What is Trade Promotions?

1. What is Trade Promotions? Created August 5, 2004

2. Agenda • So, what is TPM exactly? • Trade Promotion: Current Market Place • Deloitte’s View • Appendix A: TPM Process Details

3. Introduction • This document will focus on the promotion planning, execution and post analysis activities performed by an organization. Marketing, branding, and other activities are not included. • After this presentation, you should be able to: • Describe the TPM Process • Identify challenges associated with Trade Promotions • Develop a high-level approach to addressing TPM related issues

4. So, what is TPM exactly?

5. The TPM Process Trade Promotion Management (TPM) is defined as the process of planning, budgeting, presenting and executing incentive programs which occur between the manufacturer and the retailer to enhance sales of specific products. To provide a better understanding, we have outlined a typical trade promotions cycle: See Appendix for Process Step Details

6. Promotion Programs • The following diagram provides listings of many of the types of incentives and programs that are run. • Promotion programs vary widely from account to account • discounts on each product sold • payments of a fixed sum of money • other special programs • Incentive programs are based on corporate strategy and account objectives Costs • Performance • Benefits • Manufacturers Offer Incentives to trading Partners… • Off-invoice allowances • Favorable payment terms • Market development funds • Sell-through guarantees/failure fees • Co-op advertising • Bracket allowances • … In Return for Performance… • At Headquarters • Plan Merchandising • Buy in advance of • demand • Set prices • Authorize new items • At Retail • Merchandising • Ads • Display • Reduced prices • Coupons • “Everyday Low Prices” • Shelving • Space • Configuration • Location • Stock Rotation • … To Generate Consumer Sales… • Incremental Sales and Profits

7. Types of Trade Promotions • Trade Promotion Management (TPM) is the configuration and management of three types of promotions. • Corporate Promotions • Company-wide promotions of a product or a brand in which accounts can participate. • They are run for a specific time period and contain the objective of the promotion, suggested tactics, and other information. • For example, a beverage company decides to promote a new product with the recommended tactics of a temporary price reduction (TPR) and in-store displays. • Discretionary Promotions • After a discretionary promotion has been created, it is saved as a template. • The promotion templates that can serve as the basis of an account promotion. • Other key account managers can use templates of existing promotions when establishing promotions at their accounts. • Account Promotions • Based on a corporate promotion or a discretionary promotion. • A plan is a group of account promotions that depicts the aggregate results of account promotions, such as spending and volume.

8. Who Manages TPM? The National Sales Director leads the sales force, and gives direction in terms of merchandising priorities, product assortment, revenue targets, products focus (new and established), budget and thresholds for key metrics such as promotion ROI. The key account manager is responsible for account and promotion planning, category management, new product introductions. National Sales Director The Controller is responsible for the accurate recording of promotional results, customer payments, rebates and the tracking of free product. Customer P&L, Product P&L Key Account Manager Controller The demand planner captures customer orders, and tracks their progress The Brand Manager is responsible for providing strategic direction for brand growth and managing the P&L. She develops the consumer plan and provides guidelines on brand priorities and price points to the sales force. Demand Planner Brand Manager

9. TPM Summary • Trade Promotion Management is the process of planning, budgeting, presenting and executing incentive programs that are established between a manufacturer and a retailer to enhance the sales of specific products. • Planning: In order to meet account objectives, it is imperative to have a solid promotion plan. This plan should be based on past history, customer history, brand/product history, corporate objectives, and good judgment. Currently, many companies have extremely informal or non-existent processes. • Executing: A primary stumbling block in the execution of the account plan is accurate and timely payment to retailers for promotion performance. Effective processes and tools are imperative to avoid costly deduction expenses and overspending due to poor accounting. • Analyzing:Studies show that between 50-90% of promotions are not profitable. Many companies are not performing any post promotion analysis to determine which promotions are profitable. Without this analysis, the same unprofitable promotions are run over and over again. • The Goal: Significant increases in effectiveness coupled with reductions in trade promotion spending.

