Trade Promotion

Trade promotions have been used and still used by Manufacturers as a means of instigating the retailers to buy more of the promoted product to enable the manufacturer achieve its top line objectives. Even though managing trade promotions to achieve set objectives has been very difficult and prove to be a nightmare for Manufacturers (Kotler and Keller, 2006, P.589) but it is still a common marketing tool used in the consumer packaged-goods industry (Chopra and Meindl, 2013, P.300) which includes FrieslandCampina, a dairy company from where I will draw real life example.

Trade promotion involves the offering of discounted price on the product(s) under promotion during a defined period of time. From the Manufacturer's perspective, the objective of implementing a trade promotion is to increase sales, market share without significant forward purchase by retailers. It could also serve as means of competitive response to protect the firm's market share (Desai, Koenigsberg and Purohit, 2010, P.90), shift inventory to retailers and also to smooth out demand from peak to low periods. Products with high deal elasticity and high holding costs can make retailers pass more promotion discount to consumer's thus increasing sell through instead of just sell in and build up of retailer's inventory. But the question has always been that, does Manufacturers actually realize these set objectives at the end of the promotion period?

The general observation is that trade promotions do not really lead to increased customer demand but leads to increase in cycle inventory through the increase of lot sizes (Chopra and Meindl (2013, P.302) cited an example of how only 5% price discount led to 500% increase in lot size quantity in the case of DO seller of Vitaherb) and forward buying, loss of revenue by Manufacturer because the discount is applicable on total sales during the promotional period (Chopra and Meindl, 2013, P.302) coupled with the various losses attributable to keeping high inventory. All in all, overall supply chain profit is reduced due to the promotional activity. Retailers take advantage of trade promotions to buy product in advance at discounted price, a concept known as 'forward buying'. Trade promotion invariably leads to increased inventory at retailer's point and as well as manufacturer's because more production run will be set to build inventory in order to fill the increased orders from retailers, as a result this could lead to paying more costs on extra work and overtime (Kotler and Keller, 2006, P.589). In contrast, the buying in advance of future customer demand by retailers leads to increased inventory and supply chain flow time but the cost of goods to be sold in the future demand period is already reduced and as well at the ones sold during the promotional period (benefit of economies of scale is realized and savings made as a result of fixed ordering cost), total cost is reduced but this action is detrimental to the supply chain as a network in that it leads to the 'bull whip effect'; increased demand variability which gets pronounced towards the upstream i.e the supplier end leading to increased inventory in the supply chain (Daugherty, Kasulis and Richey, 2002, P.44).

At xxx, we run trade promotions during the year on our milk products but as always sell-in to retailers' increases without significant increase in sell-through to consumers noticed. Sell-in as well declines drastically after the promotional period and my observation from sales analysis then was that calculating the average monthly sales over months before and after the promotion does not show any significant increase in sales results compared to calculating