Professor John McCann
Fuqua School of Business
Duke University
September1995
Scanner marketing is a new phrase that entered the consumer package goods (CPG) industry in the mid-1990s.
The idea is that scanner data can now move from the fringes to the center of the marketing activities. When scanner data first appeared on the marketing scene, it was conceived as a replacement for other data ... data that had historically been collected and used to measure market share and track consumer sales. Thus it was only used in one part of the marketing equation, to understand markets, but it was not used in the second and most important part of marketing: to influence markets.
Retailers, manufacturers, and data vendors have worked together to improve the reliability and accuracy of scanner data, and this work has led to renewed confidence in the quality of the data. The result is a willingness to use the data for operational (validating scanned coupons, scan-generated re-ordering) and decision making (promotions, product assortments) purposes [1].
Wal-Mart paved the way for scanner marketing when the company opened its information system to the vendors and forced them to start using scanner data for these purposes. Productivity gains in discount chains and other retail channels has made the grocery industry aware that it too must adopt such practices in order to stay competitive.
A major enabler of scanner marketing is the willingness of the retailers to share store-level data on all their stores, rather then the long-standing practice of providing data on a sample of stores to the data vendors. As of the summer of 1994, "20,000 stores, representing approximately 70 percent of the volume of goods moving through chain supermarkets, provide store-level data to the companies that gather such information."[2] Most of the current scanner marketing efforts such as Efficient Consumer Response and Pay-for-performance hinge on the ability of both retailers and manufacturers to obtain and analyze store-level data.
The move to store-level scanner data is the logical next step. Firms originally released data for aggregation at the market level, then at the account within market level, and now it is at the store level. One of the hopes behind this move is that the new data will allow both the manufacturers and the retailers to change their focus from deals and shipments to the consumer.
We have witnessed a few chains using their information and their technology to move from an emphasis on buying to concentrate on improving consumer demand. One management consultant, Burt Flickinger, draws a clear bead on the situation:
"Today's technology gap is bringing many companies in our industry closer to extinction. While most of the food industry pursues the cost-saving and price-point-reduction elements of efficient consumer response, progressive retailers are using technology to crack the code of increasing consumer demand and build their bottom line."[3]
Having store-level data is an enabler of the renewed focus on the consumer because the data provide a view of the marketing scene at the point of action: the store.
In the past, the focal point of marketing analysis and marketing programs has been every where else but the store: the manufacturer's operations, orders from retailers, shipments to warehouses, withdrawals from warehouses, sales force interactions with retail headquarters, chain-wide decisions made at the retail headquarters, and broad aggregates of retail stores (such as markets and chains). Why such focus? Two reasons: there were meaningful actions at these focal points, and data were available about some aspects of these actions. But these actions did not have much to do with the actual marketing events that are the life blood of the firms.
Store aisles are where the consumer and the products come into contact. It is where buying occurs; it is the center of action; it is the action-point. All of the retailers' and the manufacturers' marketing and merchandising efforts are aimed at impacting the consumer as s/he pushes the cart down the aisle. All of the traditional media are used to prepare the consumer to take the desired action in the retail aisle. Advertising is designed to create brand awareness and establish a positive attitude towards the brand. Coupons are distribute to induce the consumer to pick the item off the shelf and put it in the cart. Retail prices, advertising features, and displays exist for just that purpose.
The consumer with the cart walking down the aisle ... that is where the action occurs. When the consumer's hand comes in contact with the item, lifts it off the shelf, puts it in the cart, and pays for it at the check-out counter ... that's the desired action. Everything else is tangential. Understanding and influencing those consumer-in-the-store actions is the key to marketing. Unlocking that key is the promise of store-level scanner data because it will permit, for the first time, marketers to understand markets at the point where they actually occur: the store.
We have a long tradition of defining markets in geographical terms, such as the West Coast market, the California market, the Los Angeles market. These are geographical entities but they are not really markets; they are just aggregates that we have used as proxies for markets because we could not really measure what was going on in the real market: the store.
Although states and cities do exist as political entities and as places on a map, they are really just collections of people, stores, and other institutions. Marketing actions occur when the buyer and seller interacts; when the buyer selects a product or services and makes payment to the seller. These transactions are the outcomes of the marketing processes and data that moves marketing managers closer to the transactions are better than those that keep the marketer in a fog by aggregating the data to levels that are not real markets.
In the late 1980s, Herb Baum, then President of Campbell Soup, predicted the move to the retail store as the marketing focal point. He used a military analogy in saying that companies such as his will be "fighting the battle for consumer sales and loyalty at the point of sale."
The war has certainly shifted towards retail and away from consumer media. More accurately, the retail battle has joined with the media battle as far as dollars and energy are concerned. In the early 1980s, it was common for about 80% of a brand's resources to be spent on mass media. Today, it is not uncommon for two-thirds of the budget to be directed at the retailer.
