T H E PAT H T O

EFFICIENT TRADE
PROMOTIONS
FEBRUARY 2015

Copyright 2015 The Nielsen Company 1

 THE PATH TO
EFFICIENT TRADE
PROMOTIONS
Much like the media realm, the consumer product landscape is
becoming increasingly fragmented. Competition is rising, new channels
are developing and choice is rampant. The combination of these and
many other factors has retailers and manufacturers shuffling myriad
promotion options to best publicize their products and boost sales.
The results, however, are largely ineffective and often lead to losses
rather than gains. To make matters worse, few folks have realized that it
takes more than offering additional deep discount programs to increase
promotion efficiency.

From a business perspective, its critical that companiesmanufacturers

and retailersget in front of this plight facing Americas consumer
product goods (CPG) industry. Thats because theyre collectively
spending millions of dollars to promote products and getting littleor
negativein return.

Is this a crisis for U.S. retail? The answer likely depends on your
definition of the word crisis. While the word is often used to describe
disasters like famine or disease, its possible that manufacturers and
retailers alike would describe their inability to at least break even on
their massive trade expenditures as something of a crisisespecially
since many seem ill-equipped to correct the problem.

THE BIG PICTURE

First, lets talk about the big picture. Manufacturers and retailers across
America spend inordinate amounts of money on trade promotionsthe
marketing activities that these two partners use to entice customers to
buy their products. Price discounts are a common promotion tactic, but
other efforts include feature and display, demonstrations, value-added
bonus programs and no-obligation gifts.

2 THE PATH TO EFFICIENT TRADE PROMOTIONS

 Over the past 10 years, companies around the globe have doubled the
amount of money they spend on their trade promotions. Today, they
spend about $1 trillion annually, and they show no sign of pulling back,
doing all they can to stay competitive in todays challenging economy.

While trade promotions can increase product visibility and brand

awareness, they can also grow product categories, differentiate a
product to take market share from a competitor and enlarge a specific
products segment penetration. So what are the effects of these efforts?
Today, more than one-fifth of the consumer products in the U.S. are sold
under one type of promotion or another.

Now for the bad news. More than two-thirds of the trade promotions
that happen each year in the U.S. dont break even. And whats even
more telling is that eliminating 22% of trade promotions would actually
help companies increase sales revenue. Overall, a minority of the
promotions taking place today actually make money.

ASSESSING TRADE PROMOTION PERFORMANCE

67%
DONT BREAK EVEN

ELIMINATING
33%
MAKE MONEY 22% OF PROMOTIONS
WOULD INCREASE
SALES REVENUE

Source: Nielsen Trade Promotion Landscape Analysis Database 2014 Q3

Copyright 2015 The Nielsen Company 3

 Its true. America is pretty bad when it comes to trade promotionsor
at least in terms of getting a positive return on that investment. And
whats more, the problem is getting worse. Thats because in many
cases, companies are simply trying to regain their footing by increasing
the frequency of their promotions, cutting prices lower or offering
deep discounts more frequently. Unfortunately, these tactics, without
clear insight into what will and wont work, are going to create a bigger
problem than exists right now.

PROMOTION INEFFICIENCY IS GETTING WORSE

TRADE EFFICIENCY % OF WEEKS ON PROMOTION

% OF WEEKS ON PROMOTION
$0.75 7.5%
TRADE EFFICIENCY

$0.70 7.0%

$0.65 6.5%

$0.60 6.0%
2013 4Q

2014 3Q
2012 4Q

2014 2Q
2013 3Q
2012 3Q

2013 2Q
2012 2Q

2014 1Q
2013 1Q
2012 1Q

While the aggregate picture is very telling, a comparison with ad

spending sheds a different light on the overall subject of trade
promotions. When it comes to spending, CPG companies spend more
than twice on trade promotion than they do on advertising. In terms of
actual expenditures, brands and companies typically spend about 19%
of their revenue on trade promotions, compared with about 7.5% on
advertising.

