Manufacturer and retailer power in retailer response to trade discounts.

Haines, Douglas C.

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 tradediscounted 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).

This paper adds to current research by examining the impact of manufacturer and retailer power on retailer response to trade discounts using data collected from manufacturers and retailers over a full year marketing cycle. We examine data collected from 167 manufacturer/retailer dyads representing eight different brands and forty one major grocery retailers in major metropolitan areas and regions throughout the United States. We present a longer-term model of trade promotion efficiency that incorporates retailer and manufacturer power. Specifically, the model examines how much of a manufacturer's discounted product is sold by a particular retailer to consumers during a full year marketing cycle rather than during individual promotion events. With scanner data on specific retailer performance and invoice information on particular manufacturers' brands it is possible to examine long-term trade promotion efficiency at the manufacturer and retailer level. We examine whether retailer response to trade discounts is significantly influenced by retailer and manufacturer power. Implications for marketing managers and directions for future research will consider retailer and manufacturer power in managing trade promotions.

TRADE PROMOTION AND POWER

Figure 1 represents a fundamental model of sales promotion. Manufacturers offer trade discounts to encourage retailers to further merchandize their brands. Retailers decide how much of the discounted product to buy. Retailers may then use the discount to fund sales promotion activity such as displays, advertising and price reductions for the brand in their stores. They may also elect to take some of the discount as an addition to their margin by selling some of the discounted product at the regular price without any sales promotion. This paper examines whether manufacturer and retailer power influences the retailer's decision to first buy at the offered discount and then to invest to support their own sales promotion efforts. We first describe the components of the conceptual model.

[FIGURE 1 OMITTED]

Manufacturer Trade Discounts Offered

To reach the retailer's customer, the consumer, the manufacturer offers trade promotions (Figure 1) as inducements to influence the retailer's efforts to merchandise the brand to the consumer (Blattberg and Neslin, 1990). The most common trade promotion offered is a temporary reduction in the manufacturer's price, a trade discount. Manufacturers offer trade discounts to encourage retailers to buy in quantity or to gain and maintain distribution through the retailers. Within legal and regulatory limits (such as the requirement to offer the same trade promotion to all members of the same class of trade), manufacturers determine how often they offer a temporary trade discount, how long it is available and how deep the discount is.

Retailer Purchases on Promotion

Retailers can reduce the average cost of products they purchase by purchasing more products at a discount from manufacturers (Abraham and Lodish, 1987a, 1990; Blattberg and Levin, 1987; Buzzel, Quelch and Salmon, 1990; Jones, 1990). Based on the offered trade promotion, retailers decide whether to accept the offered discount and how much discounted product to purchase from the manufacturer. In their classic analysis of retailer response to trade deals, Curhan and Kopp (1987) found that item profitability, the incentive amount, promotion elasticity, item importance and manufacturer reputation were important influences on how the retailer regarded the attractiveness of the trade promotion offered. Peter and Donnelly (2001) cautioned, "The importance attached to individual types of promotions may vary by the size of distributor/retailer ... Marketers must keep in mind that not all distributors or retailers will have the same reactions to promotions offered (p.132)."

Retailer Sales on Promotion

Retailers promote to maximize profit on promoted brands, build store traffic and create a favorable image (Curhan and Kopp, 1986). They seek to maximize the revenue generated through their limited space and minimize the cost of product they purchase to resell through that space. With periodic price reductions retailers can maintain higher prices everyday on more of their items while reaffirming consumers' self-perception of being smart shoppers (Chandon, Wansink and Laurent, 2000). Experimental evidence shows that a strategy of high everyday prices with periodic price reductions is more profitable than an everyday low price strategy (Hoch, Dreze and Purk, 1994). Retailers typically offer a retail price reduction only if the discounts from the manufacturer are sufficient to cover their costs so that the retailer maintains or exceeds their usual retail margins. To qualify for the manufacturer's offered discount, retailers may only offer minimum retail merchandising support, such as a price reduction and a one line advertisement, and sometimes offer no merchandising support at all (Chevalier and Curhan, 1976, Waters 1989).