10. Trade PromotionCurrent Market Place

11. Most CPG companies have to plan and manage Trade Promotions in an environment where they have little control, poor visibility, limited data, and few analytical tools, resulting in trade spending ineffectiveness and inefficiencies. The Trade Promotion Environment Powerful, demanding customers High dissatisfaction with promotion efficiency Deal-conscious consumers CONSUMERS RETAILERS Not satisfied with share of trade spend Declining consumer pass-through Pressure to deliver volume/$$$ targets Execution at variance from plan Multiple, disparate data sources Focus on temporary price reductions Simplistic, home-grown analytical tools Misalignment of performance objectives SALESFORCE INFRASTRUCTURE

12. Problems Experienced in TPM • Many companies experience that an increasing spend in trade promotion is not reaching intended targets. Manufacturers rating TPM inefficiency a very important issue 85% Retailers rating TPM inefficiency an important issue 63% % of spend being passed to consumers (per mfr) 52% % of manufacturers effective at evaluating incremental sales during TPM 63% % of manufacturers effective at evaluating incremental profit during TPM 40% % of manufacturers where ROI is the 2nd biggest TPM related problem 40% [ Sample size of CPG manufacturers and retailers = 300]

13. Problems Experienced in TPM (continued) CPG Marketing Spend vs. Pass Through [ % of Total Marketing Spend] Where The Trade Dollars End Up 24% Advertising Retailer Bottom Line 24% Consumer Promotions 15% 20% Retailer Expense Account-Specific Marketing 10% 51% 56% Consumer Pass Through Trade Promotions • “Consumer Goods” said of the challenge of TPM is Controlling the Multi-Billion Dollar Hemorrhage. It’s accountable for an annual $18 Billion loss to the consumer goods industry! • AC Nielsen once reported, [TPM] is CPG’s #1 problem…$470 Billion is spent annually on it and 3/4 of manufacturers feel they are receiving fair-poor value!

14. Retail competition is intensifying, consolidation is accelerating, leaders are emerging and the pressure on suppliers is increasing. The Changing Market The near future will see the emergence of 3-5 dominant global retailers with room for niche players. Driven by desire for Critical Mass and Market Share The primary issue, however, is that we are some way off from seeing global retailers manage the business in a truly global fashion.

15. The trade relationship is becoming information and insight hungry Although retail competition is intensifying and consolidation is accelerating, the fundamentals of the trade relationship remain the same. Dynamics of the Trade Relationship What display location produces the strongest results? What is my ROI? Was compliance achieved? How often should I promote Product X? Manufacturer Retail Buyer Should or how do I extend a promotion across regions of my chain? What is the residual impact on my other brands? Did my trade monies get passed along to the consumer? What was the impact of Product X on Category Y? Did my Product X promotion drive other market basket sales?

16. A challenge for the consumer relationship is better integration of and insight into the ever increasing amount of consumer data available Similarly, the fundamentals of the consumer relationship with both the manufacturer and the retailer have remained the same as in the past. Dynamics of the Consumer Relationship Why do I want a relationship with a retailer or manufacturer? Consumer Who are my highest value shoppers? What is my ROI? What is the best mix of consumer and trade spending? How can the manufacturers’ consumer insights be used to improve category management? Manufacturer Retail Buyer What insights can we gain from retailer customer loyalty programs? Who are my highest value consumers? How do we position our Private Label products? How do we increase shopper loyalty and shopper rings?

17. The Business Problem • Trade Promotion Management is complex and requires management of: • Analytical modeling to determine what to spend each time • Funding vehicles and tracking multiple ‘buckets’ of money for each customer • Payment options to maximize value to their customers - deals • Complex Pricing mechanisms, which will lead to Deductions if they are wrong • Reporting solutions to analyze performance results and share with customers • An analytical review process to confirm that planned results were achieved • Problems and inefficiencies invariably result from managing this complex issue • Deductions (which are customers short payments for failing to meet promotion obligations) average 7-9% of net sales for the typical CPG manufacturer • Field sales representatives typically spend over 60% of their time managing deductions and other administrative issues…which is more time than they spend selling to customers • Analytical review is difficult and requires a large volume of data for accuracy

18. Deloitte’s View

19. Of these key activities, Deloitte believes there are four umbrella challenges in Trade & Consumer Management that are of highest priority to CPG manufacturers. Trade and Consumer Management Overview • How can we focus marketing investments on our highest value consumers? • How should we leverage information from retailer loyalty programs to jointly market to the consumer? • Which type and level of account are the most profitable and how should we prioritize customer investments? • How do we incorporate lessons learned from past activities into future planning? Account Planning Trade & Consumer Solutions Direct to Consumer Marketing Account Management Collaboration & Exchanges • What types of promotional events and tactics are most effective? • How can we get visibility to the quality of in-store execution? • How should we collaborate with the retailer to improve demand forecasts? • What supply chain productivity gains can be achieved by linking supply forecasting with CRM information?

