HOT TOPIC REPORT November 2012

Key Factors Infl uencing Trade

Promotion Effectiveness

The Birth of an Industry Phenomenon

On August 15, 1971, a spontaneous economic decision was made that would have a 44-year impact on the consumer products and retail industries in our country. As the U.S. economy struggled with rampant currency devaluation, President Nixon declared a price freeze on all retail products to help stem infl ation. His decision, made without consulting the members of the international monetary system, created mass confusion in the U.S. and abroad, particularly within the consumer products and retail industries.

Prior to the price-freeze effective start date, CPG manufacturers immediately increased pricing to protect the inevitable escalation of cost of goods. Manufacturers then created “trade deals” to reduce costs and keep prices down for retailers. This event gave birth to a $100B industry phenomenon called Trade Promotion. For the typical CPG company today, trade promotion represents in the range of 10% to 25% of gross

sales and is a key lever for accelerating growth while potentially being a signifi cant drain on company profi tability.

Recent Trends in Trade Promotion

To better understand how trade promotion practices are evolving today, AMG Strategic Advisors reviewed trade promotion data across many categories. We solicited direct feedback from shoppers leveraging our exclusive shopper community, and gathered feedback from the Acosta sales teams executing trade promotions with retailers across the country every day on behalf of Acosta clients.

During the start of the recession in 2008, many CPG manufacturers refrained from price increases; however, as the recession began to ease in 2010, rising fuel costs and rising cost of goods forced many manufacturers to increase prices to retailers. Much to the dismay of these manufacturers, the price increases raised dollar sales but negatively impacted sales volumes. In the last year, CPG manufacturers have been forced to pull the trade promotion lever in an attempt to recover lost sales volume.

In the Food channel, total units sold on promotion peaked in 2012 with 43% of all units purchased being on some kind of promotion to shoppers. Categories like ice cream and carbonated beverages sold nearly 60% of units on promotion in the past 52 weeks, while baby food and several HBC categories like medications sold less than 20% of units on promotion.

While there are a number of metrics used to measure the impact of trade promotion, one fundamental measure is the “lift” generated during the promotional period. In 2010 the average promotional lift across all categories and promotion types was 98.5%. In the latest 52-week period ending September 1, 2012, the average lift dropped to 95.5%. This downward trend was true across all major departments and in most categories. In fact, of the 127 categories we reviewed, 70% had a lower average promotional lift this year than a year ago.

Trade Promotion –

A Shift in the Lift

H O T T O P I C R E P O R T

SUMMARY

Trade promotion is no longer generating

the same level of promotional lift.

With their

shopping behaviors

fundamentally changed,

shoppers are

making fewer impulse purchases and

often expect to fi nd their favorite items

on promotion. Retailers are evolving

to more complex Every Day Low Price

(EDLP) and Hybrid EDLP strategies, and

seeking new ways to drive shopper trips

and larger baskets. Smart manufacturers

are shifting

their trade promotion

strategies to become better aligned

with the evolving marketplace.

Shopper Behavior

Post-recession Impacts: The onset of the recession in 2008 undoubtedly infl uenced shopper behavior. Many shoppers depleted their pantries, traded down and traded out of categories, and began to buy products much closer to the usage occasion. In one of our most recent shopper surveys, 67% of shoppers indicated “buying less and sticking to a budget” best described their grocery shopping habits over the past six months. In addition, over half (54%) of the shoppers surveyed indicated they are buying fewer items on impulse – making it harder to get shoppers to purchase unplanned items.

Source: Nielsen Planners, Total US Food, Calendar Years 2009 – 2011, C52 WE 9/29/2012 Source: Nielsen Planners, Calendar Year 2011, C52 WE 9/1/2012

Source: Acosta Shopper Community, N=307, Oct 2012

CY 2009 Dry Grocery

% of Unit Sales with TPR,

Feature Ad, Display Promotions

Average Unit Lift % by Department

(Total U.S. Food Channel -

TPR, Feature Ad, Display Promotions)

Grocery Shopping Habits & Visit Types

Compared to YAG

CY 2010 HBC

42.2

CY 2011 Frozen

42.1

Current 52 Dairy Non Food GM

42.6

Less About The Same More

Quick trip to get a few essentials that I need now

14% 12% 9% 9% 7% 57% 63% 70% 46% 39% 29% 25% _21% 45% 55% Fill-in trip to replace items until my next stock-up trip Routine

stock-up trip To eat/pick upa meal on impulseBuy items 42.4 119.0 127.9 121.8 139.2 95.8 90.7 114.3 123.3 119.8 135.7 92.5 _90.1

