What’s Behind P&G’s Move
To Pay-for-Performance?
By James Tenser
Is P&G’s shift to so-called “pay-for-performance” for trade promotions something new, or is it an echo of times past?
The company’s decision, reported in June, to adopt some trade promotion practices favored by the recently-acquired Gillette Company raised eyebrows in the industry. After stories appeared
in Advertising Age and elsewhere, P&G invested a bit of energy informing the market that reported trade spending levels were
“not accurate.”
So what’s the real story?
The nation’s number one marketer of number one brands is deservedly under the microscope when it changes store-level operating practices. With the $57-billion Gillette deal completed in April, P&G further consolidated its position at the top. Gillette brought field marketing know-how to the table along with its leading personal care brands.
“Both P&G and Gillette customer funding is and have always been focused on getting performance and maximizing our ROI,” Jim Flannery, Global Customer Marketing for P&G, told CPGmatters.com, adding that his company would not comment further on trade spending levels.
But the precise size of P&G’s trade budget may be beside the
main point anyway, despite the focus of prior press coverage. This summer’s organizational change in the field appears to reflect a
shift toward Gillette-style close management of retail display and merchandising activities, but using a greater proportion of part-time personnel, as favored by the Cincinnati-based brand powerhouse.
“As part of the commitment to bring the best of P&G and the best of Gillette together,” said Flannery, “we continue to invest in retail coverage with both full and part-time resources. We are primarily using our field resources to work with customers to improve in-stock position of our brands, help retailers understand key initiatives that are coming, and to provide in-store merchandising ideas that can help build sales for our retailers.”
When the news about trade spending broke this summer, some analysts described it as a shift toward “pay-for-performance.” The phrase has decades of history in retail trade promotion circles, particularly at P&G.
“There’s 30 years or more history of pay-for-performance at Procter,” said Jim Hertel, senior vice president at Willard Bishop Consulting, Barrington, Ill. “That was business as usual a long time ago. Now they probably have picked up some best practices from Gillette that they realize are good and applicable approaches.”
P&G’s June decision seems not to have caused a ripple effect in
the market.
“You have to put this decision in perspective,” said Christopher Hoyt, managing partner of Hoyt & Co., Scottsdale, Ariz.. “P&G is the only company that can go to the trade and say ‘We’re going to cut back by tightening up,’ because their brands still have more influence over the consumer than the trade does. With the possible exception of Pepsi and Coke, I don’t see everybody following this. It would be suicide for most of them.”
Paul Thompson, partner with Chicago-based Henry Rak Consulting Partners, has a similar perspective. “Procter & Gamble is going to pay-for-performance, yet you need a lot of brand strength to do that. It will become a trend only in companies with strong brand equity,” he stated recently in CPGmatters.com.
Based on past retailer behavior, a company like P&G has plenty of grounds to ask for a little accountability, according to Hertel. “The pay-for-performance discussion centers around, ‘Did they build the display, take a temporary price cut, include the item in a feature ad?’ ‘What actions have taken place?’
“This latest move might also involve tying pay-for-performance back to ROI,” he continued. “When people go visit stores and perform actions inside the stores, we’re seeing lot of people evaluating, ‘What am I getting for my investment?’”
In-store coverage is an element of P&G’s stated commitment to win with the consumer at “the First Moment of Truth,” said Flannery. “Gillette and P&G have strengths that can be applied across the entire business to jointly create value for retailers.”
Said Hoyt: “Just put this in perspective. There is no trade promo in the highest growth channels. Wal-Mart and Costco don’t want promotion money. Just put it into the price. So this really narrows down to more pressure on the supermarket channel which has a model that’s dependent on trade promotions. That model is killing them now.”
AUGUST 2006
Pinnacle Relies on Real-Time Visibility
To Manage Its Trade Promotion
By Al Heller
Pinnacle Foods Corporation doesn’t buy into the truism that the more things change, the more they stay the same—particularly as it applies to trade promotion practices. The maker of brands that include Aunt Jemima, Vlasic and Swanson has changed plenty since it was spun off from Campbell Soup in 1998, and then bought Aurora Foods in 2004.
At that time, Pinnacle was preparing to implement a new live-accrual strategy to grow trade funds for retailers “as we produce business together, so then we can reinvest,” explained Mark Parker, Pinnacle’s vice president-business development. He also aimed to protect against overspending, while improving forecasting and data visibility throughout Pinnacle and its brokers.