Manufacturer Power

El-Ansary and Stern (1972) described power as the ability of one party in the distribution channel to control the decision possibilities of another party in that channel. They were also careful to note Emerson's (1962) view that power is a function of dependence. Emerson noted that the dependence of one party on another is directly related to their motivational investment in goals mediated by the other party and inversely related to the availability of those goals outside the relationship. Power-dependence and influence strategies have proven to be useful theoretical perspectives in understanding marketing channel behaviors (cf. Ailawadi, 2001; Buchanan, 1992; Dwyer and Oh, 1988; Hunt and Nevin, 1974). In the following paragraphs we will apply these views of power to the manufacturer/retailer relationship and suggest particular evidences of power and dependence in that relationship.

The retailer depends on the manufacturer for products and a reliable stream of purchasers for those products. The retailer must have a sufficient collection of products available to attract traffic to their store, so there are thousands of items in a typical grocery store. Therefore, the retailer likely has more than one manufacturer offering similar goods in a particular category. Based on Emerson's (1962) view of power as a function of dependence, the manufacturer's power is greater to the extent that their products are uniquely differentiated and important to consumers so that a retailer will want to be able to offer them for sale and that similar products aren't available to a retailer from other manufacturers. Brand share and price premium offer two interesting possible evidences of manufacturer power.

Brand share is the volume a brand sells compared to the volume sold in a category of similar items by the retailer. While a variety of factors may ultimately determine brand share, brand share is a relative measure of how important the product is to the consumers and, hence, to the retailer. Further, it may be said that higher brand share would indicate that the retailer would be harder pressed to find a product with higher sales from another manufacturer. Hence, brand share is a simple measure of Emerson's (1962) dimensions of power as it reflects the retailer's motivational investment in the sales possibilities of one manufacturer and the extent to which those same sales possibilities are available through other manufacturers in the category.

An industry characterized by monopolistic competition has more than one firm and they are able to differentiate their products. Each manufacturer may be regarded as a monopolist within their very narrowly differentiated segment. A monopolist is said to have market power. A common measure of market power is the Lerner Index (Lerner 1934) which is the difference between price and marginal cost divided by the price- (price-marginal cost)/price. For a pure, profit maximizing monopoly, the inverse of the Lerner Index is price elasticity. Using the manufacturer's variable cost instead of marginal cost and using the ultimate retail price, we have a measure of the retail price premium above the manufacturer's variable cost and a measure of the market power of the brand from the consumer's perspective. The Lerner Index (or markup), a measure of market power, is also a measure of how well the brand is differentiated. A retailer will have a higher motivational investment in a strongly differentiated brand and will be less able to attain similar marketing goals with other brands in the same category.

Retailer Power

The manufacturer depends on the retailer to provide a critical part of the marketing and selling function for the brand (Blattberg and Neslin 1990, Kotler 1994). The retailer makes the product conveniently available in smaller lots and provides periodic price reductions, local advertising and/or point of purchase merchandising to expedite the sale to consumers. The retailer also collects the products from many manufacturers in many categories to attract many consumers to their stores. The retailer controls what products go on their shelves to be presented for sales to consumers. Though it is feasible, it is often not economical for manufacturers to take on these same functions. Therefore, the retailer controls the manufacturer's access to consumers who shop at their stores. Retailer share is evidence of the relative amount of access that a retailer controls in their market area.

Retailer share is the volume a retailer sells compared to the volume sold in their market area and in their category of retail stores. Retailer share is a fairly simple and straight-forward relative measure of how many consumer purchase decisions they provide access to. The manufacture has a motivational investment in that degree of access and a higher retailer market share would indicate that other retailers would offer relatively less access in that same market and segment. As retailer share measures access to consumers it is reflective of the dependence of manufacturers on access through that retailer and, hence, the power of that retailer.

HYPOTHESES

Figure 2 is a graphic representation of the structural equation model that reflects the conceptual model presented earlier in Figure 1. The center path follows the trade discounts offered to the retailer through the retailer's decision of how much to buy on promotion and on to how much the retailer finally sells on promotion in their stores. Manufacturer power is evidenced by brand share and price premium while retailer power is measured by retailer share. The paths are labeled with the corresponding hypothesis number and hypothesized direction. Discussion of the hypotheses follows.

