Revitalising the Retail Promotions Machinery: THE 4M WAY

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1 White paper Revitalising the Retail Promotions Machinery: THE 4M WAY - Dhananjaya Sahoo, Gaurav Mathur Abstract Our business in life is not to get ahead of others, but to get ahead of ourselves - to break our own records, to outstrip our yesterday by our today. - Stewart B. Johnson There is a flood of retail promotions in the market today, where the customer is not only spoilt for choice of products but also the promotions that go along with it. Emerging formats, innovative technology adoption, unchartered markets and razor-thin margins of retailers combined with ever increasing expectations of customers, make the retail promotion cycle all the more complex.

2 Introduction In today s changing global market & retail environment, the success of a retail promotion is paramount for all the key stakeholders involved manufacturer, retailer and customer. CPG companies spend approximately 13% - 15% of gross sales on trade funds and it accounts for their second largest expense item.1 The average retailer sells between 40% - 45% of its inventory at a promotional price, up from 15% to 20% a decade ago.2 Customers tend to have a greater propensity to buy during promotions. For instance, customers in the U.S. spent over $59 billion during the Black Friday weekend in High stake investments by retailers & manufacturers and declining customer loyalty thus demands precision in the execution of promotion cycle and smooth integration in a multi-channel environment. 1 (Source: Acosta, 2012) 2 (Source: A.T. Kearney research, 2012) 3 (Source: National Retail Federation, 2012)

3 Common Challenges faced by Retailers I am not using analytics effectively in the planning and the post promotions phases I am not convinced if I am tracking the right KPIs and if they are aligned with my business objectives The execution of promotion across channels stores, e-tailing, m-tailing is not consistent and I don t have insights by channels in terms of performance I am not sure about the right mix of promoted versus non promoted products in my category I have lot of implementation issues and non adherence to timelines My processes in the promotion cycle are not standardized and I may be not using the best-in-class systems and tools There is limited collaboration with manufacturers. Also, there is little partnership between merchandizing, supply chain, marketing teams due to lack of systems and efficient processes Compliance percentage by vendors and at the stores is low Winning with the 4M Framework Most retailers find it challenging to manage their promotions process in an organized and coordinated fashion. The proposed 4M framework aims to offer a structured way of working, thus creating a robust and scalable process for successful promotions. Predictive analytics What-If analysis (scenarios) Intelligence on cross elasticity, price elasticity and cannibalization Historical performance Promotional effectiveness (ROI) Measurement of well defined KPI s Sales tracking Customized reporting for stakeholders Model Well defined business objective of promotion Funding model Retailer, Manufacturer, Joint Joint business planning with Manufacturer Promotion budgeting Use of analytics to refine the promotion model Measure Make Configure promotions Record space allocation Create circular & Signage Publish promotion data Replenishment quantity updates in systems Communicate event Ensure compliance by stakeholders Manage Define promotional event calendar Right product mix Determine forecast (value and volume) Determine pricing strategy Right mix of promotion tools (price vs non-price) Define replenishment plan Define and Design Concept Define themes and messages

4 Model The retail promotion cycle should begin with clear objectives and well defined goals. This provides the basis for precise execution and measureable performance indicators. Upfront clarity on funding model of promotions to internal & external stakeholders provides clarity on ownership of various activities. Ideally, any retailer would like the least risk scenario, where the vendor funds the promotion and the remaining unsold stock can be returned to the vendor. However, this cannot happen always. The rationale for selecting a promotion funding model will intrinsically depend on the products that are being promoted. For example, for a new & unproven product being introduced by a vendor, the retailer expects the vendor to take the risk and hence fund the promotion. In case of a retailer s private label, the promotion will have to be funded by the retailer itself. However, for a joint funded promotion, the retailer must convince the vendor for the need to fund a regular product, to achieve additional sales. This has to be backed by near accurate forecasting and error free execution. Vendor Funded Jointly Funded Retailer Funded New product introductions Slow moving products Brand awareness Liquidation Festive season offers Alignment with competition Private Labels Customized promotions for a store/region Commonly Practiced Models Ideally, any retailer would like the least risk scenario, where the vendor funds the promotion and the remaining unsold stock can be returned to the vendor. However, this cannot happen always. Make A retail promotion involves significant amount of time & money to be invested in planning and successful execution of the promotion. It is imperative that the promotion aligns with a few key aspects of the business namely, category & financial objectives and the overall business (format) strategy. Once the promotion calendar and theme has been published by the marketing team, the category team must consider the following aspects: Objective of the Promotion - The most common & obvious reason for running a promotion is to increase sales. However, liquidation of old & non-moving stock (markdown), promoting new products and increasing customer traffic into a new store or on a website, could be a few more objectives of a promotion. The category manager must design the promotion keeping this is mind and accordingly decide the product mix. Commonly used KPI s to assess the success of a promotion are sales lift, ROI, basket size, margin lift, penetration into the market etc. Pricing Strategy - To counter the threats from other retailers offering year-long promotions (like Every Day Low Price) to attract price conscious customers or Hi-Lo pricing to attract selective purchasers or to capture a larger market share of the consumer spend; the pricing strategy is by far the most significant stage in running a successful promotion. While designing a promotion and its pricing, the retailer must decide the following: Promotion Depth: Type of promotion being planned, e.g. price off, buy one-get one, free sample or a discount coupon on next purchase. Promotion Intensity: Frequency (how often to run the promotion?) and duration (how long to run the promotion?) Promotion Support: Complementary feature and/or display decisions for a given brand All these components put together help in assessing the financial impact of running a promotion. Sales Forecast - Accurate historical sales data and promotional forecast are required to arrive at the additional lift in sales expected due to the promotion. This not only helps in inventory planning but also helps assess the efficacy of the promotion. Retailers & manufacturers must exchange their forecasts so that both are aware of the expected surge in volume. To do this, retailers must invest in tools that will aid in churning the voluminous data along with statistical modeling to arrive at a dependable forecast. It is imperative that the promotion aligns with a few key aspects of the business namely, category & financial objectives and the overall business (format) strategy.