The interesting thing about this scenarioespecially given the lackluster

efficiency rate among trade promotionsis that its rare to find studies
analyzing the return on trade spending. Comparatively, however,
advertising effectiveness is a constant focal point for marketers and
agencies around the globe.

Perhaps this suggests that the industry perceives advertising as being

easier to evaluate than trade promotions.

4 THE PATH TO EFFICIENT TRADE PROMOTIONS

 IDENTIFYING
WHATS
CAUSING THE
INEFFICIENCIES
In looking at the significantly subpar performance of trade promotions
across the U.S., its no wonder that only one in four Nielsen clients says
theyre happy with their promotional program outcomes. So why is that?

Based on learnings from our work with numerous CPG manufacturers,

Nielsen has identified four fundamental issues that are hindering trade
efficiency.

MEASUREMENT CHALLENGES
Measurement is no easy feat, and grappling with understanding the
effectiveness of trade promotions is something that plagues many
across the CPG landscape. While manufacturers know what they spend,
determining what they make on that spend is less clear-cut. For starters,
the data they receive about what consumers buy comes from multiple
sources. While manufacturers have access to retail sales data, they must
cope with a different set of product identifiers from each retail data
source, as well as differences in the unit of measure (such as case vs.
consumer unit).

Compound this problem with aligning the dates of the promotion

between the manufacturer and the retailers across the tens of thousands
of promotions a big CPG company runs each year, and you get some
sense of the scale of the challenge. Further, manufacturers have to
separate out sales that would have occurred anyway, if the product had
not been promoted, from the incremental sales driven by the promotion,
as well as adjusting for other drivers (including the weather).

STRATEGIC PLANNING VS. TACTICAL REALITY

Its not just about data and metrics. Its also about the difference
between a CPG companys plan and what happens on the ground. Most
CPG companies strategically plan for price and promotion once or twice
a year. Many use sophisticated predictive analytic tools to figure out how
alternative promotional programs would do in the market and decide on
the best course of action.

Copyright 2015 The Nielsen Company 5

 Then, they relay these decisions as guidelines out to the account
teams, who work directly with the retailers. At that point, a thousand
negotiations beginat which point the link between the view at the
strategic level and the key account level has already been broken. As the
year progresses, the sum of the thousand negotiations is likely to be very
different from the strategic plan sent down from headquarters at the
beginning of the year.

Manufacturers need to integrate strategic planning tools at headquarters

with tactical negotiation processes at the key account levelso that each
retailer negotiation can be optimized while also remaining aligned with
the overarching intent of the strategic plan.

PROMOTIONAL PLAN MANAGEMENT AND EXECUTION

Given the large number of promotional programs that manufacturers
execute across categories, retailers and geographies, its critical that
they use a consistent approach in order to ensure that the right products
are at the store at the right timeeven if a retailer changes its mind at
the last minute and chooses to change the time, scope and support of
a promotion. Nielsen research has found that more than half of out-of-
stocks are caused by poor price and promotion management.

In short, promotional optimization and management tools have to link

reliably into the supply chain and financial management systems of the
manufacturer.

MANAGEMENT PROCESS
Much like anything, optimizing and managing promotional activity
relies on a dedicated, consistent process. CPG manufacturers will not be
effective or efficient in their trade promotions if they use them in an ad
hoc fashion or have a small group of analysts operate them in a silo.

Truth be told, companies need powerful, integrated software applications

that enable a wide range of managers to optimize and execute
promotional activities on an end-to-end basis so that a consistent
process is used pervasively throughout the organization, for all
categories, retailers and geographies.

6 THE PATH TO EFFICIENT TRADE PROMOTIONS

 A DEEPER DIVE
INTO THE PROBLEM
Knowing that the rubber meets the road when consumers start buying
and that trade promotion efficiency is lackluster, Nielsen recently
conducted a widespread analysis of the retail landscape to better
understand the aggregate situation.