Everyday Value: Shoppers are clearly looking for ways to save on their everyday groceries: 59% indicate that over half of their shopping basket is fi lled with items that are “on deal.” Shoppers have many options to purchase the products they are looking for. Nearly half (49%) of all shoppers and nearly two thirds (63%) of younger Gen X and Gen Y shoppers indicate they have different destination stores for the various grocery items they purchase on a regular basis. The Dollar and Club channels have benefi ted from the biggest increase in shopper trips over the past year as shoppers seek value, especially extreme value. With overall shopper trips declining, it becomes increasingly important to fi rst, ensure shoppers are including your store or brand in their consideration to get them into the store and second, to capture shoppers’ attention while they shop. Well executed trade promotion is one of the key tools that can infl uence both of these factors.

32% report

this is up

vs. YAG

3

say

more than half

of their purchases are

“on deal”

59%

CY 2011 Current 52

Trade Promotion – A Shift in the Lift

Loyalty: Shopper loyalty to a single retailer is virtually non-existent. While 71% of shoppers indicate they have a loyalty card for at least one retailer and two thirds of those shoppers indicate they will frequent those stores for most of their shopping, only 6% indicated being exclusive to a single retailer due to the loyalty card. Promotional fatigue is also setting in for many shoppers. As manufacturers increased promotional levels in recent years, shoppers have become accustomed to buying products on promotion. Shoppers know if a product is not on promotion this week, it likely will be next week: 65% of shoppers indicate they “expect certain products to be on sale and, if they are not, they will wait until they are on sale to purchase.” This is especially true in categories that

tend to have higher purchase frequency. _{Source: Acosta Shopper Community, N=307, Oct 2012}

Level of Agreement With Statement

Relating to Promotions

I expect certain products to be on sale, so if they aren’t I’ll wait to purchase it until it’s back on sale When a product is being offered on sale for a limited time period, I need to purchase that item that day so I don’t miss out

If my preferred retailer doesn’t offer competitive prices I will shop elsewhere Promotional deals in the front of the

store when I walk in save me time If a brand has a product demo or offers a sample

I am MORE likely to buy that brand that day I always see the SAME products on a promotional deal If I see a product on promotion when I walk in the store I buy it off the display and will not go to that product aisle

I will only buy items on sale/promotion, even if it’s NOT my preferred brand

65% 61% 57% 53% 42% 35% 31% 28%

Total Store Five-Year Price Trends

$3.10 $3.00 $2.90 $2.80 $2.70 $2.60 $2.50 $2.40 $2.50 $2.40 $2.30 $2.20 $2.10 $2.00 $1.90 $1.80 2008 2009 2010 2011 2012

Everyday Price Promo Price

Everyday Price Per Unit

Quad Weeks

Pr

omoted Price Per Unit

Source: Nielsen, Total U.S. Food, L5 Years Ending 9/1/2012

Impact of Price Increase

Many manufacturers have made more than one price increase over the past 24 months that have resulted in a negative impact on base volume. Historical promotional price points are no longer feasible. Since the beginning of 2008, the average retail unit price across the store has risen by 30 cents from $2.65 to $2.95. The average promoted price per unit has followed and increased from $2.11 to $2.37. For example, a popular soup that was featured last year at 4/$2.00 was featured recently at the same retailer at 4/$3.00. Similarly, a popular bath tissue was featured at $4.99 last year and $5.99 this year at the same retailer. Some manufacturers are changing the number of items included in promotions, in addition to the price point. For example last year’s 20/$10.00 yogurt feature was promoted this year as just 10/$6.00, a 20% price increase per unit to the shopper.

Trade Promotion – A Shift in the Lift

Retailer Dynamics

Retailers continue to look for ways to drive profi tability and many are taking higher margin on promotions. In a recent survey of the Acosta fi eld team highly engaged with retailers, we found that 62% of retailers are taking more margin on promotion than they did last year. Retailers are either eliminating or reducing margin compression on promotions, which directly translates to a higher price for shoppers. This practice is expected to continue to increase into next year.

Display space in stores is also getting harder to come by as retailers are combining more items on end caps during promotions. Forty-six percent of retailers are moving toward more of a “clean fl oor” policy, limiting the available display space in stores for shippers and other displays.

Our recent The Why? Behind the Buy study indicated retailer circulars’ infl uence over 80% of shoppers’ purchasing decisions. With newspaper circulation continuing to decline and younger shoppers less likely to be infl uenced by retailer circulars, retailers continue to do more digital advertising - 67% of retailers are doing more digital online advertising this year than last year. This practice is also expected to increase in the coming year.

