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Friday, September 23, 2011

Promotion Smothers Advertising

Over the years, there has been a quiet revolution going on in communications. It probably started in the 1980’s, but in recent years, with a weak U.S. economy, it has really increased dramatically. It is simply the growth of consumer sales promotion. From a total of about $56 billion in 1991 it could be as high as approximately $400 billion for calendar 2011. On top of that eye-popping amount, US marketers will also spend an additional $175 billion on promotional activity targeted at retailers and wholesalers. When you think of promotions, you generally think of activity by packaged goods companies. Look at it a bit closer and you see health care, consumer electronics, computer companies and even some service firms leaning on it.

The high water mark for conventional media advertising occurred somewhere in the 1980’s. After a lot of number crunching, that is as precise as I can get to it. Since then, many if not most consumer products companies have changed the way in which they market their products. Amazingly, for those of who have lived and breathed conventional advertising, approximately 50% of packaged-goods support in 2011 among my admittedly small sample of publicly traded companies is for trade promotion, a little more than a quarter for consumer promotion, and slightly under a quarter to what we would define as media advertising. Additionally, a fair amount of the media advertising is focused on promotional messages regarding rebate offers, contests, sweepstakes or games.

Why is it happening? Why is it a surprise to many of us in the advertising world? Will the pendulum ever swing back?

What are sales promotion activities? The list of types of consumer promotions would include: coupons, premiums, refunds, bonus packs, price-offs, loyalty programs, sampling, and event marketing. Trade-oriented promotions are co-op advertising, trade shows, point-of-purchase displays, trade allowances and dealer incentives and contests.

For years, those of us in the ad game believed that brands were built and maintained with media advertising. Promotion was an afterthought. Junior art people would grind out coupons. Sometimes the client had an internal group that handled promotions. Firms that only did promotions made inroads but many people were asleep at the switch and did not realize that ad budgets were not increasing due to the growth of promotions as a percentage of the total marketing budget.

Structurally, several things have occurred in recent years that are making promotional activity more prominent:

1) Retailers have muscle today—40 years ago, the manufacturers such as the major soaps, P&G, Colgate-Palmolive, and Unilever, had the influence. The retailers were almost treated as distributors. The brands received heavy media support and the occasional promotion. On their own, the retailers were not into sales analysis. The scanner at checkout changed all that. At their fingertips, retailers now knew what was selling and how quickly each product turned over. Wal-Mart and Target got bigger and bigger and power shifted to the giant retailers. If a manufacturer would not provide trade support for their brand, they might get their shelf facings reduced or, in a few cases, dropped. Today Wal-Mart alone is 25% of the sales of some brands. A manufacturer has to meet their needs or they jeopardize their brand’s franchise.
2) Brand Loyalty is sagging—with a weak economy, people are looking at price and value more than ever. Some of us have certain brands that we will buy regardless of price or competitive promotion. But, with money tight, many now will buy brands that are close to parity at a nice discount.
3) Time Crunch—virtually all Americans say that they live under a time crunch. Working Moms and especially single Moms top the list. Some 70% of purchase decisions are said to occur in the store. Buying what is on special cuts decision time and usually saves money.
4) Promotional activity is accountable—for years, we have told people that advertising does not guarantee success. We know that it contributes to sales growth but it takes time and there are other factors (state of the economy, competitive action, etc.) that are part of the mix. Results from sales promotion activity are almost always easier to measure than those from conventional media advertising. Ad campaigns may hit their stride after a few months; a few well-placed coupons give you instantaneous sales boosts. Retailers monitor their scanner data and put pressure on underperforming brands to run more promotions. Results are often tracked daily.

Should the advertising industry be concerned about this move toward promotion? The loss of potential billing is and has been significant.

There are broader issues out there, which some agencies do not address adequately. If you wish to charge a premium price for your product you need to differentiate from the competition. Advertising helps greatly in maintaining a strong franchise by honing your image, maintaining brand loyalty, and talking up your brand’s benefits.

Yet, the world of 2011 is a short-term world. The average marketing director at a US company lasts under two years. I do not have a precise figure for brand managers but it is not much longer for sure. So, promotion is tempting for a short-term fix for the hired guns in the world of marketing. Also, and importantly, the compensation of many brand managers is based on quarterly sales data. So, dropping some coupons or doing price-offs or bonus packs can be irresistible for many. How many 28 year olds care about the long-term value of their brand’s equity when they can get their first nice bonus with a few successful promotions? Top management needs to work on this as promotions almost become like a drug to some staffers.

Increasingly, there is an analysis paralysis setting in. If you can look at daily promotional data, you lose sight of the long-term value that advertising can provide. And, Wall Street does not help as when quarterly sales are down a few pennies due to increased advertising investment, the stock gets hammered and you have disgruntled shareholders and maybe an unhappy board of directors who should know better.

Can advertising fight back and get a larger share of advertising dollars? With some firms it certainly will and, when the economy gets strong again (someday☺) it should claw its way back a bit.

But remember, technology might not help. Social media options like Groupon and Living Social are making coupon users out of young adults. In the mobile arena, the Cellfire’s and other fellow travelers are delivering promotions (largely coupons) to the 20 somethings and often highly successfully.

The power of brands has to be diminished under this scenario, as there appears to be very little residual advertising value to promotional activity. And, many of your loyal buyers love them as they get a discount when they cheerfully would have paid full price. This is impossible to measure accurately but hurts your bottom line.

A friend whom I interviewed for this piece is a very talented creative director. He e-mailed me back after seeing an outline of this post “do you mean to say that my team will have to do more crappy coupons and POP displays than we do now.” Well, yes in most cases. These days you have to find revenue where you can and if you stick only to conventional advertising, there will be no shortage of people who will siphon off the promotional projects and hurt your income.

For the moment promotional activity will keep growing in the U.S. Established brands might want to shift their advertising emphasis overseas where brands, especially American ones, have cache and growing power.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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