At the onset, the benchmark analysis* covered 340 categories, 15

departments, 1 million UPCs, 125 million event weeks and $1.6 trillion
in retail sales. We then narrowed the analysis to eliminate some of the
extreme skews. Specifically, we wanted to focus on the businesses that
were promoting regularly and exclude promotional activity that was
minimal and infrequent. The analysis also excluded activities around
tobacco, alcohol, and a few kitchen staples: eggs, milk and bread.

The final analysis, which aimed to identify what drives performance,

ultimately zeroed in on 92 million event weeks over nearly three years
and totaling $213 billion in sales across 75 retail banners. To hone in
on performance, the analysis identified the weeks where prices were
lower than the everyday cost for an item and then isolated the expected
volume from the actual volume sold during that period.

We also used assumptions about the cost to execute and margins for
manufacturers and retailers.

211
CATEGORIES
13 811k 92MM 213B
DEPARTMENTS UPCs EVENT WEEKS US RETAIL SALES

Copyright 2015 The Nielsen Company 7

 CATEGORY
EFFICIENCY RATES
AND AREAS OF
OPPORTUNIT Y
While there are clear departments that would benefit from increased
promotion efficiency more than others, the entire store is ripe with
opportunity. Thats because the top effectiveness rate across the entire
store is only 50%. So even manufacturers and retailers that have
managed to crack part of the trade promotion code by excelling to some
degree can improve their efforts and boost efficiency rates.

EFFICIENCY OPPORTUNITIES EXIST THROUGHOUT THE STORE

TRADE PROMOTION EFFECTIVENESS RANGES FROM 25%-50%

ACROSS DEPARTMENTS
% OF WEEKS WHERE PROMOTIONS DONT BREAK EVEN

MEAT DAIRY
62% 75%
DELI
72%
HOUSEHOLD CARE

FROZEN FOODS
MERCHANDISE
PERSONAL

GENERAL

GROCERY
50%

50%

50%

50%

PRODUCE 73%
74%

BEAUT Y HEALTH PET CARE BAKERY

CARE
50% 59% 66% 73%

Read as: 74% of the promotion weeks for the produce category dont break even.
Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3

8 THE PATH TO EFFICIENT TRADE PROMOTIONS

 The interesting thing about trade promotion efficiency is that
effectiveness can vary significantly within a single department. For
example, 73% of the promotion weeks in the grocery department dont
break even, yet promotions for coffee are among the strongest in the
store. In fact, for every dollar spent on promoting coffee, retailers will
get more than a dollar back in return 70% of the time.

And some categories that are begging for proper trade promotions
arent delivering. Take the seasonal area, for example, which exists
solely to feature items that will be promoted, is falling short, delivering
positive returns only 24% of the time.

PROMOTION EFFICIENCY VARIES SIGNIFICANTLY WITHIN CATEGORIES

UNDERSTANDING WHERE YOUR EFFICIENCIES ARE IS VALUABLE CONTEXT

100%

TRADE EFFICIENCY < 0

80%

60%

40% 0 < TRADE EFFICIENCY < 100

20%
TRADE EFFICIENCY >= 100
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Read as: For every $1 spent on promotions for frozen toaster pastries, the promotions deliver more than $1 in returns 32% of the time.
Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3

Copyright 2015 The Nielsen Company 9

 In addition to finding notable variances in efficiency across products,
Nielsens benchmark study found that there is no relationship between
category size and promotion effectiveness. In short, category size does
not dictate performance.

For example, when we look across the store, it doesnt get much
bigger than salty snacksa $10.5 billion category. Despite consumers
immense love for their chips and pretzels, promotions in the category
didnt break even more than 75% of the time during the study period.
On the flipside, the dips for salty snacks category is much smaller ($331
million), yet promotions for them broke even more than 70% of the
time.