[FIGURE 2 OMITTED]

The manufacturer offers trade discounts to encourage retailers to buy more or to add or maintain distribution of their brands. The manufacturer determines how often and how much to offer in trade discounts (Figure 2). The retailer decides whether to accept the offered discounts, how much to invest in additional merchandising support (including price reductions) and how much of the discounted product to order. If trade discounts are lower and are offered less often there is less motivation for the retailer to buy discounted product. Likewise, if the discounts are deeper and offered more often the retailer has the opportunity to purchase more of the product at a lower price. It would seem that the manufacturer would offer a level of trade discounts that is commensurate with the desired level of retailer response. The amount that a retailer buys on deal would then be directly related to the trade discounts the manufacturer offers leading to our first hypothesis:

H1: Manufacturer Trade Discounts Offered are positively related to Percent Bought by Retailer on Promotion.

More powerful brands may offer promotions less often and with smaller discounts, relying less on retailer sales promotion in their marketing mix (Rao 1991). A brand with higher market share indicates that the retailer has more motivational investment in the sales possibilities of the brand, giving the brand more power compared to lower share brands. Furthermore, the retailer may sell proportionately less on promotion of a more powerful brand than a less powerful brand given similar manufacturer trade promotion offerings. For a given level of manufacturer trade discounts offered, the percent of brand volume that a retailer buys on promotion would be lower for higher share brands:

H2: Higher Brand Share is associated with lower Percent Bought by Retailer on Promotion.

Brands that have more market power as measured by the Lerner Index are less price sensitive and may not require as much retail price promotion (Rao 1991). The percent of brand volume that a retailer buys on promotion would be lower for these more powerful brands. Substituting variable cost for marginal cost in the Lerner index shows how much of a price premium a brand can command above its variable cost. For a given level of manufacturer trade discounts offered, the percent of brand volume that a retailer buys on promotion would be lower for brands with higher price premium:

H3: Higher Price Premium is associated with lower Percent Bought by Retailer on Promotion.

In some markets a retailer may control one third to one half of the grocery volume in the market area. Brands depend on the retailer for access to those consumers and the millions of purchase decisions the retailer can influence. The opportunity for retailers to purchase brands at a discount from manufacturers is an opportunity for retailers to extract concessions from the manufacturer for access to retail consumers (Kim and Staelin, 1999). Larger, more powerful retailers may buy disproportionately more discounted volume over time to further reduce their cost of goods sold. This suggests our fourth hypothesis:

H4: Higher Retailer Share is associated with higher Percent Bought by Retailer on Promotion.

If it is true that manufacturers offer trade discounts in proportion to the degree they want retailers to offer price reductions at retail, it should be true that the percent of brand volume sold by a retailer on promotion is directly related to the percent of brand volume that the retailer bought from the manufacturer on discount. Indeed, if a retailer expects to sell more of a brand on promotion, they should want to purchase more of the brand at the discounted price to support their margins. Therefore, we hypothesize:

H5: The Percent Bought by Retailer on Promotion is positively related to the Percent Sold by Retailer on Promotion.

Category leading, higher share brands are less promotion dependent (Ailawadi 2001). Consumers, the retailer's customers, are willing to buy more of such brands regardless of whether the retailer offers them on promotion:

H6: Higher Brand Share is associated with lower Percent Sold by Retailer on Promotion.

A brand with higher market power as measured by the Lerner Index (Price Premium) indicates that consumers do not perceive that there are close substitutes for the brand and that the brand may be characterized as being well differentiated. Consumers are willing to buy proportionately more of brands with higher market power even when they are not offered by the retailer on promotion:

H7: Higher Price Premium is associated with lower Percent Sold by Retailer on Promotion.

