Empirical Analysis of Budget and Allocation of Trade Promotions in the U.S. Supermarket Industry

AMA Publishing
Current average rating    
Key Takeaways

Miguel I. Gomez, Vithala R. Rao, and Edward W. McLaughlin

Executive Summary
Trade promotions comprise a growing category of manufacturer incentives directed to channel members, wholesale, and retail distributors rather than to consumers. Use of trade promotions by manufacturers of consumer packaged goods to distributors has increased eightfold since 1996 and, in 2004, totaled approximately $80 billion. Trade promotion spending accounts for approximately 70% of a manufacturer's marketing budget and is the second-largest manufacturer expense after the cost of goods. Manufacturers use trade promotions to counter the popularity of lower-priced store brands, to pass along a discount to a price-sensitive segment of shoppers (e.g., through a frequent-shopper program), to enhance brand exposure with target consumers, or simply to provide additional stimulus to move excess inventory or counteract competitors. Retailers favor trade spending because it builds store traffic and improves retail margins and because, in general, the majority of the costs (and risks) are borne by the brand manufacturer.

Various trade promotion types include off-invoices, billbacks, scanbacks, accrual funds, co-op advertising, extended payment terms, free goods, and others, used singly or in combination. Despite the magnitude of trade promotions and the various types in use, research has been limited to examination of "pass-through" (i.e., the extent to which retailers actually pass on the supplier discount to consumers) and the policy implications of potential efficiency distortions. No research has focused on the process and factors involved in the determination of promotional budgets and their allocation. This is partly due to the difficulty in gaining access to data from confidential supplier–retailer negotiations.

Employing a unique data set from 36 U.S. retail companies describing trade promotions for six major product categories from both large and small manufacturers, the authors examine the retail and manufacturer characteristics that jointly determine trade promotion budgets for supermarket brands and their allocation across trade promotion types using state-of-the art econometric methods. They find that manufacturer variables, such as brand position in retailer product category, brand price premium, and annual retailer sales, determine trade promotion budgets. Furthermore, they find that retail companies with a larger share of private label in product category sales, larger annual sales, and stronger brand positioning are able to increase the allocation of promotional funds to off-invoices and decrease allocation to performance-based trade promotions, such as scanbacks, accruals, and billbacks. Manufacturers with formal trade promotion policies tend to decrease allocation to off-invoices. These results are important for manufacturers and retailers that make trade promotion decisions.

Finally, many studies suggest that channel coordination is often facilitated when one of the parties of the supplier–buyer dyad in a dominant position exerts market power. However, the authors' results suggest that neither supermarket companies nor grocery manufacturers have a dominant position in the negotiation of promotions, at least not along all dimensions, thus shedding light on various regulatory issues related to food channel structure, behavior, and market power.

Miguel I. Gómez holds a PhD from the University of Illinois. His areas of expertise are marketing and price analysis, applied econometrics, and industrial organization. Miguel is an assistant professor in the Department of Agricultural and Consumer Economics at the University of Illinois. Previously, he was research associate in the Food Industry Management Program, Department of Applied Economics and Management, at Cornell University. His current research focuses on the economics of the food industry, negotiation of trade promotions between manufacturers and retailers, customer satisfaction in retailing, price analysis, and market power in the food industry. He has academic and research experience in Latin America and Eastern Europe and has served as a consultant for various national and international public and private institutions.

Vithala R. Rao is Deane Malott Professor of Management and Professor of Marketing and Quantitative Methods in the Johnson Graduate School of Management at Cornell University. He received his master's degrees in Mathematical Statistics from the University of Bombay and in Sociology from the University of Michigan, and he received a PhD in Applied Economics/Marketing from the Wharton School of the University of Pennsylvania. He has published more than 100 articles on several topics, including conjoint analysis and multidimensional scaling for the analysis of consumer preferences and perceptions, promotions, pricing, market structure, corporate acquisition, and brand equity. His current work includes bundle design and pricing, product design, diffusion of preannounced products, competitive issues of preannouncement strategies, evaluation of offline and online channels, Internet recommendation systems, and linking firms' branding strategies to their to financial performance. His research has appeared in Journal of Marketing Research, Journal of Marketing, Multivariate Behavioral Research, Journal of Consumer Research, Decision Science, Management Science, Journal of Classification Society, Marketing Letters, Applied Economics, International Journal of Research in Marketing, and Marketing Science. He is also the coauthor of four books: Applied Multidimensional Scaling, Decision Criteria for New Product Acceptance and Success, New Science of Marketing, and Analysis for Strategic Marketing. He currently serves on the editorial boards of Marketing Science, Journal of Marketing Research, and Journal of Business to Business Marketing. He received the 2000–2001 Faculty Research Award of the Johnson Graduate School of Management at Cornell University, among other awards for his articles.

Edward W. McLaughlin is Robert G. Tobin Professor of Marketing, Director of the Undergraduate Business Program, and Director of the Food Industry Management Program at Cornell University. He received his master's degree at the University of Vermont and his PhD at Michigan State University. Before his academic appointment, he had extensive international experience; he spent four years in Africa with the U.S. State Department and has with the United Nations and the World Bank. His research interests include new product introductions, branding commodities, linking customer satisfaction to firm performance, retailing, and trade promotions. His research has appeared in numerous journals, including Journal of Marketing, American Journal of Agricultural Economics, and Journal of Retailing. In 2000, he received the William Davidson Award, second prize, for his article (with Sirohi and Wittink) in Journal of Retailing. He has won numerous national awards for distinguished teaching and is also Professor of Retailing at Nyenrode, the Netherlands School of Business. He has published three books, including (with Vithala .R. Rao) Decision Criteria for New Product Acceptance and Success.

Journal of Marketing Research, Vol. XLIV, No. 3, August 2007
View Table of Contents.

Author Bio:

AMA Publishing
Add A Comment :

Become a Member
Access our innovative members-only resources and tools to further your marketing practice.