CATEGORY SIZE DOES NOT DICTATE PERFORMANCE

PROMOTION EFFICIENCY CAN BE ACHIEVED THROUGHOUT THE STORE

$12
120%

$10
100%
CATEGORY SIZE ($ BILLIONS)

THAT DONT BREAK EVEN

% OF CATEGORY EVENTS
$8
80%

$6 60%

$4 40%

$2 20%
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Read as: Soft drinks represent a $9.8 billion category, yet promotions in this space dont break even 76% of the time.
Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3

10 THE PATH TO EFFICIENT TRADE PROMOTIONS

 EVENT
FREQUENCY,
DISCOUNTING AND
EFFICIENCY
The other important thing for companies to understand when they plan
their trade promotions: more events do not equate to more returns. In
fact, the two are negatively correlated. According to Nielsens research,
over-promoting actually dilutes efficiency.

Over-using deep discounts is another way to kill promotion efficiency.

According to Nielsen data, using deep discountsthose where the price
is 25% lower than normalthe effectiveness at driving sales significantly
degrades for 50% or more of the total promotional activity.

SELECTIVELY USE DEEP DISCOUNTS TO MAXIMIZE PROMOTION EFFICIENCY

AVERAGE CATEGORY TRADE EFFICIENCY

74.3%
69.0%
60.6%
53.2%

40.8% 37.0%

0% 0-5% 0-5% 25-50% 50-100% 100%

% OF TOTAL EVENTS PROMOTING DEEPER THAN 25% DEPTH OF DISCOUNT

Read as: When 0-5% of promotions involve deep discounts, the average trade efficiency rate is 74.3%.
Source: Nielsen Trade Promotion Benchmark Database 2014 Q3

Copyright 2015 The Nielsen Company 11

 In addition to knowing how much to promote, it pays to know when to
promote. For example, theres an overabundance of promotional activity
between Thanksgiving and Black Friday, but knowing how effective they
are can help retailers understand if theyre just spinning their wheels as
the holidays approach. Despite the findings about the diluting nature
of deep discounts, a Nielsen study at the end of 2014 found that price
cuts of 30%-60% work better for U.S. retailers around Thanksgiving and
Black Friday than at other times of the year.

In looking at the trends over the past two years, retailers have boosted
their deep discount promotions by 3% around Thanksgiving, and the
majority dont fall victim to common promotional pitfalls. In fact,
consumers have been so receptive to deep discounts around this time
of year that trade promotions can drive as much as a 22% higher-
than-normal return, as has been the case in the general merchandise
category, which includes small appliances, photo supplies, and
telephones and accessories.

12 THE PATH TO EFFICIENT TRADE PROMOTIONS

 DEEP-DISCOUNT PROMOTION INCREASES AND
CHANGES IN PROMOTION EFFICIENCY

THANKSGIVING VS. YEAR-ROUND AVERAGE

DEEP DISCOUNT DEEP DISCOUNT TRADE

VOLUME CHANGE EFFICIENCY CHANGE

12.6%
GENERAL MERCHANDISE 21.9%

1.7%
BEAUTY CARE 10.4%

2.3%
MEAT 7.2%

1.1%
PERSONAL CARE 4.4%

1.6%
PRODUCE 4.2%

8.4%
DAIRY 3.9%

BAKERY -0.4%
2.1%

PET CARE -0.8%

1.8%

GROCERY 4.4%
0.9%

DELI 0.0%
-1.1%

HEALTH CARE 0.4%

-1.8%

FROZEN FOODS 6.4%

-2.6%

HOUSEHOLD CARE -1.2%

-3.7%

Read as: Deep discounts for the general merchandise category have been nearly 22% more efficient during the holiday season
over the last two years than during the rest of the year.

Source: Nielsen Trade Promotion Landscape Analysis 2014 Q3

Copyright 2015 The Nielsen Company 13

 STRATEGIES
TO AVOID AND
STRATEGIES TO
EMBRACE
When we look at the overall picture, its clear that the majority of the
retail market needs to improve the efficiency of its promotions. There
are, however, a handful of success storiesthose that illustrate an
effective balance of promotion type, frequency and category to drive
effective performance.

