in decreased trade efficiency. Although it’s
not a causal relationship, there’s little question that there is too much of
a good thing when it comes to promotions.
On the flipside, of the strategies that have proven to be ineffective,
three tactics have demonstrated the ability to drive positive results—
regardless of category. The winners who have employed these tactics
have improved their trade efficiency by 3.6% and seen sales climb
almost 3%.
15THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
MODERATION IS KEYThe selective use of deep discounts, along with shallow discounted
events, can be very effective. Specifically, less-frequent deep discounts
have proven to be the most profitable. Nielsen has identified 13
categories where this strategy has helped bring improvement where
inefficiency has been the norm. Among these categories, 73% of events
don’t break even, but a reduced use of deep discounts has proven
to improve efficiency by 3.6% over the past year. In aggregate, deep
discount frequency was reduced by 39%. For example, deep discounts
in the ice cream category were cut by 48% since last year, which boosted
efficiency by 2%.
CHANNEL-TO-PRODUCT MIX IS A CRITICAL CONSIDERATIONMatching promotional channels to promotional product mix has led to
greater returns. In the hair-color category, for example, the opportunity
lies in re-distributing the amount of promotion volume taking place
across other channels. The ratio of inefficient-events-to-share-of-events
in the drug category is 1.35x, meaning that the share of bad events
is disproportionally high compared with the total number of events.
As a channel, the drug category is over-indexing in terms of its bad
events, which suggests that cutting back on promotions would boost
trade efficiency. To turn things around, retailers should transfer their
investment in the under-performing drug channel to a channel with
better returns.
PROMOTE WHERE PERFORMANCE IS HIGHManufacturers and retailers would be well served to promote more in
the segments that are strong performers. Segment performance is not
static. It varies over time. So with that in mind, it’s critical to stay on
top of fluctuations in order to adjust investments and maintain positive
results.
In one category in the grocery channel, manufacturers spend the most
money promoting a specific segment that has the lowest promotion
efficiency. This is most likely because the category is the most frequently
promoted nationally. When we looked deeper into this segment, we
found that 1% of the promotions are still considered best-in-class with
high efficiency. This presents an opportunity for manufacturers and
category advisors to examine the planning and execution of these 1%
events in order to identify ways to improve the rest of their promotions.
16 THE PATH TO EFFICIENT TRADE PROMOTIONS
NEXT STEPSIn taking a step back from the granular details, we can re-focus on the
larger issue: the frequency of products being promoted in the U.S. is
increasing while the effectiveness of those promotions—which is already
low—is declining. The takeaway for the market? This is simply not
sustainable for the packaged goods industry. It’s not sustainable for the
retailers or the brands that operate in this space. No one is immune to
this.
All is not lost, however. The first step in turning efficiency trends
around is recognizing that a majority of the promotional efforts taking
place don’t break even. And what’s more, 22% of promotions could be
eliminated and actually improve sales results.
The next step is knowing where to start, which means understanding
where your current efforts are netting out. If you don’t know where you
are right now, there’s no way to create an effective strategy to move
forward.
For example, if you know your events are delivering less than $1 in return
for every $1 you spend, predictive analytics can help differentiate how
to best promote by category, channel, event type and account. If you’re
in the middle of the road—meaning you’ve experienced some success
but could gain additional efficiencies—identifying gaps where your
efforts are missing will help drive additional success. For example, the
illustration here shows how three manufacturers agree on the right times
to promote a specific category, as illustrated by the three solid lines. The
dotted line, however, highlights how sales also peak in late winter and
early spring—times when consumers are buying but promotions are at
bay.
17THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
If your promotional activities fall into the elite category where every
$1 dollar spent is delivering more than $1 in return, there’s still
room to improve. That’s because even the beauty and personal care
departments—the two most efficient areas of the store—are only turning
in trade efficiency rates of 50%. The key to better trade efforts lies in
learning which consumer segments are driving differential performance.
With that knowledge, you’ll be in a much stronger position to shift your
strategy in a complementary way.
ALIGN YOUR PROMOTION PLAN WHEN SALES PEAK TO MAXIMIZE EFFECTIVENESS
SEIZING OPPORTUNITIES
CATEGORY TRADE EFFCIENCY
MFR A % ON PROMOTION
MFR B % ON PROMOTION
MFR C % ON PROMOTION
10%
20%
30%
40%
50%
60%
70%
80%
20%
40%
60%
80%
100%
120%
140%
160%
180%
CAT
EGO
RY TR
ADE
EFFI
CIE
NC
Y TIME O
N PRO
MO
TION
Month
2012 02 Feb
2012 03 Mar
2012 04 Apr
2012 05 May
2012 06 Jun
2012 07 Jul
2012 08 Aug
2012 09 Sep
2012 10 O
ct
2012 11 Nov
2012 12 Dec
2013 01 Jan
2013 02 Feb
2013 03 Mar
2013 04 Apr
2013 05 May
2013 06 Jun
2013 07 Jul
2013 08 Aug
2013 09 Sep
2013 10 O
ct
2013 11 Nov
2013 12 Dec
2014 01 Jan
2014 02 Feb
2014 03 Mar
2014 04 Apr
2014 05 May
2014 06 Jun
2014 07 Jul
2014 08 Aug
2014 09 Sep
18 THE PATH TO EFFICIENT TRADE PROMOTIONS
19THE PATH TO EFFICIENT TRADE PROMOTIONS Copyright © 2015 The Nielsen Company
*ABOUT THE NIELSEN TRADE PROMOTION LANDSCAPE ANALYSIS
The findings from this report were derived from 2012 through third-
quarter 2014 data from Nielsen’s Trade Promotion Landscape Analysis.
This analysis examined trade promotion events where prices were
discounted at least 10% across 75 banners from food, drug and mass
merchandise retail. The analysis included categories with sales of more
than $100 million and promotion frequency of at least 5%. The analysis
excluded tobacco, alcohol, eggs, milk and bread. The analysis also
excludes Walmart.
ABOUT NIELSEN Nielsen N.V. (NYSE: NLSN) is a global performance management
company that provides a comprehensive understanding of what
consumers Watch and Buy. Nielsen’s Watch segment provides media and
advertising clients with Total Audience measurement services across all
devices where content — video, audio and text — is consumed. The Buy
segment offers consumer packaged goods manufacturers and retailers
the industry’s only global view of retail performance measurement. By
integrating information from its Watch and Buy segments and other data
sources, Nielsen provides its clients with both world-class measurement
as well as analytics that help improve performance. Nielsen, an S&P 500
company, has operations in over 100 countries that cover more than 90
percent of the world’s population.
For more information, visit www.nielsen.com.
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20 THE PATH TO EFFICIENT TRADE PROMOTIONS