Faced with sagging bottom lines, food companies have been trying a number of tactics to drive efficiencies, among them allocating resources to their most profitable brands and eliminating non-performing products. Now, despite a long history of offering retailers trade dollars with no guarantee of the price promotions or displays they've paid for, manufacturers, armed with better tracking data, are finally demanding their due. And they are willing to cut retail accounts that can't perform.
"Over the years, trade monies have become a taken-for-granted expectation rather than a promotional vehicle," said a Nestle executive. "Now we're re-emphasizing in our contracts that there has to be a base promotion executed upon for these funds to be paid." Each brand within Nestle's confection, prepared foods and beverage divisions will have its own set of minimum-performance requirements for promotions. Nestle has found to drive product sales, among them reduced prices for distinct periods, ads featured in retailers' circulars and displays.
Retailers must meet those requirements in order to qualify, a fact that means fewer funds for non-performing accounts and in some cases a shift away from some retailers that won't comply. "We'll just move to a different account where we can better move product through," the Nestle executive said.
In the past, Nestle paid promotional funds to retail partners based on flexible verbal agreements for promotions that often did not come to pass.
Package-food companies in the last few years have been trying to shift the marketing mix away from trade spending and more toward brand-building efforts such as advertising without much success, said Lehman Bros. analyst Andrew Lazar. According to research by Cannondale Associates, package-goods companies' trade spending rose 0.5% to 17.4% of gross sales in 2003, accounting for 54% of companies' marketing budgets-up from 44% of total budgets in 2002. For the $470 billion food industry, that translates to as much as $80 billion.
The shift is partly due to the rise in alternative retail channels focused on everyday low prices-central among them Wal-Mart Stores. "More food companies are willing to be far less democratic in working with retailers," said Mr. Lazar, allocating resources behind the most profitable accounts and those most focused on using trade funds effectively.
where the bang is
Hershey, for example, this past year spent disproportionately more with its top 10 retailers than in years past because, Mr. Lazar said, "they know where they're getting bang for their buck." Kraft, too, is in the midst of its own pay-for-performance trade-spending initiative designed to reward retailers more for moving products off the shelf than for taking on excess inventory into their warehouses, as it had in the past.
Cannondale partner Ken Harris cites "robust data" from tracking systems including improved syndicated data, frequent-shopper cards and hand-held inventory devices as the reasoning for the move toward pay-for-performance spending.
Retailers are recognizing, albeit grudgingly, that the new movement will demand a change to their ways. "We will have to make promises to manufacturers and do a better job upfront determining what is going to get displayed," said one East Coast retail executive.
Such promises, the executive said, will likely make it more difficult for regional or third-tier brands to get displays, but bigger manufacturers will get more sales and profits as a result.