Circular Paradox
Retailers are evolving their advertising practices in response to consumers' needs and expectations.
A strongly held notion among most businesses is that advertising drives sales. Economic theory also recognizes the important role played by advertising in shaping consumer demand. Yet, despite the agreement of practitioners and academics alike, surprisingly little research has been conducted on how retailers advertise and what constitute the critical criteria they use to establish their advertising programs. To gain access to consumers, manufacturers need to understand retailers' standard advertising practices, and similarly, retailers themselves need knowledge about the advertising processes of their competitors for maximum differentiation and sales effectiveness.
In part to remedy this gap, we surveyed U.S. food wholesalers and retailers in 2010 about their advertising practices. Although complete results are still in preparation, this article summarizes several top-line findings.
Strategy and Organization. As expected, virtually all respondents confirmed that advertising is driven by the overall marketing strategy of the company. Further, ad strategy guides decisions relating to media selection, level and timing of expenditures, and the development of specific advertising vehicles. For slightly over two-thirds of companies, an internal advertising committee is responsible for ad strategy, whereas in other companies (23 percent) a single individual holds the responsibility. For some independent supermarkets (9 percent), an external wholesaler-based group is responsible.
Retailers primarily advertise weekly promotions with the goal of boosting immediate traffic and sales. To achieve this, they tend to favor certain types of communication channels for their advertising spending, which differ markedly from the TV-dominated ad expenditures of their suppliers. Newspapers still remain the most popular medium for retail food ads, although newspaper proportion of total retail ad spending has declined over the past three years and is forecast by our sample to decline still further in the near future. Not surprisingly, the Internet is taking up much of the slack: Compared with three years ago, when retail Internet ad spending totaled less than 2 percent of total ad spending, retailers expect Internet spending to be nearly 12 percent of the total in three years, a fivefold increase.
Role of Manufacturers. Much conventional industry wisdom holds that retail grocery ads are determined by the extent of manufacturer funding. Our retailers say otherwise. For the three media types employed by retailers that account for roughly two-thirds of ad spending — newspaper inserts, TV and radio — the majority of its ad funding doesn't come from manufacturers. Retailers estimated that only 25 percent of the total cost to print/distribute their ads and 47 percent of the total markdown was offset by supplier funding. Thus, while manufacturer funding is hardly inconsequential, it doesn't seem to play the dominant role.
Explaining Retailer Ads. It would hardly be surprising if retailers took competitor actions into account in their own ad budgeting and planning. On the other hand, developing one's own ads as a sole function of competitor ads is likely to be unwise, not to mention unprofitable. Developing strategy based on competitor moves instead of internal strengths is often a recipe for failure. So it's perhaps reassuring that most retailers report that the most important variables determining their circular format, size and length are internally focused: overall sales and traffic the year before, the company's financial results, and paper/printing costs.
Front-page Strategies Differ From Interior. Commonly, retailers strive to reinforce their company brand message and competitive position on the front (and, less often, the back) page of their ads, generally with special attention to hot prices. For the front page, competitive positioning and potential for traffic generation count the most in establishing prices; however, in the ad's interior pages, financial considerations take over — manufacturer cost and gross margin generated by the ad.
With traditional vehicles becoming less prominent in the future and retailers shifting emphasis toward television and online advertising, manufacturers will be challenged to find creative ways to drive consumers to their own brands using new methods.
The authors are at Cornell University in the following capacities: Gupta is Henrietta Johnson Louis professor of management and professor of marketing, S.C. Johnson Graduate School of Management; Hawkes is senior extension associate, Food Industry Management Program in the Dyson School of Applied Economics and Management; and McLaughlin is Robert G. Tobin professor of marketing and director of the Food Industry Management Program. For more information, contact [email protected].