Through a special arrangement, what follows is an excerpt of a current article from CPGmatters monthly e-zine, presented here for discussion.
CPG manufacturers should toughen up when dealing with retailers who don't respect the true purpose of trade promotion.
In fact, CPGs should use Sarbanes-Oxley "as the excuse to put teeth into their position" when retailers look to trade promotion as a profit center, resist submitting trade promotion documentation costs, or intimidate CPG sales reps, urged Ray Wezner, COO and General Manager of the Tactical Promotion Administration (TPA), a division of MARS, speaking recently at the Trade Promotion Marketing Associates (TPMA) Financial Impact Conference in Tampa.
The Sarbanes-Oxley law mandates that all trade payments (vendor allowances) be counted as revenue reductions rather than marketing expense unless:
- The manufacturer benefits;
- Trade payments are clearly separable from the sale of the product;
- The benefit could be purchased from a source other than the retailer;
- The manufacturer obtains proof of performance;
- The manufacturer can reasonably estimate true costs.
To arrive at "true value," CPGs must know the costs of each promotional claim, the dollar value of each claim and ad, and proof of performance.
As an example, Mr. Wezner said one major vendor was forced to pay Kohl's one percent of sales in exchange for media exposure of brands, yet the chain doesn't provide proof of performance. TPA determined that 91 percent of the supplier's 2006 spending allowance with Kohl's had valid proof and could be moved to marketing expense.
In another example, a designer brand was able to reduce its retail overpayments of 46 percent by taking TPA's "true value" pre-audit media cost estimates and "turning them into their rate card back to the retailer," he noted.
"In preparation for top-to-top meetings, companies can see roll-up reports to know all of their trade promotion spending with that retailer, across all of their brands," said Mr. Wenzer.
A third vendor used media cost insights in a way that kept it simple for salespeople.
"'Let's spend the same money, but get four ads instead of three,' was their direction, and this enabled them to negotiate aggressively," Mr. Wezner said.
"All along clients felt they were taken advantage of, but they just didn't know how much, and they never had a tool to help them negotiate that with the retailer," he stated. "Think about the amount of money thrown around in trade promotion and people just say 'OK, we'll do it.' It's incredible to me that salespersons aren't better trained in media. The average salesperson knows a lot about product and little about buying media. Keep it simple for the sales force."
Discussion Questions: What are some ways vendors and retailers are resolving trade promotion allowance issues? Are there methods to assure proof of performance that are practical for retailers? Do you agree that manufacturer salespeople need to know more about media buying?