As weve detailed, some departments do better than others, and

weve seen notable variations even within a category. Contrary to what
might be viewed as beneficial from a strategy perspective, Nielsen has
identified several common misconceptions when it comes to program
efficiency:

CATEGORY SIZE DOES NOT DICTATE PERFORMANCE

Opportunities exist across the store in all categories. A range of
categoriesranging from $100 million to $10 billion in sizefall in the
65%-75% inefficiency range, so size is a relative non-issue.

CATEGORY HEALTH IS NOT DISCRIMINATING

Inefficiency can plague both rising and falling stars. Nielsen research
has found high degrees of performance variation among categories with
increasing and decreasing sales. Trade efficiencies among categories
with declining sales of more than 5% ranges from -$0.41 to $1.76, and
effectiveness among categories growing by more than 5% ranges from
-$0.12 to $1.50.

OVER-PROMOTING ERODES EFFICIENCY

Across categories, every 5% in additional time on promotion is
associated with nearly 10% in decreased trade efficiency. Although its
not a causal relationship, theres little question that there is too much of
a good thing when it comes to promotions.

On the flipside, of the strategies that have proven to be ineffective,

three tactics have demonstrated the ability to drive positive results
regardless of category. The winners who have employed these tactics
have improved their trade efficiency by 3.6% and seen sales climb
almost 3%.

14 THE PATH TO EFFICIENT TRADE PROMOTIONS

 MODERATION IS KEY
The selective use of deep discounts, along with shallow discounted
events, can be very effective. Specifically, less-frequent deep discounts
have proven to be the most profitable. Nielsen has identified 13
categories where this strategy has helped bring improvement where
inefficiency has been the norm. Among these categories, 73% of events
dont break even, but a reduced use of deep discounts has proven
to improve efficiency by 3.6% over the past year. In aggregate, deep
discount frequency was reduced by 39%. For example, deep discounts
in the ice cream category were cut by 48% since last year, which boosted
efficiency by 2%.

CHANNEL-TO-PRODUCT MIX IS A CRITICAL CONSIDERATION

Matching promotional channels to promotional product mix has led to
greater returns. In the hair-color category, for example, the opportunity
lies in re-distributing the amount of promotion volume taking place
across other channels. The ratio of inefficient-events-to-share-of-events
in the drug category is 1.35x, meaning that the share of bad events
is disproportionally high compared with the total number of events.
As a channel, the drug category is over-indexing in terms of its bad
events, which suggests that cutting back on promotions would boost
trade efficiency. To turn things around, retailers should transfer their
investment in the under-performing drug channel to a channel with
better returns.

PROMOTE WHERE PERFORMANCE IS HIGH

Manufacturers and retailers would be well served to promote more in
the segments that are strong performers. Segment performance is not
static. It varies over time. So with that in mind, its critical to stay on
top of fluctuations in order to adjust investments and maintain positive
results.

In one category in the grocery channel, manufacturers spend the most

money promoting a specific segment that has the lowest promotion
efficiency. This is most likely because the category is the most frequently
promoted nationally. When we looked deeper into this segment, we
found that 1% of the promotions are still considered best-in-class with
high efficiency. This presents an opportunity for manufacturers and
category advisors to examine the planning and execution of these 1%
events in order to identify ways to improve the rest of their promotions.

Copyright 2015 The Nielsen Company 15

 NEXT STEPS
In taking a step back from the granular details, we can re-focus on the
larger issue: the frequency of products being promoted in the U.S. is
increasing while the effectiveness of those promotionswhich is already
lowis declining. The takeaway for the market? This is simply not
sustainable for the packaged goods industry. Its not sustainable for the
retailers or the brands that operate in this space. No one is immune to
this.

All is not lost, however. The first step in turning efficiency trends
around is recognizing that a majority of the promotional efforts taking
place dont break even. And whats more, 22% of promotions could be
eliminated and actually improve sales results.

The next step is knowing where to start, which means understanding

where your current efforts are netting out. If you dont know where you
are right now, theres no way to create an effective strategy to move
forward.