20. TPM Benefits • TPM, if implemented correctly and efficiently, has a number of benefits that can be felt across an entire organization. • Fully understanding the costs of promotions to facilitate running smarter promotions in the future (what works and what doesn’t) by focusing promotion dollars on what will increase profits, rather than just increasing gross revenues. • Ability to forecast with greater accuracy over a longer time horizon to a lower level of detail than a manual approach would yield. Forecasting affects: • Promotions • New Product Development • Seasonal (Xmas / Easter / Public Holidays) • Contribute to an accelerated, more precise budget creation process • Ability to compare promotion effectiveness during planned and unplanned scenarios (e.g. weather, holiday season, stock market fluctuations, etc.) • Assist in long range business and capital planning • Quick, accurate, and appropriate application of market cannibalization* and the associated phasing-in and phasing-out • Market cannibalization is the impact a new product has on the sales performance of a company's existing, related products. EXAMPLE: Coca ColaTM puts out a new product called Coke2TM. Market cannibalization is where customers buy Coke2 instead of regular Coke.

21. Thus far, we have observed several themes that drive both the trade management and consumer relationship related activities within the industry. Key Management Drivers Visibility • Trade performance • Customer segmentation & profitability • Consumer trends and preferences Integration • Multi-channel touchpoints • Front office to back office Collaboration • Collaborative Planning Forecasting and Replenishment • Trade planning and supply chain integration Global Account Management • Coordinated management and planning with an increasingly global trade Consumer Intimacy • Consumer engagement • Cross brand “lifestyle” solution

22. How Do We Make It Happen? • To improve current trade spending ineffectiveness and inefficiencies, CPG manufacturers need to adopt a comprehensive model that incorporates trade program simplification, customer and internal collaboration, and the use of technology as a key enabler. Single Data Repository Controls and Safeguards Modeling Capabilities TPM Customizable Reporting Flexible and Seamless Workflow

23. To address these CRM ailments, most CPG companies are aligning their business solutions around three fundamental technology strategies. Typical TPM Technical Strategies Strong Integration Breadth of Offering Depth of Functionality

24. Q&A

25. Appendix A: TPM Process Details

26. The TPM Process Trade Promotion Management (TPM) is defined as the process of planning, budgeting, presenting and executing incentive programs which occur between the manufacturer and the retailer to enhance sales of specific products. To provide a better understanding, we have outlined a typical trade promotions cycle: See Appendix for Process Step Details

27. Allocate Budget • The Trade Promotions process begins with a determination of the funds that will be devoted to various accounts. This step draws on several key inputs: • historical sales data • sales quotas by account/brand • the promotion strategy for the product/brand • A clear understanding of the types of promotional dollars and activities available, as well as how the promotional dollars should be spent from a strategic perspective, is needed to effectively allocate promotion dollars. • This step produces detailed spending budgets for each account by product or product grouping. • For example, an account manager for the XYZ Grocery might have a quota of $250,000 for liquid soaps. To reach that quota, the sales representative might be given $32,500 of promotional spending allocated for liquid soaps.

28. Creating a Promotion Plan • This step focuses on creating a formal trade promotions plan, because a formal plan helps the company look beyond the short term to consider trade promotions in a holistic, strategic light. It is the largest component of the Trade Promotions Management process and the true cornerstone to successful trade promotion activities. • The challenge is to understand the thought processes that the best reps are using to create profitable promotion plans and to translate that into reusable process steps. Creating a formal promotion plan helps manufacturers to take this longer term view - typically promotions have been seen by manufacturers as short term initiatives to meet sales projections for a given period. Instead, trade promotions need to be considered more holistically to meet long term account objectives. • Developing the trade promotion plan by account requires a strong understanding of past sales and promotions and often simply a “gut feel” for future events. Given the breadth of knowledge required to develop the plan, this process step should not be solely completed by either marketing or sales.

29. Creating a Promotion Plan - continued • Typically marketing will provide initial strategic direction, sales representatives will use that direction as well as their extensive account knowledge to develop the detailed plan by account, and promotion specialists as well as sales management will review and approve the plan. • The creation of a plan draws on a wide range of inputs, including historical data about sales, promotions and budgets; best practices in use at other companies; the company's marketing plan; and an understanding of the customer's strategies, goals, objectives, and needs in terms of products and services. The effort should involve both the marketing and sales organizations, with marketing providing the initial strategic direction, and sales professionals providing specific account knowledge. • The promotion plan documents what the manufacturer will do for the retailer in exchange for what the retailer will do for the manufacturer. When complete, the promotion plan will list the details of events that are to take place with each account, such as: • Event start and end dates, as well as order and shipment dates for the promotion • Products included in the event • Expected base and incremental sales for each product (lift) • Event tactics (end-aisle display, temporary price reduction, ad feature, etc.) • Event costs (per case shipped to retailer, per case sold by retailer, lump sums) • Expected profitability for the event

