Manufacturer and Retailer Power in Retailer Response to Trade Discounts (2007)

ABSTRACT Trade promotion effectiveness/efficiency was rated as the top issue faced by grocery manufacturers in a recent A.C. Nielson survey and was reported to account for 16% of gross sales. This study addresses trade promotion efficiency by examining the percent of trade-discounted product that is bought then sold through particular retailers to consumers. We test whether manufacturer or retailer power has any influence on retailer response to trade discounts using annual data from 167 manufacturer/retailer dyads involving a major multi-brand grocery manufacturer and forty one major grocery retailers in metropolitan regions throughout the U.S. Indicators of manufacturer power (brand share, price premium) and retailer power (retailer share) are used to extend the simple model of traditional push trade promotion. Brand share and price premium is shown to have a negative effect on both how much a retailer buys on promotion and how much they sell to consumers on promotion. Retailer share had a positive impact on how much the retailer bought on discount and a negative impact on how much the retailer sold to consumers on promotion. How much the retailer bought on promotion was a significant predictor of how much they sold to consumers on promotion. Contrary to expectations, more trade discounts offered resulted in lower percent of product bought by the retailer on promotion. INTRODUCTION Trade promotions, including temporary price reductions or trade discounts, are the principal way manufacturers have of persuading retailers to reduce retail prices and further promote the manufacturers' brands in their stores. Trade promotion spending has grown to be the largest marketing expenditure for most packaged goods marketers, exceeding advertising and consumer promotions combined (Ailawadi, Farris and Shames, 1999). As trade promotion spending has increased, so has the concern for its efficiency (Ailawadi, 2001; Mohr and Low, 1993). Marketers are concerned about how much of their trade promotion is ultimately reflected in the promotional efforts of the retailer. Trade promotion efficiency/effectiveness was considered the top issue by 99% of manufacturers in the A.C. Nielsen 2002 Trade Promotion Practices Study. The study also reported that trade promotion spending accounted for 16% of gross sales. Several researchers have shown that traditional manufacturers' trade promotions appear to be a losing proposition (cf. Abraham and Lodish, 1990; Blattberg and Levin, 1987; Buzzell, Quelch and Salmon, 1990; Dreze and Bell, 2002 and 2003; Jones, 1990). Abraham and Lodish ( 1990) found only sixteen percent of manufacturers' trade promotions are profitable based on incremental sales through retailer warehouses compared to the manufacturers' cost of discounts, allowances and lost margin. Using individual manufacturer's sales and shipment data, Blattberg and Levin (1987) showed that none of the trade promotion events they examined were profitable. Jones (1990) argued that the incremental volume from the price discount generally does not compensate for the lost margin. These and other researchers have encouraged brand managers to re-examine the components of their trade promotion programs (cf. Buzzell, Quelch and Salmon, 1990; Dreze and Bell, 2002 and 2003; Farris and Quelch, 1987; Jones, 1990; Walters, 1989). However, the impact of retailer power and manufacturer power on trade promotion efficiency has not been empirically addressed in trade promotion research. Models of trade promotion efficiency have generally focused on particular promotional events (cf. Abraham and Lodish, 1987a; Blattberg and Levin, 1987; Dreze and Bell, 2002 and 2003 ; Little, 1975 ; Van Heerde, Leeflang and Wittink, 2000; Walters, 1989) and assessed trade promotion efficiency by determining incremental consumer or retailer response to specific promotional events. Though they have included the manufacturer controlled components of trade promotions, they haven't considered whether and how retailer power affects retailer response to trade promotion incentives (Abraham and Lodish, 1987b; Struse, 1987). …