Optimizing Promotional Spending -- Reliance Baking Soda Case Study

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Optimizing Promotional Spending -- Reliance Baking Soda

Evaluation and Budget Recommendations for 2008 Marketing Plan

Marketing Plan Problem Statement.

There is a need to optimize the promotional spending on brand advertising, product distribution, consumer promotion initiatives, and trade promotion programs. Faced with a 10% contribution to the Division's P&L, the Household Division of Steward Corporation will evaluate the current marketing plan and make recommendations for a 2008 marketing budget for the Division. Several problems will be addressed through changes in the marketing plan, which are designed to optimize promotional spending and provide a 10% contribution to the Division's profit. A constellation of problems -- which are highly interactive -- will be considered here. The trade promotion program and the consumer promotion campaigns are not operating in concert, nor are they achieving their stated goals. The trade promotion program has been co-opted by the merchandisers, such that, discounts are used to build supply in storage and not to restock shelves. As a result, year-long sales are not stable; an inordinate number of sales to the trade occur during trade promotions. In addition, because discounts from the trade promotion process have been captured by the trade, there is no incentive to implement the consumer promotional campaigns that are designed to overlap the trade promotion periods. Any potential for increased sales due to consumer discounts or for developing a new and enthusiastic customer base are undercut by the actions of the merchandisers.

The following questions form the basis of the marketing problem statement:

What reductions in promotional spending can be executed in order to achieve any necessary reductions and to drive up sales sufficient to achieve a 10% increase in profitability.

What incentives are available to promote conformity with the intended objectives of the trade promotion program?

How can the sales force encourage merchandisers to implement the consumer promotion campaigns during their trade promotions?

What type of training might be offered to the sales force to engender excitement about the multiuse possibilities of the RBS product?

How can social media be used to invite conversations with a young market segment?

What advertising firms show promise of running a successful cross-channel campaign to reposition the RBS product as "more than baking soda?"

The discussion below addresses the effectiveness of consumer and trade promotion activities in more detail. Recommendations are made for changes to current levels of marketing expenditures for advertising, the consumer promotion program, and the trade promotion program. Long-term strategic implications for the recommended changes in the marketing plan are addressed in the final section.

Marketing Plan Review.

With the objective of optimizing the promotional spending plan for Reliance Baking Soda in 2008, primary consideration will be given to changes in marketing expenditures, particularly with regard to the effectiveness of the trade promotion and consumer promotion programs, and the advertising strategy and plan configuration.

The statements in this paragraph are general observations that refer to a three-year period from 2005 through 2007. Consideration will be given to a comparison the changes in marketing expenses over this three-year period. Figures for 2007 are estimated based on Q1 and Q2 revenue and expenditures. Gross sales and gross margin for the period are up over three years. Advertising costs are moderately down from 2006. Total marketing expenses are up over the three-year period from 2005, but are down in 2007 compared to 2006. Profit before SG&A, Overhead, and Taxes is up in 2007 from both 2005 and 2006.

Marketing Plan Problem Considerations.

Changes to the 2008 RBS marketing plan will need to contribute 10% to 2008 profitability of the Stewart Household Division's P&L. These increased earnings will be used to fund the marketing launch for two new Division products. The fundamental problem is how the 10% contribution to profit can be achieved. Alternative schemas include an increase in promotional spending, a reduction in promotional spending, or a reallocation of promotional spending without changes to the categorical advertising expenses.

Trade promotion. This section addresses considerations related to the trade promotion program. Overall, 2006 trade promotion costs were up 26% from 2005. By 2007, trade promotion costs were reduced by 9% from 2006 levels and were up from 2005 trade promotion spend by 21%. Total estimated spend for trade promotion in 2007 was expected to be $11,011 million. Over 73% of shipments to factories occur as a result of sales made during trade promotions. When trade promotion spend and consumer promotion spend were reduced in 2007, factory shipments dropped by 10% across all container sizes.

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Feedback from various stakeholders indicates a lack of agreement about what changes should be made to the trade promotion plan. If trade promotions foster an interest in stockpiling by trade rather than selling, there is less incentive for the trade to promote RBS to consumers. If there is less incentive for the trade to sell product during trade promotions than there is for them to save money on their RBS stock, then over-lapping consumer and trade promotions does not maximize advertising dollars. In fact, competitors' brands are achieving much higher levels of advertising via the trade than RBS. Trade advertising support is strongest for RBS ads that fall in the smallest category; this pattern is quite likely driven by the price of the ads, with smaller ads taking a smaller bite out of the trade promotion incentives offered by RBS. The stipulation is that consumer advertising will occur during trade promotions, but there is no incentive for this advertising to consist of the larger and more expensive ads.

Additional support for the concerns expressed by several Household Division managers that trade promotions are not having the desired effect comes from two factors. Factory shipments have been down specifically during those quarters when trade promotions have either been absent or have diminished discounts. Quarterly sales also decrease in concert with trade promotions, lending support to the idea that the trade is stockpiling RBS product rather than offering it to consumers, in conjunction with consumer coupons and in-store advertising, which is essentially a fundamental expectation of the trade promotion discount.

With a market share loss of 5% over a decade to discount sellers of private label baking soda brands, it is important for RBS to ensure that the consumer promotion program is effective and that consumer coupons effectively target the discount baking soda market. Diminished sales of RBS during trade promotions points to an ineffective strategy that could, over time, add to a loss in market share to discount sellers of private label baking soda brands. A more effective consumer promotion program could help to support an incremental price change. Assurances from the raw materials plant manager are not sufficient to safeguard against erosion of the bottom line as a result of increases in raw materials, expected or not. Manufacturers selling prices have been raised three times on the RBS product over the last half decade, with a single increase of 13% from 2006 to 2007. Where price increases have occurred simultaneously with promotions, sales have remained strong. Conceivably, a price increase could be implemented to support the increased profitability target for 2008.

A dynamic that may be contributing to overstocking by the trade is that sales personnel receive commissions based on quotas. These quotas are not tied in any way to the performance of the trade during promotions. Sales personnel are focused on achieving their quotas separate from other contextual influence. The sales force does not appear excited about the RBS product and, in fact, seem convinced that customers do not see the possibilities for multiple uses of the product. Randall Todd, senior account manager for a number of large grocery store chains, has stated that RBS requires a considerable amount of push marketing. It is possible that the sales force is focused on quarter by quarter sales to the trade and not on the retail sales that ultimately drive the merchandisers' sales. If this is the case, then the problem of stockpiled RBS product is not on the radar screen of the sales force. Conceivably, a bonus program for sales personnel that facilitates the use of consumer coupons in the store they sell to could help drive retail sales up, and at the same time encourage merchandisers to sell at the suggested retail prices rather than discounting the RBS product as a matter of course. It is much easier for the trade to blanket sell the RBS product at a discounted rate rather than to maximize the potential gain to be had through an effective discount program based on consumer coupons. There is also an intrinsic appeal for the trade to reduce their participation in promotional activities that require them to make alterations to displays and store layout to accommodate RBS product promotion.

Advertising expenses. This section addresses issues related to the advertising strategy. Total advertising expenses increased by 36% from 2005 to 2006. By 2007, total advertising costs were.....

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