Experimental evidence suggests that retailers are more profitable with a strategy of high everyday prices with periodic price reductions (Hoch, Dreze and Purk, 1994) while appealing to their customers' perception of being smart shoppers (Chandon, Wansink and Laurent, 2000). Larger retailers could support promotions on more brands during a planning cycle so that they are less dependent on the promotions of any particular brand. Larger, more powerful retailers in a market may, then, sell less of a particular brand on deal than smaller retailers:

H8: Higher Retailer Share is associated with lower Percent Sold by Retailer on Deal.

RESEARCH METHOD

Sample

From the marketing information and financial accounting information systems of a multibrand U.S. manufacturer and marketer of non-durable packaged goods (more specifically, processed food products) we collected data from 167 brand and retailer dyads representing eight different brands and forty-one major grocery retailers in major metropolitan areas/regions throughout the United States (e.g. New York Metro, New England, Southern California, Chicago, Dallas/Fort Worth, etc.). Included were retailers described by the company as direct accounts with scanner data available for a given geographic area. These grocery retailers were large enough, then, to be serviced directly by the manufacturer, not through a wholesaler. Smaller independent stores or chains are serviced by wholesalers and were, therefore, not included in this research. The sample did not include convenience stores, discount stores, drug stores, etc.

Scanner data provided measures of the retail unit and dollar volume, and whether consumer purchases were made when a promotion was offered by a retailer. The manufacturer's financial accounting information system provided measures of promotion and non-promotion unit and dollar sales volume as well as cost of goods sold. All of the information was collected and aggregated for each brand and retailer in each represented major metropolitan area/region over the manufacturer's annual planning cycle.

Variables

Manufacturer Trade Discounts Offered is a product of the frequency that promotions are offered and the depth of the price discounts offered. Frequency is measured by the number of weeks during the year that the manufacturer's brand was offered on promotion to the retailer. The depth of the discount is calculated using the on promotion unit and dollar volume and the nonpromotion or regular price unit and dollar volume. That yields an average deal and non-deal price for the year. Manufacturer Trade Discounts Offered, then, is the product of the percent annual average price discount times the number of weeks the brand is offered on deal. This product provides a single aggregate measure of the trade promotion opportunities that the manufacturer presents to the retailer.

Brand Share is the brand's volume in a particular retailer in a given market area compared to the volume of the brand's top three competitors in the same retailer in the same market area.

Price Premium is an approximation of the Lerner Index and is measured by the annual average retail price minus the cost of goods sold all divided by the cost of goods sold. The cost of goods sold is used as an approximation of the marginal costs.

Retailer Share is measured on a local market basis. Each retailer's total (all grocery) dollar volume is compared with the total (all grocery) dollar volume in the particular market area.

The measures of what is bought and sold on promotion by the retailer are reported as a percentage of all of a brand's volume bought and sold by the retailer through the annual planning cycle. Percent Bought by Retailer on Promotion was obtained from company invoice history for the retailer for the year in the particular local market area. The invoice records indicated whether a product purchased by the retailer included a manufacturer's trade discount. The discount usually carried some minimum retailer performance requirement. Note that manufacturer promotions such as additional merchandizing allowances were not reflected on the invoice because they were administered separately by the manufacturer. However, these allowances were generally offered in conjunction with a manufacturer's trade discount that was reflected on the invoice. Retailer purchases on promotion were then divided by the total purchases of the particular brand in the particular local market area during the annual marketing plan cycle. Percent Sold by Retailer on Promotion came from scanner data that the manufacturer subscribed to from one of the major national suppliers. It measured what the retailer sold to consumers in a particular local market area and how much of it was associated with a retail promotion such as price reduction, retailer advertising or in-store display. Expressing retailer purchases and sales on promotion as a percentage of their annual purchases and sales allows analysis across retailers and markets of different size.

Data Analysis

The model presented in Figure 2 is represented by a system of equations shown in Table 1. Partial Least Squares (PLS) analysis was used to analyze the data collected. PLS is a structural equation modeling (SEM) technique that allows simultaneous evaluation of all paths. The minimum sample size for PLS analysis, based on Chin's criterion (1998), is ten times the number of independent variables in largest multiple regression. Both dependent variables, Percent Bought by retailer on Promotion and Percent Sold by Retailer on Promotion, have four independent variables. The minimum sample size required is 40 (4*10). With 167 observations, our PLS analysis has sufficient power. Each of the dependent variables can be solved for sequentially in terms of the observed independent variables so this system of equations is recursive. Note that Percent Bought by Retailer on Promotion is both a dependent variable in the first equation and an observed independent variable in the second equation. A recursive system such as this can also be estimated one equation at a time using Ordinary Least Squares (Pindyck and Rubinfeld 1981) with similar results.