But the shift has not been a happy one, and it has not led to good relationships between the retailers and manufacturers.
Manufacturers have not recognized the store as the real market, and thus they have not built an organization that can truly impact the market in the market. The sales force simply does not participate in the real markets.
Oh yes, they do go into stores. But it is usually for two purposes: a "store check" in which they record what they see at the moment they are in the store, and a more organized shelf space recording exercise in which they inspect and record the facings allocated to their items and their major competitors.
If they are not focusing on the true market, where is their focus?
Their attention is on the "Retail Khyber Pass"[4]. The real Khyber Pass, an historic gateway between Central Asia and the Indian Subcontinent, became famous in the Western world when a British Army stationed a few soldiers in the pass to facilitate a retreat. By holding superior position and armed with good weapons, these few soldiers were able to hold off the enemy so that the army could reach safety on the other side of the mountains. The Retail Khyber Pass is thought to be the grocery buying offices through which the manufacturers (the "enemy") is trying to rush it sales reps, products, and promotions into the stores. It is this funnel that has captured more and more of the manufacturers' attention.
The attention of the manufacturers is translated into money; money that they are pouring down the funnel. Roughly 100 billion dollars flows through the Retail Khyber Pass each year, and it is growing [5]. Manufacturer deals have totally captured the attention of food retail buyers, to the point that they make their money buying, not selling.
With all of this money flowing into the retailers pockets, we would expect that they would be getting more and more profitable. But, alas, that is not the case. Throughout the 1990s and early 1990s, retail chain have not increased their profits, while manufacturers have enjoyed a much rosier profit picture in spite of the money spent on trade promotions [6]. This empirical observation is being used by consultants, as well as a few leading retailers, to change the retailers focal point from the buying point to the selling point: the store.
Account-level scanner data facilitated this buying office view of a retailer. We have adopted a phrase to allow us to understand this focus: what you can measure you can manage. Because you can measure what is going on in an account, you can manage it.
This same slogan will be working with the store-level data: since manufacturers can measure what is going on in the store, they can begin to participate in the management of their items, and the categories their items are in, at the store level.
Of course, this is a maddening challenge for marketers because it simply explodes the number of times that they have to do marketing. That is, it explodes the number of markets (the stores) that they have to understand and try to influence. In the good old days of regional marketing, a firm only had to "do marketing" about 60 times because that was all s/he could measure. With the advent of account-level data, the number of markets grew to around 250.
But store-level data presents a whole new challenge ... a discontinuity ... a paradigm shift. When you can measure the results of your marketing efforts in 20,000 individual stores, you are facing a challenge that is very different from the ones faced in all previous phases of the data evolution.
Is it beyond the pale of comprehension to think that a company, for instance a Kraft, would focus its efforts at the store-level? Could they possibly send troops (sales representatives) onto the real battle fields (the stores)? To get some feeling for the possibilities, let's look at some numbers.
In early 1995, the old Kraft and General Foods organizations were finally put together, forming Kraft. At that time, there were perhaps 3,500 people in the sales force, with 40 to 50 sales reps visiting a chain [7]. Let's assume that there are actually 3,000 people available for store-level marketing. If each person spent an hour in a store, it would be reasonable to visit 5 stores per day. If four days were devoted to this activity each week, and if 40 weeks were devoted to store-level marketing each year, then each sales rep could make 800 store visits per year. With 3,000 people, Kraft could take part in 2.4 million marketing actions each year.
Think about it. Two and a half million times a year, Kraft could have someone in the middle of the marketing battle. Understanding and influencing at the point of marketing action. Now if Kraft really wanted to join in this form of marketing, it could assign the sales reps to work in the stores five days a week, thus yielding a cool 3 million store visits ... 3 million times a years a Kraft professional could be influencing the real consumer markets. That is the promise of scanner marketing.
I can hear the howls of protest.
Manufacturers complain bitterly that retailers have taken their eye off the ball; that they spend their time buying, not selling; that they spend their time trying to get money out of the manufacturers in the form of deals and not out of the consumers in the form of profitable sales.
Scanner marketing gives these manufacturers the means to regain the lead in the battle for consumer sales and loyalty. If they, the manufacturers, shift their focus to the point of the actual sale, then the retailers will be induced to follow suit. Everyone will join the real battle, instead of fighting behind the lines over the resources that should be directed to the points of action.
What happens when you focus on the store? What does an army of Kraft sales reps have to offer when they show up at the store manager's door? Are they there simply to sell more cheese and coffee to the store? If so, they are at the wrong address because those decisions are better made at other levels. No, the manufacturers have something that is much more valuable: knowledge. Firms such as Kraft, Procter & Gamble, and Ocean Spray Cranberries are masters of a form of marketing that has led to their continued profit picture: building brand equity.