Retailers are looking to maximize category sales by promoting competitive items in the same circular. Ad space allocation has changed and exclusive manufacturer promotions are declining. Market Track, a leading provider of business intelligence in promotional advertising, recently analyzed ads across grocery, mass, drug, and club retailers and found that both national and regional retailers have increased promotional circular distribution and the total number of ad blocks. The average page count for FSI, Inserts and ROP circulation is up 8% for national retailers and up 4% for regional retailers. Ad blocks per retailer are up 10% for national retailers and 11% for regional retailers.

The analysis identifi ed categories that had increased and decreased share-of-voice on the front page of retailer circulars. Butter/margarine, detergents, bread & baked goods, and condiments all had 20%-30% more front page presence in the fi rst eight months of 2012 versus the same time period in 2011. Frozen meals, canned vegetables,

cereal, and pet food all had less share-of-voice on the front page than a year ago. The analysis also reviewed shared ad blocks where more than one brand from the same category shared the same ad block. Two of the highest trade promotion categories (candy and laundry detergent) have vastly different percentages of manufacturer shared ad blocks, 11.5% and 2.7% respectively. Two competing manufacturers sharing an ad block usually lessens the impact of that promotion.

Market Track also discovered that several perimeter store categories that maintained historical promotional lifts had high levels of digital promotion. Comparatively, some frequently promoted categories (such as cereal and carbonated soft drinks) which are not experiencing historical lifts had lower levels of digital promotion.

We also evaluated retailer performance and classifi ed top performing retailers on three criteria: those that attracted more shoppers in their stores this year than last year; those that drove larger shopping baskets; and those that increased their market share. We found the top 10 retailers based on this criteria sold nearly double the volume on promotion as the bottom 10, had higher lifts on promotion and had signifi cantly higher levels of quality merchandising (feature and/or display with promotion).

Source: Nielsen Planners L52 WE 9/1/2012

Winning Retailers See Higher Lifts and

Also Sell a Larger Percentage of Units

on Promotion Than Losing Retailers

Winning Retailers 44.5% 125.5 Winning Retailers Winning Retailers Losing Retailers 25.0%

Unit Lift, Any Promo

% Units, Quality Merchandising (Promotions Including Feature and/or Display)

% Of Units On Promotion 117.6 14.6% Losing Retailers Losing Retailers Winning retailers promote nearly twice the unit volume as losing retailers.

Winning retailers also get higher lifts than losing retailers, which may be attributed to their quality merchandising tactics.

Trade Promotion – A Shift in the Lift

H O T T O P I C R E P O R T

Private Label Brand Impact

Private label brands have shown a CAGR of +3.6% in dollar sales over the past four years and gained two unit share points and three dollar share points of total store sales over the past fi ve years. While the recession infl uenced some of this growth, retailers are also offering higher quality private label brands and often in multiple tiers that positions them as much more than a lower-cost alternative. In many cases these products are national brand equivalent or, in some cases, exceed the national brands in both quality and price at the shelf. Shoppers now have more options in many categories. This has also impacted national brands’ ability to drive the same level of promotional increases as they did in the past. Private label brand units sold on promotion have also increased. In the Food channel, over 36.7% of all private label brand units were sold on promotion versus 35.8% a year ago.

Promotional Timing

While there are exceptions for some categories, overall we found that the fi rst two weeks of the month show higher promotional lifts than the last weeks. The second week of the month for grocery retailers is currently showing the highest average promotional lift over any other week of the month. The last week of the month shows the lowest promotional lift. When brands do not follow a major competitors’ promoted week, the promotional lift was an average 60% higher.

Major Food Retailers

(Average Category Lift During Non-Holiday Weeks)

Week 1 Week 2 Week 3 Week 4 Week 5

Source: Nielsen Planners, L52 WE 9/29/2012

The EDLP Factor

The days of traditional High/Low retailers may soon be gone. It is expected that nearly 75% of retailers will be either EDLP or some form of hybrid EDLP/High-Low format within three years. As retailers shift strategies to a more EDLP focus, trade spend is often allocated to buy price down every day or on long-term temporary price reduction (TPR).

We evaluated a number of eight-week TPR promotions and found the fi rst week for a TPR returns the highest lift on average. Each additional week of promotion shows a lower lift than the previous week and the eighth week shows a 31% lower lift than the fi rst week.