RESULTS

Descriptive statistics for each of the variables are shown in Table 2 below. The variables are approximately normally distributed. These observed variables cannot be less than zero and the percentage variables have an upper limit of 100% so the extreme tails of some of the distributions are specifically limited.

Figure 3 below summarizes the results of the Partial Least Squares (PLS) analysis. The path coefficients are shown for each relationship. Bootstrap resampling was used to test the significance of paths (500 sub samples). The number below each of the two dependent variable names is the percent of variance explained by the paths leading into it.

[FIGURE 3 OMITTED]

Hypothesis One: Trade discounts offered had a significant negative effect on percent bought by retailer on promotion (b = -0.192, t = 2.3516, p < .05). This is opposite to the positive relationship hypothesized. Retailers bought proportionately less on promotion from brands that offered deeper discounts more often.

Hypothesis Two: Brand share had a significant negative effect on percent bought by retailer on promotion (b = -0.348, t = 3.5493, p > .05).

Hypothesis Three: Brand price premium had a significant negative effect on percent bought by retailer on promotion (b = -0.315, t = 3.2997, p < .05).

Hypothesis Four: Retailer share had a significant positive impact on percent bought by retailer on promotion (b = +0.143, t = 2.2155, p< .05).

Hypothesis Five: Percent bought by retailer on promotion had a significant positive impact on the percent sold by the retailer on promotion (b = +0.145, t = 1.8870, p< .10)

Hypothesis Six: Brand share had a significant negative impact on the percent sold by retailer on promotion (b = -0.186, t = 2.3545, p < .05).

Hypothesis Seven: Brand price premium had a significant negative effect on percent sold by retailer on promotion (b = -0.394, t = 5.4537, p < .05).

Hypothesis Eight: Retailer share had a significant negative effect on percent sold by retailer on promotion (b = -0.218, t = 2.5747, p < .05).

DISCUSSION

We have shown that retailer and manufacturer power does have an impact on manufacturers' trade promotion efficiency. A manufacturer's trade promotion spending could be said to be more efficient to the extent that more of the product they sell to the retailer on promotion ends up being sold through by the retailer to their consumers. Simple indicators of manufacturer and retailer power were significant in explaining either how much the retailer bought on promotion or how much they in turn sold on promotion in their stores to their customers, the consumer.

While the focus of this study is on the impact of manufacturer and retailer power on retailer response to trade discounts it is interesting to note that the traditional push promotion model remains an enigma. Manufacturer Trade Discounts Offered (H1) are significantly but negatively related to Percent Bought by Retailer on Promotion, which is opposite the hypothesized direction. Though manufacturers offer trade discounts expecting (hoping) the retailer will buy more and continue to support their brand, retailers buy proportionately less the more the manufacturer offers.

The unexpected negative relationship between the trade discounts the manufacturer offers and how much the retailer buys on discount might be explained by how manufacturers use trade discounts and how retailers respond to those offered discounts. Traditionally, trade discounts are said to encourage retailers to buy in quantity or to carry a new item. It was not possible to identify the purpose of the trade discount for this analysis. The retailer's response could depend on the purpose of the trade discount.

If the trade discount is an incentive to get or keep the manufacturer's brand on the shelf, it is likely that retailers will allocate minimal space to the brand, such as one slot in a warehouse and one facing per retail store. The manufacturer may feel the pressure to extend or deepen trade discounts for fear of losing their slots and facings with the retailers. No matter how long the promotion period or how deep the discount, though, the retailer may limit both the number of purchases and the quantity in each purchase to just keep their shelves stocked. This constrains their willingness to buy in larger quantities even when a trade discount is offered.

