Consumer packaged goods companies spend about $150 billion per year on marketing and promotion programs. Retailers spend uncounted billions to drive a substantial amount of their sales through promotion programs.
But a substantial change is about to happen -- the beans are about to be counted differently. New accounting requirements indicating when a marketing or sales expenditure is classified as an expense and when it is classified as a reduction in revenue have been issued by the Emerging Issues Task Force of the Financial Accounting Standards Board. Additional changes may also be considered.
The FASB changes -- which affect all publicly traded companies, both retailers and CPG manufacturers -- are so fundamental that they promise to require a re-thinking of most sales and marketing programs and the way sales and marketing managers use promotional tools such as off-invoice allowances, couponing, and frequent-shopper programs. Advertising and consumer promotions are also affected. Both retailers and manufacturers must, therefore, take into account the provisions of the new FASB requirements when preparing their new budgets.
The new accounting procedures must be applied in financial statements for annual or interim periods beginning after Dec. 15, 2001. (They are titled EITF Issue 00-14 "Accounting for Certain Sales Incentives" and EITF Issue 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products.") To date, the new EITF/FASB requirements have gone relatively un-noticed by sales, marketing and promotional managers. From a formal accounting perspective, the new rules have no impact on an organization's bottom-line results. Yet, in our view, the impact of those regulations and reporting approaches will have a major impact on sales, marketing and promotional programs for every firm in the United States.
Put simply, these new accounting standards require that many of the traditional marketing and promotional programs used by retailers and marketing organizations -- such as retail price reductions, off-invoice allowances, coupons and slotting fees -- will now have to be characterized as a reduction of revenue rather than as expense.
As an example, if an organization has $10 million in gross sales, and to generate that volume they have spent $1 million in promotional marketing funds (expenditures covered by the new EITF/FASB regulations), they may be required to report gross sales as $9 million, not $10 million. While the bottom line will be the same under either the new rules or old rules if additional sales are not generated, this new requirement will undoubtedly create major havoc for retail, sales, marketing and brand management accustomed to achieving sales targets through various promotions and then managing margins after the fact.
If management is to show stockholders the firm is growing, both the top and the bottom lines must grow. Because of the new EITF/FASB requirements, the traditional big marketing and promotion budgets for retail, sales, marketing and brand management may no longer be sacrosanct.
To generate the same top-line sales using their traditional trade promotion programs, the sales and marketing people will have to generate a minimum of 25% more volume. If the objective is to grow sales and maintain margin dollars, a 100% increase in unit volume or more must be obtained.
So what does all this mean for sales promotion and marketing programs? For one thing, it likely will make measurement and evaluation of promotional investments a much more salient issue for top management. Second, there will likely need to be more pre-testing of marketing programs to determine the impact and return. Third, many retailers and CPG manufacturers will be forced rethink their entire marketing and sales strategies -- not an altogether bad idea.
The column was co-written by Don Schultz, Ph.D., professor of Integrated Marketing at the Medill School of Journalism, Northwestern University; and Marsh Blackburn, chairman of Plato Partners, Chicago, a consulting firm. Teresa Iannaconi, a partner with KPMG LLP's Department of Professional Practice, New York, and a member of the EITF, assisted.