30. Sell-in Promotional Plan • In this step, the manufacturer puts its portion of the promotion plan into action, and monitors the retailer's activities, keeping track of shipments, compliance and consumption. As the promotion proceeds, the process is managed to ensure: • A completed event/proof of performance: Did the retailer perform as planned? Did advertisements actually run? Were displays set up? Etc. • Customer payment - based on the spending agreed to in the promotion plan • Closed deduction- any deductions and adjustments are reconciled against the promotion plan and proof of performance

31. Monitor Plan • When a promotion is running, sales and marketing teams pay close attention to its impact on sales and market share so that they can make timely adjustment decisions using a TPM solution. A manufacturer must also monitor promotions for success. To do this, it requires shipment data from its own ERP system or, for even more sensitive monitoring, syndicated data from the point-of-sale systems of retailers or from an agency like AC Nielsen. Where a promotional event like a “back-to-school” special is tied to in-store activity, a manufacturer’s sales force might also collect compliance data in the field. • As the promotion plan is being executed, managers track actual performance in a number of areas, including: • shipments • revenues • spending • profitability • retailer compliance with promotion parameters • This actual data is diligently compared with planned performance. The goal is to maintain a clear picture of how well the promotion is doing, and to revise the plan to meet any new customer or business demands. For example, the manufacturer may want to expedite additional shipments to support strong early promotion results, or commit additional funds if early results are weak.

32. Execute Plan • During this step, the manufacturer needs to actually execute their side of the plan based on previous commitments. This will entail: • finalizing ads where appropriate • performing retail activities as needed • giving appropriate payments and discounts • monitoring retail activities to ensure that their customers are acting as agreed.

33. Evaluate effectiveness • This step involves the review and analysis of the promotion, and produces the critical historical information that is used in the planning activities at the beginning of the TPM process - identifying what works and what doesn't and providing feedback that can drive improvements in trade promotions overall. • The analysis and evaluation should be performed by promotion or customer-marketing specialists in the sales organization, in conjunction with sales representatives, to ensure that performance is clearly and accurately understood. The analysis should include both quantitative and qualitative data about factors that affected the plan, and be incorporated into a formal scorecard that can be used to consistently compare the performance of various promotions. • Post analysis is a critical component of trade promotion planning process to ensure that the most effective promotions are utilized. • The easiest way to increase the profitability of trade promotions spending is to shift funds from what doesn’t work to what does work.

35. Don’t Delete – Editable Version. CPG Industry Distribution Network High Consumers Influencers Retail Stores Web Purchase Influencers Catalog Call Center Retailers / Wholesalers Influencers Sales Force Collaboration Complexity Web/email Promotions Call Center Distributors & Brokers Call Center Sales Force Web/email Web Trade Call Center Suppliers Low Low High Collaboration Value

36. Don’t Delete – Editable Version. Leading- Edge Best Practices 100% Required to do Business Working Capital Reduction Brand Strategy SKU Rationalization e-Procurement CPC Outsourcing eCRM Advertising Effectiveness Adoption Rate Sales Force Redesign Trade Promotions Management SAP Beverage Solutions Mergers & Acquisitions VMI (multi-partner) Channel Strategy Multi-tierCPFR Value Based Management Multi-tier Design collaboration 0% Emergent Mature Cost Improvement/ / Competitive Parity “Packaged” Applications Strategic Advantage Custom “Home-Grown” Applications

37. Don’t Delete – Editable Version. Financial To succeed financially, how should we appear to our stakeholders (Regulators, Customers, etc.)? Internal Process Customer How do existing and potential customers view us? How do we continue to provide value? To satisfy our stakeholders and customers, what business processes must we excel at? Learning & Growth To achieve our vision, how will we sustain our ability to change and improve?

38. Don’t Delete – Editable Version. • Sales Quota by Account • Overall Spending Budgets • Historical Sales Data • Historical Consumption Data • Past Promotions Results • Marketing Plan • Promotional Strategy • Account Plan • Historical Account Activity • Customer Promotion Calendar • Final Promotion Plan • Promotion Results Corporate Commitment Trade Marketing Organization Internal/External Collaboration Monitor Revise Plan Allocate Budget Accounts Create Plan Sell-in Plan Evaluate Effectiveness Execute Plan Promotion Management System ERP Integration Internet/ Wireless enabled See Appendix for Process Step Details

39. The Deloitte color palette