With higher volume brands the retailer may have more warehouse and retail space allocated to a brand and, therefore, have more flexibility to buy in quantity. The retailer could even buy in anticipation of their own sales promotion activity and come back for at least one more purchase to replenish their stocks during a particular promotion period. It is possible, then, that retailers could buy proportionately less on promotion of brands that are more deeply discounted for longer if the manufacturer is offering the discounts to get or keep retail space. Retailers could buy proportionately more on promotion of brands that are less deeply discounted for fewer weeks per year if the manufacturer is offering the discounts to encourage retailers to buy in quantity.

Percent Bought by Retailer on Promotion (H5) was significant in explaining Percent Sold by Retailer on Promotion suggesting that manufacturers could still anticipate some connection between what the retailer buys on promotion and what the retailer sells on promotion. As noted earlier, the manufacturer depends on the retailer to merchandize and promote its brands. How much a retailer sells on promotion may have more to do with how they promote the brand in their stores than with how much they bought from the manufacturer.

Brand Share (H2) and Price Premium (H3) were significant with the expected direction in explaining Percent Bought by Retailer on Promotion, suggesting that, for a given level of trade discounts offered, retailers will buy proportionately less of their annual requirements on discount from stronger brands. From the manufacturer's perspective, higher share brands that can maintain higher price premiums will sell proportionately less of their volume on discount for a given level of trade discounts offered.

Retailer Share (H4) was significant in explaining Percent Bought by Retailer on Promotion. This confirms that, for a given level of trade discounts offered, relatively large retailers will buy proportionately more of their annual requirements on discount from manufacturers. Manufacturers selling to higher share retailers would expect to sell proportionately more on discount.

Brand Share (H6), Price Premium (H7) and Retailer Share (H7) were all significant in the expected direction in explaining Percent Sold by Retailer on Promotion. Larger brands that that maintain a higher price premium will sell proportionately less on promotion through retailers for a given level of Percent Bought by Retailer on Promotion. Higher share retailers will sell proportionately less of what they bought on promotion for any brand on promotion in their stores.

Manufacturer Trade Discounts Offered had a significant influence on Percent Bought by Retailer on Promotion but opposite to the direction hypothesized. That indicates that retailers buy proportionately less of their volume on discount from brands that offer deeper discounts or more weeks on discount. This seems to conflict with conventional wisdom. Perhaps there is something in how manufacturers use trade discounts and how retailers respond that could help explain this finding.

LIMITATIONS AND RESEARCH DIRECTION

The data collected for this study was from multiple brands from the same manufacturer. The brands were all in different processed food categories, but did not cover the entire spectrum of trade discounted processed foods or, for that matter, all trade discounted packaged goods. While this limits the generalizability of these findings to the larger class of packaged goods, it also likely served to constrain the range of promotion practices examined so that the impact of power was made clearer. There is an important cautionary note that suggests the need for additional research. Though we found important significant relationships, we weren't able to explain much of the variance in the Percent Bought by Retailer on Promotion and Percent Sold by Retailer on Promotion. It is troubling, though maybe not surprising, to discover that how much a retailer buys is not explained by how much trade discount they are offered and how much they sell is not influenced by how much they buy. Perhaps it is, after all, simply an inventory management decision.

This research only examined whether there was any promotion activity at all by the retailer. It may be more important to know the details of what a retailer does to support and merchandize the brand on promotion such as features, displays and price reductions. A fuller examination of power and trade promotion efficiency should include a look at retail price reductions, retailer advertising and display support. These may better explain how much a retailer sells on promotion. Further, if retail sales on promotion are responsive to specific merchandising support, it will be important to understand whether there is any relationship between power and retailer merchandising support such as whether retailers offer disproportionately more merchandizing support to stronger brands.

In addition to power, there may be other properties of retailers not indicated by share that influence their response to trade discounts. Retailer share is a single, simple indicator of retailer power and this study did not explore other indicators of retailer power or other properties of retailers that may have an impact on their response to trade discounts. For example, we did not have a measure of retailer market power analogous to the Lerner index we used as an indicator for manufacturer power. Another factor that needs additional exploration is whether a retailer's management of a private brand influences their response to manufacturers' trade promotion efforts. A retailer's response to a manufacturer's trade discounts could depend on the retailer's goals for their own private brand.