For example, if you know your events are delivering less than $1 in return
for every $1 you spend, predictive analytics can help differentiate how
to best promote by category, channel, event type and account. If youre
in the middle of the roadmeaning youve experienced some success
but could gain additional efficienciesidentifying gaps where your
efforts are missing will help drive additional success. For example, the
illustration here shows how three manufacturers agree on the right times
to promote a specific category, as illustrated by the three solid lines. The
dotted line, however, highlights how sales also peak in late winter and
early springtimes when consumers are buying but promotions are at
bay.

16 THE PATH TO EFFICIENT TRADE PROMOTIONS

 SEIZING OPPORTUNITIES

ALIGN YOUR PROMOTION PL AN WHEN SALES PEAK TO

MAXIMIZE EFFECTIVENESS

CATEGORY TRADE EFFCIENCY MFR B % ON PROMOTION

MFR A % ON PROMOTION MFR C % ON PROMOTION

180% 80%

160% 70%
CATEGORY TRADE EFFICIENCY

TIME ON PROMOTION
140%
60%
120%
50%
100%
40%
80%
30%
60%
20%
40%

20% 10%

b ar r ay n ul g p t v c n b ar r ay n ul g p t v c n b ar r y n ul g p
th Fe M Ap M Ju 7 J Au Se Oc No De 1 Ja Fe M Ap M Ju 7 J Au Se Oc No De 1 Ja Fe M Ap Ma Ju 7 J Au Se
on 02 03 04 05 2 06 12 0 08 09 2 10 12 11 2 12 3 0 02 03 04 05 3 06 13 0 08 09 3 10 13 11 3 12 4 0 02 03 04 05 06 14 0 08 09
M 12 12 12 12 1 0 12 12 1 0 1 01 13 13 13 13 1 0 13 13 1 0 1 01 14 14 14 14 14 0 14 14
20 20 20 20 20 2 20 20 20 2 20 2 20 20 20 20 20 2 20 20 20 2 20 2 20 20 20 20 20 2 20 20

If your promotional activities fall into the elite category where every
$1 dollar spent is delivering more than $1 in return, theres still
room to improve. Thats because even the beauty and personal care
departmentsthe two most efficient areas of the storeare only turning
in trade efficiency rates of 50%. The key to better trade efforts lies in
learning which consumer segments are driving differential performance.
With that knowledge, youll be in a much stronger position to shift your
strategy in a complementary way.

Copyright 2015 The Nielsen Company 17

18 THE PATH TO EFFICIENT TRADE PROMOTIONS
 *ABOUT THE NIELSEN TRADE
PROMOTION L ANDSCAPE ANALYSIS
The findings from this report were derived from 2012 through third-
quarter 2014 data from Nielsens Trade Promotion Landscape Analysis.
This analysis examined trade promotion events where prices were
discounted at least 10% across 75 banners from food, drug and mass
merchandise retail. The analysis included categories with sales of more
than $100 million and promotion frequency of at least 5%. The analysis
excluded tobacco, alcohol, eggs, milk and bread. The analysis also
excludes Walmart.

ABOUT NIELSEN
Nielsen N.V. (NYSE: NLSN) is a global performance management
company that provides a comprehensive understanding of what
consumers Watch and Buy. Nielsens Watch segment provides media and
advertising clients with Total Audience measurement services across all
devices where content video, audio and text is consumed. The Buy
segment offers consumer packaged goods manufacturers and retailers
the industrys only global view of retail performance measurement. By
integrating information from its Watch and Buy segments and other data
sources, Nielsen provides its clients with both world-class measurement
as well as analytics that help improve performance. Nielsen, an S&P 500
company, has operations in over 100 countries that cover more than 90
percent of the worlds population.

For more information, visit www.nielsen.com.

Copyright 2015 The Nielsen Company. All rights reserved. Nielsen and
the Nielsen logo are trademarks or registered trademarks of CZT/ACN
Trademarks, L.L.C. Other product and service names are trademarks or
registered trademarks of their respective companies.15/8455

Copyright 2015 The Nielsen Company 19

20 THE PATH TO EFFICIENT TRADE PROMOTIONS