Package-Goods Players Just Can't Quit Coupons

Despite Falling Usage and Negative Publicity, Media Spending Up 26%

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Newspaper circulations are declining, coupon usage appears to be falling off among younger consumers and the leading coupon clearinghouse is under indictment for an alleged $250 million fraud.

All that might make couponing seem like a dinosaur headed for the tar pits. Yet TNS Media Intelligence reported spending on the media side of the industry up 26% last year to $1.8 billion, and marketers and retailers are about to dole out millions to upgrade systems in a sweeping re-engineering of coupon codes for 2010.

So coupons may be a tactic U.S. package-goods marketers love to hate, but it's also one they can't seem to live without. Unilateral disarmament in coupons can mean losing cost-conscious consumers to the competition, while joint efforts to scale back can lead to antitrust issues. Ironically, 10 years after testing elimination of coupons, Procter & Gamble Co. is making them the cornerstone of a corporate-branding effort via its P&G Brandsaver coupon inserts.

Paper prices
However, the 26% growth rate might be deceiving. Mark Nesbitt, chief operating officer of TNS's Marx Promotion Intelligence unit, said the company updated media-cost estimates for the first time in a couple of years, and rising paper costs helped push the number up.

In fact, combined sales for the three big players in couponing, Valassis Communications, News Corp.'s NewsAmerica and Catalina Marketing (operator of Checkout Coupons) were flat last year, at $1.8 billion.

But that's where the agreement ends. NCH, a clearinghouse that's a unit of Valassis, found the total number of coupons distributed by package-goods players was actually up 0.4% last year to 279 billion, while another clearinghouse, CMS, found coupon distribution declined 12% to 286 billion. CMS said redemption was down 13% to 2.6 billion.

It's clear, however, that the industry is plagued by a common enemy: coupon fraud. In fact, the biggest coupon clearinghouse in the U.S., International Outsourcing Services of El Paso, Texas, was indicted in federal court in March for an alleged nine-year, $250 million fraud against package-goods marketers.

The indictment charges eight executives of IOS and two executives of Riva, a New Jersey company alleged to have recruited stores to participate in the scam. It says the defendants circumvented fraud-detection systems for marketers such as P&G, Unilever and Kraft Foods by, among other things, saying coupons from small stores had actually come from bigger chains and having employees in Mexico tumble coupons in a cement mixer so they'd look like they'd been individually handled.

IOS, which handles 70% of U.S. coupons redeemed, denied all charges. "We strongly believe that the facts will show our company has complied with the law and dealt fairly with all parties," the company said in a statement. "These allegations stem from a longstanding industry dispute regarding coupon processing between IOS and a very small number of manufacturers."

The flip-side
Bad publicity aside, the organization representing those manufacturers believes the case could strengthen couponing by reducing fraud.

"This is something the industry can look back on and say, 'The system worked,'" said Bud Miller, executive director of the Coupon Information Center.

The industry is also going after consumers who use flaws in bar codes to, for example, use $5 coupons for expensive tooth whiteners on less-expensive bottles of shampoo or "get one free" without buying one. Some consumers have been ahead of marketers in using technology. They participate in online communities such as to swap ways of exploiting coupon codes.

But a new coding system due in 2010 will be harder to exploit, will simplify coupon offers and will track relationship-marketing efforts, said Don King, associate director-advertising services at P&G, in a presentation last week to the Food Marketing Institute Show.
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