IMPLICATIONS FOR MANAGERS

Our findings have some important implications for practicing managers. Manufacturer and retailer power are more important in driving how much a retailer sells on promotion than how much the manufacturer offers in trade discounts. What the retailer sells on promotion is positively related to how much they buy on promotion but negatively related to how much trade discount the manufacturer offers. This suggests the conventional view of the traditional push promotion strategy does not hold, at least in non-durable packaged goods (grocery). Manufacturers shouldn't plan to see a proportionately positive retailer or consumer response to their trade discount efforts.

While there is not a clear link between a manufacturer's offered trade discounts and how much a retailer sells on promotion, it is clear that a manufacturer's power, as measured by brand share and price premium, will have an impact on retailer response to trade discounts offered. Higher share brands that can maintain a higher price premium will have proportionately lower purchases on promotion by retailers and, likewise, proportionately lower sales on promotion through retailers for a given level of trade discounts offered. So we have shown that such brands are less deal dependent, but the data and analysis cannot show for these brands whether the net effect is higher trade promotion efficiency, in that more of what the manufacturer sells on discounts gets through and is sold on promotion by retailers to their consumers. It is clear, though, that for any brand, trade promotion efficiency will be lower through more powerful retailers as higher share retailers buy more and sell less on promotion for a given level off trade discounts offered.

Price Premium is one of the more important explanatory variables significantly related to Percent Sold by Retailer on Promotion. Price Premium is an indicator of market power, as measured by the Lerner Index mentioned earlier. Consumers are also willing to pay a higher price for a brand with stronger brand equity. This suggests that the percent of volume the retailer sells on deal is related to the properties of the brand. These properties include the non-tangible benefits strengthened by all of the manufacturer's marketing efforts that contribute to market power and brand equity. An important way to improve trade promotion efficiency, then, is to invest in other marketing activities such as advertising that may build brand equity. Marketers should also not overlook the fundamental importance of product design and effective product positioning in building brand equity and, consequently, improving trade promotion efficiency.

Marketing managers should carefully consider the impact of manufacturer and retailer power as they develop their trade promotion plans. Managers of lower share brands should expect to sell proportionately more on promotion than their higher share competitors. A new brand, for example, will have to depend more on trade promotions as they build brand equity through effective product positioning and other marketing efforts. Smaller regional or specialty brands can reduce their reliance on trade promotions by working to even more strongly differentiate their brands so that they can command a higher price premium. Manufacturers with lower share brands or brands that cannot sustain a higher price premium could improve trade promotion efficiency by carefully targeting their efforts to specific markets and retailers so that they rely more on the lower share retailers.

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Douglas C. Haines, University of Idaho

Table 1: Model Path Equations

Percent Bought by +[b.sub.1] * Manufacture Trade Discounts
Retailer on Promotion = a1 offered
 +[b.sub.2] * Brand Share
 +[b.sub.3] * Price Premium
 +[b.sub.4] * Retailer Share
Percent Sold by +[b.sub.5] * Percent Bought by Retailer
Retailer on Promotion = a2 on Promotion
 +[b.sub.6] * Brand Share
 +[b.sub.7] * Price Premium
 +[b.sub.8] * Retailer Share

Table 2: Descriptive Statistics

 Manufacturer
 Retailer Trade Discounts
 Brand Share Price Premium Share by Offered

Mean 29.1% 1.895 28.6% 5.995
Median 25.9% 1.834 26.8% 4.027
Std. Dev. 28.1% 0.564 15.8% 5.009
Range 0.3-100% .66-3.82 4.6-81.7% 1.288-23.000
Skewness .594 .768 .710 1.976

 Percent Bought Percent Sold
 Retailer on by Retailer on
 Promotion Promotion

Mean 76.8% 31.4%
Median 79.9% 30.6%
Std. Dev. 18.0% 13.5%
Range 1-100% 6-73%
Skewness -.690 .387