EDLP and long-term price reduction promotions are effective with many retailers, specifi cally in categories where it is necessary to manage to key price points or where specifi c price gaps must be maintained relative to other competitive brands. For example, one CPG manufacturer

recently experienced signifi cant and unexpected volume and share losses due to shoppers switching to a new market entry and/or switching to private label. Unable to effectively combat this shopper switching behavior, the company implemented a strategy to fi ght back on PRICE. It offered to selected retailers an EDLP allowance that was then used to lower the everyday retail price. Closing the price gap with private label worked, and the company subsequently experienced an increase of 30% in base volume for the brand.

On average, brands sell 60% of sales on a non-promoted basis. Managing everyday prices must be an integral part of any trade promotion strategy. As retailers begin to do more competitive price matching like the Walmart “Ad match guarantee” or the Safeway “Just for U” program, everyday retail pricing can be equally or more important than the trade promotion strategy.

Trade Promotion – A Shift in the Lift

Shopper Preferred Promotions

While trade promotion needs to be evaluated on a category and retailer specifi c basis, shoppers prefer “buy one get one” promotions best. Some of the promotions that have moved the needle across many categories include:

Shoppers also indicate that fi nding promotions in the aisle are preferred over the end aisle or something displayed in the front of the store. IRCs and promotions close to the point of purchase can also be effective.

Prefer to See Promotion/Sale

(Percent of Shoppers)

Buy one get one free (BOGO) Get one item 50% off An extra incentive based on the

retailer’s reward program Special price for buying multiple

items (such as 4 for $10) Bonus packs Buy multiple brands offered by the SAME manufacturer, get reward points / cash back

But this, get that, in a different category But this, get that, in the same category Meal solutions (easy recipe shopping) Other

In the aisle

In the front of the store At the end of the aisle

in a special display No preference On the product Other Generational Factor

Millenials are most drawn to an “extra incentive from a

retailer reward program” (26%)

“I believe that in-store sampling stations where you can try or taste products is very effective. In addition, I think that coupons

attached to products that can be used at the cash register immediately have a high impact

on purchasing behavior.” • Buy and save. Example, buy 10 items and save

$5.00 or buy 5 and save $5.00

• 72-hour sales with hotter promoted price points

• In-store coupons or IRCs that promote meal solutions

• Buy one get one

• Long term EDLP with display support

• Four-week “manager special”

• Inner city promotions

Source: Acosta Shopper Community, N =307, Oct 2012 Source: Acosta Shopper Community, N=307, Oct 2012

Coupons

Not surprisingly, shoppers perceive coupons to be most effective when they incent the shopper to repeat past purchases rather than to encourage buying a new brand. Two thirds of shoppers indicate that they are looking for coupons for products they routinely purchase.

Impact Coupons Have on Grocery Shopping

purchase I would have made anyway. The coupon will cause me to purchase a different brand than I would have originally purchased. The coupon will cause me to make

a purchase that I would not have made from that category. The coupon will cause me to purchase

a greater quantity of the product.

12% 16%

64%

8%

Source: Acosta Shopper Community, Those Who Clip Coupons=292, Oct 2012

Most Appealing Promotion

(Percent of Shoppers)

Trade Promotion – A Shift in the Lift

Gas Incentives

Fuel prices have historically impacted shopper behavior. Over the past four years, we have seen a strong, inverse effect on branded product sales when fuel prices increase. Retailer fuel incentive programs have become very popular with shoppers. Many retailers are using “Fuel Perk” type programs to reduce shoppers’ fuel prices based on in-store purchases. Sixty-four percent of shoppers indicate they are more likely to shop more often at stores that offer fuel discounts. Retailers are responding to this. In the fi rst quarter of 2011, 25% of retailers used some kind of fuel incentive program, and most recently that has risen to 39% of retailers after the third quarter of 2012.

Behavioral Economics

Progressive manufacturers are studying behavioral economics and testing new ways to present promotions to shoppers. Behavioral economics introduces psychological research on the economic decision process for shoppers. A number of manufacturers are leveraging and testing

behavioral economics principles such as the ‘compromise effect,’ ‘mental accounting’ and others. Behavioral economics can lead to entirely new promotional strategies, as well as fresh wording and new communication strategies for traditional promotions.

Manufacturer Behaviors

CPG manufacturers continue to seek strategies to maximize promotional spending. Some have been able to reduce trade spending and reallocate funds to digital and shopper marketing. Shopper marketing is now estimated to be 16% of total marketing spend. Twenty-fi ve percent of manufacturers are shifting trade funds toward digital promotions.

