Accounting by new rules

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As package-goods marketers come to grips with how new accounting treatment of promotion spending is hurting their financial statements, a growing in-store media industry is angling to profit from their discontent.

Most package-goods marketers are starting to grasp the full impact of new accounting rules requiring that price givebacks to retailers and consumers be deducted from revenue rather than reported as marketing expenses, said Ken Harris, partner with Cannondale Associates, Evanston, Ill.

The rules, which were developed by the Financial Accounting Standards Board and took effect late last year, were originally intended to skim promotional froth from top lines of dot-coms. But they possibly have had a bigger impact on package-goods marketers.

Some, such as Procter & Gamble Co. and Unilever, have long accounted for promotion spending this way. But Cannondale research indicates the new rules will cut reported net sales for package-goods companies on average by 8.5% this year, cut reported marketing spending by half or more in many cases and slash the industry's five-year average annual sales growth rate by nearly a third, from 2.9% to 2%.

Earnings are not affected, but the impact of promotion spending on both revenue and marketing outlays appears to be a growing quality-of-earnings issue for investors, particularly in the era of post-Enron scrutiny, said Jim Gingrich, analyst with Alliance Capital Management's Sanford C. Bernstein.

hard look

The new rules have made marketers take a harder look at promotion spending despite retailer pressure. For the first time in five years, the share of package-goods marketing budgets earmarked for total trade promotion went down last year, according to Cannondale's recently released survey, though only to 59% from 61%.

Retailers complaining they aren't getting their fair share of trade dollars rose to 46% this year from 37% in 2001, while 61% of manufacturers said they'll evaluate promotion spending more closely and 26% expect to cut it.

But the FASB rules draw a line between pure price rebates and payments for in-store or co-op advertising and events. Marketers still can count the latter payments as marketing expenses to the extent they're not linked to the retailer's purchase of products and reflect fair market value. Marketers clearly want to see what's in store: At the AdWatch: Outlook 2002 conference in June, James Stengel, P&G's global marketing officer, noted P&G's interest in reaching the vast number of shoppers at outlets such as Wal-Mart Stores using in-store media.

loophole

A growing array of retailer-owned media, such as in-store TV, radio and billboards at Wal-Mart, Kmart Corp. and Kroger Co., could drive business through that loophole, and other emerging in-store media concepts could also benefit.

Among them is Approach Infinity Media, Toronto, which recently has launched interactive makeover kiosks that take pictures of consumers, then let them virtually try on cosmetics or new hair colors and styles.

Unilever is using the kiosks in a current mall tour in conjunction with iVillage to back a relaunch of its Finesse hair-care brand later this month, and Revlon is using them for a similar tour of its own to launch High Dimension hair color. Coty's Rimmel cosmetic brand has used the kiosks on double-decker buses for promotions at Wal-Mart Stores.

But Steve McPhee, sales and marketing director for Approach Infinity, is also pitching the kiosks to retail chains as an in-store "retail-tainment" concept that they would own and in turn sell to marketers on a rotating basis. Mr. McPhee said chains in the U.S. and Canada are set to begin testing the kiosks as permanent in-store displays by year end.

Favorable accounting treatment might be "an ancillary benefit" for Approach Infinity, he said, but he sees primary drivers as in-store fun and the ability to target shoppers at the time they're making decisions and use data to develop shopping lists and loyalty programs. Approach Infinity claims the kiosks can generate sales lifts of 50%.

Onvance InStore Advertising Network, founded by a group of petroleum companies that operate convenience stores and launched last month in more than 500 convenience stores, could also benefit from the new rules. The network, which places several monitors in each store running a mix of 40% entertainment programming and 60% advertising, benefits retailers by creating an average sales lift of 7.8% and providing free satellite broadband access, though they don't share in ad revenue, said Gerard Coelsch, VP-marketing.

Onvance plans to eventually reach 30,000 stores, or about a quarter of the 125,000 in the U.S. Given an average convenience store's daily customer count of 1,100, the network could have an audience of more than 30 million, said Mr. Coelsch. Even at startup levels of more than 500,000, its audience exceeds that of some cable news networks, he said.

early birds

Early advertisers include both convenience store regulars like PepsiCo's Frito-Lay and Aquafina, and non-convenience store brands such as Levi Strauss & Co. and credit-card issuers. Though advertisers can use existing ads, Mr. Coelsch said ads specifically tailored to the network, including a strong promotional call to buy and tie-ins to displays, can more than double per-store sales.

Mr. Coelsch said he is hearing some marketers cite the accounting change as a factor that could drive budgets from conventional trade deals to in-store media. It's a touchy subject, since some of Onvance's outlets could lose trade dollars as a result. "I don't necessarily favor [that thinking]," he said. "But if it does happen, I think we benefit."

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