Why did Philip Morris pay significantly more than book value for General Foods, Miller Brewing, and Kraft? Were they paying all of that money for manufacturing facilities and distribution systems? No, they were buying Maxwell House, Miller Lite, and Kraft cheese. They were buying brands. More specifically, they bought the equity that had been built in those brands. Consumer packaged goods companies know how to build equity via established brand marketing concepts, tools, and techniques.
That brand equity is what manufacturers have been offering retailers for decades. Consumers would seek those stores that had the high-equity brands. All the retailer had to do was to make sure that he stocked the high brand share brands, and profits would take care of themselves. When attention turned away from brand equity and towards trade deals, retailers learned that they could buy at lower prices. They thought that they would be able to take advantage of these prices in ways that would lead to increased profits.
But this did not happen, perhaps because all retailers could similarly buy at the lower prices. Given the competitive nature of retailer, the retailers "competed away" these funds. They learned (or should have learned) that simply being able to buy a commodity at a price that is lower than the published price does not lead to higher profits when your competitors can also buy at that lower price.
This was particularly true in food retailing in the last two decades because of alternative sources of food such as mass merchandisers and club stores. Eating out of the home has taken a big toll on food retailers market. So, given a shrinking customer base and a need to grow, retailers competed away the funds they captured from manufacturers.
Building store equity is a natural approach when you look at a retail chain from the viewpoint of a consumer. Consumers shop in different retail stores, but it is unlikely that a consumer will shop on a regular basis in multiple stores owned by the same chain. To almost all consumers, a retail chain is represented by the store that s/he shops in, not by the overall chain. To that person, a store is the chain. The shopping experience in that store is what determines the consumer's attitude towards the chain much more than image advertising and other chain-wide marketing efforts. Those efforts create top-of-mind awareness, but experiences with a product or service are much more powerful determinants of a person's loyalty than are advertisements.
Thus, to market a chain such as Safeway, the retailers should market the stores. Each store can be considered a "product" that has a set of customers. The store can be customized to meet the needs of its customers. It is possible for the store to know the name and address of most of its customers, as well as their shopping patterns. Most shoppers pay for their purchases via check, debit card, or credit card, and their identify is thus known to the store. The scanner equipment in each store keeps track of the shopping basket of each customer. Thus it would be possible to link most of the shoppers' purchases with their name, and the result would be a customer database for each store.
This database provides the basis for building store equity via marketing. Marketing is the process of understanding and influencing markets. With the customer database, each customer is a "market" because each customer can be understood via the data and each customer can be influenced via the mailing of marketing communications and/or while s/he is shopping in the store.
Store-level marketing is a concept that most retailers do not practice. They make chain-wide decisions and give little latitude to store managers for store specific decisions. Further, most retailers are not marketers, they are retailers. Thus, they need help and their vendors are in the best position to provide the help through the process of co-marketing, a phrase coined by Chris Hoyt of Reach Marketing.
"That's a process by which leading brand marketers, large or small, work hand-in-hand with food retailers by providing them with fundamental brand marketing expertise. ... The manufacturing community is going to have to take the initiative to make all of this happen. Manufacturers are going to have to show retailers, by-category, by-brand, by-store and store cluster, how moving to a consumer-based marketing strategy will yield more profitable and more predictable results than price-based merchandising tactics."[8]
Another consultant has identified the steps being taken by the leading retailers:
"1) Reposition their stores as brands, anchored by highest-quality store brand products (what most ad agencies still refer to as private labels); and 2) work with their suppliers to develop strategic co-marketing programming that builds store and brand equities together. They are seeking long-term, proactive partnerships with like-minded manufacturers that are willing to share their consumer knowledge and brand-building expertise. It is now not only possible to build brand image, loyalty and equity via co-marketing through retail channels, it is becoming imperative. Given the trade's 'store brand' vision, coupled with its stranglehold over how or whether brands are marketed at the store level, we have reached the point where communication with consumers cannot occur without the full marketing -- not just merchandising -- involvement of the retail trade."[9]
CPG firms are starting to apply the co-marketing concept, as evidenced by recent moves by H.J. Heinz:
"In an effort to reach consumers in a more local way, H. J. Heinz Co. is biting into the relatively new area of grass roots co-marketing with grocers. ... 'We're trying to move into genuine brand equity, which encourages retailers to support our products at a very local, account-by-account basis,' said Brian Falck, VP-retail advertising for Heinz. 'The concept of the old way of doing business is changing,' said John Kramer, president of J. Brown. 'Retailers made money from buying foods rather than selling goods. Heinz has realized if you're going to gain and maintain your position, you must market with the retailer.' ... Heinz will work with grocery stores to build promotions that tie in either store brands or other manufacturers through local and regional advertising and direct mail. ... 'Joint programming builds brand image and the retailer simultaneously,' Mr. Kramer said. 'The traditional co-op advertising was price and item driven; this will be equity building for both in a seamless integration.'"[10}
We can see the challenge facing CPG firms: helping chains build store equity in the process of building brand loyalty for the brands of the CPG firms and NOT the brands of the retailers. How does Heinz work with Safeway to build brand equity and store equity at the same time without also building brand equity for the Safeway brands that directly compete with the Heinz brands?