5 Manage Retailers face execution roadblocks and sometimes fail to implement an otherwise perfect promotion plan. This leads to increased administrative expenses, loss of sales, failure to meet promotion objectives and losing competitive edge during the period. Perfect execution revolves around four important pillars or 4Cs Configuration, Collaboration, Communication and Compliance. Configuration Are the promotions configured error-free in the system? Collaboration Is there a collaborative approach between manufacturers & retailers and between different functions within the retail organization? Communication Are the promotions being communicated in the most effective manner to all stakeholders? Compliance Are all stakeholders complying with the laid out guidelines Configuration: Setting up promotions in the system which are correct, complete and timely is the first step towards minimal disruptions once the promotion goes live. Collaboration: Collaboration with manufacturers for sharing of insights and readiness of back-end supply chain to fulfill additional demand is essential. An integrated technology environment with a centralized event calendar supported by a powerful workflow tool, helps the merchandising, operations and marketing teams to work together to increase visibility and accountability. Communication: A centralized promotions helpdesk to address queries from all internal teams and suppliers combined with automation of process to trigger s/ reminders to relevant teams ensures better coordination, prioritization of activities and timely visibility of bottlenecks. Compliance: Successful execution of promotions is comprehensive if all teams comply with the company s guidelines (brand, target customers, display rules etc.) and timelines. Compliance of in-store displays, price labels and planogramming with replenishment team addressing the variation in demand and category leaders proactively auditing the progress on the ground must be ensured. Perfect execution revolves around four important pillars or 4Cs Configuration, Collaboration, Communication and Compliance. Measure It is generally accepted that, what can t be measured can t be improved. Gaining & using insights in pre planning phase and measuring performance parameters in post promotion stage must be focused upon. The entire planning and execution phase is incomplete unless we close the loop with effective analysis and tailored reporting. The aim should be to move away from open ended promotion process to closed loop promotion cycle. Advanced promotion optimization tools can help retailers analyze in an efficient way. Analytics service providers, who bring in a wealth of retail domain knowledge, can do in depth analysis of each phase and churn out customized and insightful reports for all stakeholders, releasing bandwidth of the retailer to focus on core business.

6 Pre Planning Analysis Post Promotion Analysis Reporting Predictive Analytics Scenario building Historical performance analysis Consumer purchasing behaviour in different retail channels Cross elasticity and cannibalization Product mix assessment Competitive intelligence Measuring defined KPI's (sales lift, margin, basket size etc) ROI measurement Split of performance by e-tailing, m-tailing and stores Sales tracking Recovery Performance metrics reports Reports by product, category and cluster level Business metrics reporting for senior management In-flight reports The aim should be to move away from open ended promotion process to closed loop promotion cycle. Conclusion There are huge opportunities today to achieve more from promotions by optimizing fragmented processes, improving technology adoption, using niche players to develop insights and driving cultural change for a rigorous process adherence state. The 4M model encompasses the entire set of activities used in a promotion cycle in a coherent and cogent manner. Retailers have to ensure all the four stages are being followed meticulously with a lot more synchronization within teams to achieve promotional objectives and accomplish the larger organization goals. To conclude, an inward (company) looking, yet outward (customer) focused approach will triumph in these changing and challenging business environment. About the Authors Dhananjay Sahoo Consultant, Retail Practice, Infosys BPO Dhananjay has over four years of experience in the IT & ITES industry specializing in retail solution design, supply chain consulting and business development. In his current role as a Solution Design Consultant, Dhananjay supports the Infosys global sales team, and provides business advisory services to Retail, CPG & Logistics industry clients. He has done his MBA in Marketing from FMS, University of Delhi and Engineering from NIT, Rourkela. Dhananjay can be reached at Dhananjaya_Sahoo01@infosys.com Gaurav Mathur Consultant, Retail Practice, Infosys BPO Gaurav has over six years of experience in Retail & IT industry specializing in assortment planning & optimization, space planning, inventory management and master data management. In his current role as a Solution Design Consultant, Gaurav supports the Infosys global sales team, and provides business advisory services to Retail, CPG & Logistics industry clients. He has done his MBA from Symbiosis, Nasik and Engineering from JNTU, Hyderabad. Gaurav can be reached at Gaurav_Mathur04@infosys.com

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8 About Infosys Infosys is a global leader in consulting, technology, outsourcing and next-generation services. We enable clients, in more than 50 countries, to stay a step ahead of emerging business trends and outperform the competition. We help them transform and thrive in a changing world by co-creating breakthrough solutions that combine strategic insights and execution excellence. Visit to see how Infosys (NYSE: INFY), with US$8.25 B in annual revenues and 165,000+ employees, is helping enterprises renew themselves while also creating new avenues to generate value. Infosys BPO, the business process management subsidiary of Infosys, provides a broad range of enterprise and industry-specific services. We deliver transformational benefits to clients through our proprietary Process Progression Model TM (PPM). These benefits include cost reduction, ongoing productivity improvements and process reengineering. For more information, contact infosysbpo@infosys.com Infosys Limited, Bangalore, India. All Rights Reserved. Infosys believes the information in this document is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of other companies to the trademarks, product names and such other intellectual property rights mentioned in this document. Except as expressly permitted, neither this documentation nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, printing, photocopying, recording or otherwise, without the prior permission of Infosys Limited and/ or any named intellectual property rights holders under this document.