Promotional lift is not the only metric that dictates a successful trade promotion. Manufacturers are beginning to implement Trade Promotion Optimization solutions that can infl uence shifting to promotions that generate better ROI, but may not drive the same lift as less profi table

promotions. Many promotions generate lower lift levels but return a better ROI for manufacturers or meet other promotional objectives like gaining trial from new users or driving repeat purchases from loyal shoppers.

Retailer segmentation has become a popular strategy for manufacturers. To maximize return, two thirds of CPG manufacturers are segmenting retailers and executing trade promotion strategies based on the programs retailers offer. Forty-two percent of manufacturers plan to spend more on long-term TPRs to buy price down.

Trade Promotion – A Shift in the Lift

Recommendations for Success

Trade promotion strategy will continue to evolve as companies increasingly realize the benefi ts of: shopper marketing programs, digital and social media investments across the path to purchase, and new behavioral economic strategies. Traditional feature ads, displays in stores and price reductions are not going away. A new generation of tools is emerging: market mix optimization tools with a shopper centric approach and new Trade Promotion Optimization (TPO) tools that better measure the impact of in-store marketing activities. While technology can be leveraged to optimize spending, equally important is a solid trade promotion strategy and a disciplined trade promotion management process. A successful trade promotion strategy begins with implementing fi ve basic principles: Targeting, Everyday Price, Timing, Innovation, and Collaboration.

1) Target shoppers and leverage the right promotion and right communication vehicles for each segment.

When targeting shopper segments, do not inadvertently abandon any of your important shoppers. Millennial shoppers are moving into heavier spending years and have behaviors very different than Generation X or the Baby Boomers. They are more willing to take the time to understand value is not just defi ned as lowest price. They appreciate packaging design, innovative fl avors, and are more experimental. At the same time, we cannot ignore the Baby Boomer generation. They have unique interests and needs as they age, and they still represent signifi cant spending power.

Manufacturers (and retailers) should invest to understand the unique needs and promotional responsiveness of each of the key demographic and sociographic shopper segments. Each segment is distinctly different in their attitudes and shopping behaviors. For example:

• 46% of shopper households earn under $45,000 per year. This segment lives week-to-week and is not technology savvy. A retailer’s promotional activity is one of the most important factors when deciding where to shop.

• 14% of shopper households earn over $100,000 per year. This segment has not been as impacted by the recession. They shop in many different formats, they are very technology savvy (most have smartphones and use them across the path to purchase).

• Millennials will drive up demand for budget-friendly organic, natural and sustainable goods. They reward innovation and design, and are willing to try new products, fl avors, etc.

• U.S. Hispanic shoppers tend to shop as a family, use mobile technology more than the general population and many prefer to be communicated with in Spanish. 2) Make sure everyday price is right.

While the focus is often on promotional activity, a comprehensive understanding of everyday price points and price gaps is an important step in building a successful trade promotion strategy. Getting the everyday price right can drive increased baseline sales as well as make promotional initiatives more effective.

3) Timing is everything.

Another key success factor is understanding competitive brand promotional timing since, in most cases, brands that promote prior to competition see higher promotional lift. Lead time: Promotional planning continues to be critical as 77% of retailers expect at least three-months lead time for promotion offers and one-third expect fi ve- to six-months lead time.

4) Don’t be afraid to try something new.

Instead of repeating last year’s promotional calendar, allocate some resources to test and learn from innovative promotional initiatives, such as more targeted coupons, mission inspired promotions, IRC’s, shopper marketing overlays, cross merchandising initiatives, and “shopper solution” promotions.

5) Invest in collaboration.

Partnering with the retailer is a critical step in the trade promotion strategy process. Winning manufacturers will create strategies that align with their retailer partners’ most important goals of driving trips, increasing share of wallet, reducing leakage, and driving bigger baskets. Manufacturers should consider sponsoring strategic joint business planning sessions with retailers to align promotional goals and strategies and also to uncover common growth platforms and opportunities for joint innovation.

About AMG Strategic Advisors

AMG Strategic Advisors is the growth strategy consulting unit of Acosta, assisting clients in accelerating profi table growth by leveraging insight driven strategies and advanced analytics. AMG Strategic Advisors leverages its seasoned consultants from leading strategy fi rms with proven industry expertise to provide best-in-class strategy consulting, brand positioning, shopper and marketing insights, and data analysis. For more information, visit www.acosta.com. For more information about this Hot Topic report or other AMG Strategic Advisors research, contact Colin Stewart at [email protected].

Trade Promotion – A Shift in the Lift