The day that I am composing this section of this document, a new Harris Teeter store opened near my home. I visited the store manager on opening day, and he showed me around the store. We discussed a large end aisle display for President's Choice brand of colas, which is the Harris Teeter store brand. As I stared at this impressive store with its large display of President's Choice Cola, I saw the delima facing CPG firms. If Pepsi, for instance, works with this store manager to build store loyalty, will Pepsi not at the same time be building brand loyalty for the President's Choice brand?
What does it mean to build store equity? Well, equity has come to mean different things to different people; there is a new tradition in marketing in which people are first providing a definition and then studying equity from that perspective. One popular conceptualization of brand equity is the ability of a brand to "spawn" successful new products in categories that are different from the brand's base category. So, it is thought that the Arm & Hammer brand of soda powder has high equity because it's company was able to successfully introduce the Arm & Hammer Dental Care product. The idea is if people come to trust the Arm & Hammer brand in one category, they will transfer this trust to another category ... from baking soda to toothpaste.
So, building store equity at Harris Teeter means that the consumer would learn to trust Harris Teeter. When that happens, Harris Teeter is able to transfer that trust from its store to particular items in the store. In particular, it can transfer that trust to its store brands and thus undermine the brand equity of the very firms who help it build store equity. This is the paradox facing the CPG firms as the retailers evolve and co-marketing begins to replace "the deal" as the foci of their relationships.
The Co-marketing Paradox facing CPG firms is only one of similar situations facing thousands of firms worldwide as they evolve from closed, vertically integrated corporations to firms who build alliances with their suppliers and/or competitors. But the CPG firm/grocery retailer alliance is fraught with structural problems.
A more natural alliance is between grocery retailers and private label suppliers. Let's look at an example involving the cola category.
"Toronto-based Cott Corporation, which makes private label soft drinks, was asked by Safeway Supermarkets for help in marketing its store-brand line of soda pop. Cott saw that Safeway needed to do more than simply revive sluggish cola sales - it needed to improve the performance of all its private-label products. Cott suggested alternative approaches to package design, merchandising, promotion, and production formulation. ... Cott ... also enlisted the help of the people who could be the most effective in selling the cola: Safeway employees. Cott reminded them that private-label soda helps preserve Safeway's profit margins - and their jobs. ... In effect, Cott created 76,000 new sales people for Safeway Select Soda and achieved a stuffing 35 percent market share within four months of introduction. Working similarly with Wal-Mart, Cott achieved and has maintained a nearly 50 percent market share for Sam's American Choice cola against product leaders Coke and Pepsi."[11]
This is a natural alliance because what is good for Cott is also good for Safeway ... it is a win/win situation. Cott does not sell the same item in the stores of Safeway's competitors. Cott may manufacturer cola brands for Safeway's competitors, but they are not the same brands. Thus Cott and Safeway can become deep partners and Cott can even become Safeway's soft drink category manager.
A Pepsi/Safeway alliance is not as natural as the Cott/Safeway alliance because Pepsi and Safeway are both partners and competitors: they partner to sell Pepsi brands and they compete with Pepsi selling its brands and Safeway selling Safeway Select Soda. If a CPG firm treats co-marketing as just an extension of existing trade marketing practices, it stands to lose in a big way. The term "trade marketing" is somewhat of a misnomer because it tends to involve only one element of the marketing price: price.
The primary weapon employed in marketing to the retail trade is money ... raw money. Most CPG firms do not market to the trade; they do not attempt to understand and influence the trade with the full arsenal of marketing weapons; they simply give the retailer money. If this practice is continued under the banner of co-marketing, the retailer will use the money to build store equity at the expense of manufacturers brand equity. If that happens, then the CPG firms will be the losers ... they will let the retailers use their money to defeat them.
But, can CPG firms ignore this new situation? Can they continue to practice trade marketing? If the Cott/Safeway story is an exemplar, then the answer is no, CPG firms cannot ignore the new realities of the retail trade. They must find creative ways to market with and through the retailers in ways that builds the equity in their brands more than it improves the retailers' competitive positions. As is always the situation in successful marketing stories, it is creativity and imagination that tends to win the wars, not the raw transfer of money.
