Kraft, believed to be among the five to 10 largest buyers of market-research services in the U.S., recently circulated a letter outlining its "Supplier Optimization Program" for market research suppliers with which it did $100,000 or more in business last year, according to several industry executives. The letter asked research vendors to agree to rebates even if they have existing contracts with Kraft, and seeks rebates for all of 2003, including work completed and billed prior to the letter's circulation.
The demand outraged at least one recipient. "I've been in the industry for 30 years and never seen anything like this."
While limited to market research, the move comes amid a wide-ranging cost cutting effort at Kraft, which, like its competitors, has been squeezed between higher raw material costs and resistance from Wal-Mart Stores and major retailers to price hikes. Adding to the pressure, Kraft last month lost access to commercial paper markets because of credit downgrades following a large tobacco litigation judgment against parent Altria Group.
Kraft purchasing executives have been given specific dollar targets to take out costs, and some discussed the broad cost-cutting mandate last week at the Association of National Advertisers' Advertising Financial Management Conference in Florida in an ANA members-only session on "Procurement Best Practices."
"We have a responsibility to our shareholders to have the best services for the least cost," said a spokeswoman regarding the market research rebate program, but added that it was unrelated to financial pressures at Kraft.
The rebate levels start under 5% and rise depending on how much business the participating firm does with Kraft this year.
The Kraft spokeswoman said the company was actually extending to new market-research suppliers a program that already existed for its largest market-research vendors. She wouldn't specify how many were previously participating or how many were added.
VNU's ACNielsen Corp., which handles retail data tracking for Kraft, is likely its biggest research vendor. An ACNielsen spokesman declined to comment on its compensation agreement with Kraft.
The letter to research firms indicated Kraft, after reviewing the "mutual benefit" for itself and suppliers, determined "the need to create a Kraft rebate program that's fair and consistent across the supplier network," said one research executive.
But the letter doesn't offer specific guarantees that agreeing to terms will generate more business, he said. When the longtime research executive contacted Kraft, he said he was told his firm could lose business if he didn't go along. "The only consideration [on Kraft's part] is a big gun held to my head," he said.
Executives or principals of four other research firms also indicated they had either been sent the letter or heard of the proposal, which they said was unlike any they had seen before. With industry margins already running low, retroactive rebates can mean losing money on projects.
One industry executive said he had been presented with volume-based rebate plans by other large clients in contract negotiations but had never seen a proposal for retroactive rebates or price cuts on existing long-term contracts, which tend to be negotiated at substantial volume discounts at the outset.
Executives of Kraft marketing services firms outside the research industry said they haven't faced demands for rebates, but are feeling growing pressure from Kraft to cut prices.