Back then, the company sold products through two brokers, had disparate systems for sales planning, trade spend planning and deductions, and tracked volume through self-built Excel templates, recalled Andrea Petrelli, director of finance and sales operations at Pinnacle Foods Canada, in a presentation at this June’s Consumer Goods Technology Sales & Marketing Summit in New York. That was also a period when incremental sales of Pinnacle brands became increasingly trade-spend-dependent.
To manage the change to live-accrual, and to unify all trade quotas and budgets visibly in one system, Pinnacle began using MEI software in April 2005. By now, deductions have clamped down to “far less than 1%, compared to two to three times that previously,” noted Parker, and deductions are typically cleared within 60 days.
In a $2 billion sales company with trade budgets “in excess of the industry average, that savings is significant,” he said.
Moreover, Pinnacle is able to use the tool to allocate funds, align spends with consumer marketing events, review results of promotions on a daily and weekly basis, and reconcile through off-invoice programs, billbacks or deductions, explained Fred Schroeder, chief executive officer of MEI.
Since Pinnacle has also streamlined to one broker, Acosta Sales & Marketing, to sell all of its name brands nationally (though not private labels or in foodservice), the CPG firm needed to give Acosta a consistent picture of all its businesses, and it needed to be flexible in organizing and presenting different data views to retail customers—say Stop & Shop as a northeastern regional chain, or as part of Ahold, for example. “We have as much real-time insight as we need to manage trade,” said Parker. “That’s a big deal, and retailers respect that as the business grows, the funding grows.”
Parker believes that Pinnacle’s trade promotion practices differentiate the supplier from many others who remain stuck on the same basic issues of five years ago—not knowing where trade dollars are at any given time, and data that doesn't match between the manufacturer, broker and retailer.
The reason such visibility is critical to a CPG firm, contends
Paul Thompson, partner, Henry Rak Consulting Partners, is “it is important for CPG firms to understand what drives their volume and there’s a huge battleground for features and displays, and just so much space available on the sales floor or in ads. All this money is coming, and so much of it goes to less efficient activities such as temporary price reductions. Not everyone can get quality events.”
Another retailer-supplier disconnect he cited: Retailers don’t always provide proof for what they say they’re owed. Systems like MEI’s are helping to manage payment flow, he noted, and in one show of clout, “Procter & Gamble is going to pay for performance, yet you need a lot of brand strength to do that. It will become a trend only in companies with strong brand equity.”
According to Thompson, most of the large CPG suppliers “have moved to a trade promotion management system. Some develop their own. Others buy from MEI, Siebel, CAS or SAP. Buy off the shelf, and you need to understand the complexity of interfaces to properly synchronize all of your data sources.”
More important, suggests Thompson, is not only to acquire the tool, but to “take the opportunity to enhance how you think about promotions. What are the right metrics? What do you want to accomplish? Think about post-event evaluation. Reinvigorate your process. A lot of companies want to do what-if scenarios, and understand the implications for volume and profitability if they make changes. If they can migrate their systems to be both transactional and analytical, they’ll have greater potential value.”
Indeed, Parker intends to activate the tool’s embedded analytical capabilities to evaluate promotions within the next 12 months. “The industry’s talk and perception about evaluating promotions exceeds the experience so far,” noted Schroeder, whose MEI tool nevertheless allows for analysis at any level of the business.
The first step to better trade promotion practice, sources agreed, is to quickly implement a tracking system and have a company embrace it from top to bottom. “The average tenure of a vp-sales is such that they can’t wait two years for a system to come in and help. It needs to produce in the next quarter,” said Schroeder, whose tool was designed for a four-month implementation.
To make that happen, CPG suppliers need to stress that senior management supports it, dedicate a task force, and assign a single person to decide on business processes. “It will stall if marketing, sales and trade executives want to do different things. There has to be a feeling that there are no winners or losers, but this is just to create a better enterprise,” added Schroeder.
Training is also critical to success, noted Thompson. “The tool means nothing unless the organization understands and assimilates what is to be accomplished. If it adds time to how people do their job, it may be hard for them to see the value, which may well be in providing better information.”
To this point, Parker credited the involvement of Pinnacle’s finance, information technology and business teams for the tool’s success at the company. “We feel we have much improved insights for managing the business. We’ve demonstrated that we make better and smarter decisions,” he said.
