The payoff is potentially huge. Household and personal-care marketers typically spend nearly as much on trade promotion as advertising -- likely more than $2 billion annually in P&G's case. Yet manufacturers estimate that more than a quarter of trade spending goes directly to retailers' bottom lines rather than to cover promotion costs or reduce prices to consumers, according to Cannondale Associates.
"Whenever you can get the retailer to actually apply 80% to 90% of those funds to actual in-store merchandising, temporary price reductions, end-aisle displays, what have you, it's very good for P&G," said an executive familiar with Gillette's system.
Details haven't been disclosed to retailers yet, but P&G executives have described them as similar to Gillette's practices of paying for specific performance, such as merchandising products in front-end displays.
Still, P&G is eliminating full-time jobs of Gillette retail merchandisers in favor of its own part-time system effective July 1, according to people familiar with the matter. P&G is advertising online for about 200 such part-timers at $10.50 an hour.
Implementing the new system will be Ed Shirley, who headed Gillette's sales and trade-marketing efforts outside the U.S. He recently took over as president-North American Market Development Organization, overseeing trade and other multibrand marketing efforts for all of P&G in the U.S.
Both P&G and Gillette traditionally dubbed their trade-marketing programs "pay for performance," but Gillette's appears to more closely tie retail payouts to specific in-store execution. Currently, retailers accrue funds from P&G based on the number of cases they buy. But while the funds are earmarked for specific promotion programs, retailers don't need to prove they executed the programs to collect.
'Being a little more specific'
"What we're talking about is ... being a little more specific with how we spend that money, how we evaluate the payout for it," said Chris Petersen, VP-investor relations for P&G, according to an April transcript of a conference call with clients of investment bank Goldman Sachs.
Better retailer performance could mean much better display or other in-store marketing for P&G brands at the same or lower cost as before-though even a $70 billion behemoth like P&G could have trouble taking money away from key retailers without getting punished by competitors.
Burt Flickinger, principal, Strategic Resource Group, believes P&G will use its new system to fund fewer, bigger promotions, encouraging multiple purchases across its brand portfolio. Not only could that mean more bang for the buck, but also better profitability for one big customer -- Wal-Mart -- which regularly loses money on some big P&G brands as it cuts its prices to match weekly deals by local competitors. Fewer promotions each year would mean fewer weeks Wal-Mart has to sell P&G brands at a loss.