*2001 Annual Report Introduction: Proceed With Caution

Posted on May 1, 2001 by Chief Marketer Staff

PROMOTION SPENDING: $100.98 BILLION

A Cautionary Tale: Promotion spending rises 8.1 percent in 2000, as the market goes iffy.

Repeat after us: There is no recession. There is no recession. There is no recession.

Of course, whether the U.S. economy truly is in a state of decline or is simply settling back into a period of more realistic growth is a moot point, right? Because the promotion industry has always been recession-proof.

The industry posted another solid year of growth in 2000, as spending on promotion marketing rose 8.1 percent to break the $100 billion plateau for the first time ($100.98 billion, to be exact), according to PROMO estimates based on a vast array of industry sources.

In a reversal of recent trends, that growth rate was slower than the one enjoyed by advertising, which saw spending increase 9.8 percent to $236.3 billion last year, according to the annual Insider’s Report from McCann-Erickson’s Bob Coen. Bolstered by the Summer Olympics, intense national elections, and an influx of dot-com advertisers in the first half of the year, ad spending increased at its highest rate since 1983, according to McCann.

But advertising is not recession-proof. In 2001, there are no Olympics. There are no elections. And the dot-com advertisers still in business are putting most of their marketing dollars into promotion. “The industry is moving away from advertiser push to consumer pull,” Procter & Gamble ceo A.G. Lafley told an audience of advertising executives at a conference last fall. And promotion pulls better than advertising — especially in a “recession.”

Promotion Industry Revenues
Segments	1999	2000	Change	% of total
Premiums	$26,300	$26,900	2.3%	26.6%
POP	14,400	17,000	18.1	16.8
Ad Spec	14,800	16,300	10.1	16.1
Sponsorships	7,600	8,700	14.5	8.6
Coupons	6,980	6,920	-0.9	6.9
Printing	6,200	6,100	-1.6	6.0
Licensing	5,500	5,775	5.0	5.7
Fulfillment	3,297	3,800	15.3	3.8
Agency	2,178	2,614	20.0	2.6
Interactive	1,471	1,800	22.4	1.8
Games, Contests, Sweeps	1,380	1,504	9.0	1.5
Research	1,340	1,460	9.0	1.4
Sampling	1,120	1,200	7.1	1.2
In-store	870	904	3.9	0.9
Total	$93,436	$100,977	8.1%	100%
Source: PROMO Magazine

What’s more, advertising is becoming more of a promotion-driven strategy than it ever has before. (For that matter, p.r. is becoming more of a promotion-driven strategy, too. Can you say “convergence?”)

Spreading the Wealth

Unlike 2000, however, growth did not come robustly to all industry segments. Marketers were trending toward cost-reduction and efficiency long before anyone started whispering the “R” word. They’re even more focused on it now. “Those pencils are definitely sharper,” says Sue Furlong, president of DVC Group.

Among segments, interactive marketing posted the greatest increase at 22.4 percent, as Internet marketing dollars rose 40 percent to $1.3 billion (see chart). While the increase was only half as great as the one posted in 1999, it’s still impressive considering the bloodbath which took place among dot-coms last year — and the fact that most traditional marketers are still only tiptoeing into the channel.

Net revenues among agencies jumped 20 percent in 2000, even as traditional ad agencies, p.r. firms, and marketing services companies continued efforts to siphon business away from the core. Spending on point-of-purchase displays rose 18.1 percent, as account-specific activity spread and more retail channels adopted techniques.

On the flip side, spending in the coupon segment slipped about one percent, as massive consolidation among CPGs shook up second-half schedules and consumer redemption declined. And specialty printing revenues dropped 1.6 percent as marketers, sensing the impending economic downturn, scaled back on second-half plans.

Promotion’s recession-proof nature may be tested in 2001. The expansion of the discipline to include more sophisticated strategies such as entertainment sponsorships and event marketing has moved the industry away from pure sales-driving tactics — and that’s what in the past kept it flourishing during times of economic uncertainty.

But, like we said, there is no recession.

View from the Inside

For the second straight year, PROMO and the Promotion Marketing Association, New York City, surveyed 2,000 promotion professionals early in the year in an effort to enhance this industry report with additional data and insight. Again this year, different questions were asked of (an equal number of) brand marketers and promotion agencies/marketing services suppliers to gain a fuller understanding of activity in 2000 and expectations for 2001. This year, the effort generated 267 responses.

The following is a review of the most significant findings from this year’s survey, which should serve as a good prologue to the rest of the report.

Overall Spending

Marketers said they allocated about 53 percent of their total spending to advertising this year, about 23 percent to consumer promotion, 18 percent to trade promotion, and six percent to other segments (including p.r., research, and customer service).

Compared with the 2000 study, consumer and trade allocations were down (from 25% and 29%, respectively), while advertising was up. Elsewhere, marketers said that about 18 percent of their ad budgets have been used to fund promotion-driven messages in the last three years.

Two key factors likely played into the difference between 1999 and 2000: fewer responses this year from dot-coms, which were heavily focused on promotion in 2000, and more responses from entertainment companies, whose budgets go primarily to advertising.

Strategic Fodder
Which statement best describes the role of promotion in your marketing plan?
A separate program not integrated into the overall plan	13.7%
An ancillary component of our integrated marketing plan	51.0%
The core component of our integrated marketing plan	31.4%
Source: PROMO Magazine

But even last year’s breakdown doesn’t accurately reflect the marketing world’s increased emphasis on consumer promotion. In advertising, promotional messages moved beyond the tag to envelope the primary message. (The latest flight from MasterCard’s Priceless campaign is for a sweepstakes; McDonald’s in the first quarter went beyond spots for its latest premium offer by running 30-second branding spots for Happy Meals.) And within trade spending, more marketing dollars are being channeled into frequent-shopper programs and account-specific efforts which, while allocated to accounts, are designed to pass through to consumers.

Growth Plans

Only 16 percent of marketing respondents said they would increase promotion spending in 2001. That compares unfavorably with results from last year, when 43 percent said their budgets were greater than ’99 — and at an average increase of 12.5 percent. About 73 percent said spending would be equal to 2000, while 12 percent said it would decrease. Similarly, only 20 percent said they would increase trade promotion funding (67% said it would stay the same).

The general consensus among industry experts is that promotion activity will increase while marketers reduce costs by putting the onus on agencies and suppliers to save money.

Besides, not every marketer is running scared. Coca-Cola, for instance, recently announced plans to boost spending by more than $300 million; an increase like that can offset a lot of budget reductions elsewhere.

Services Growth

More than 58 percent of agency/supplier respondents said revenues increased in 2000, while only 10 percent said they decreased. The median rate of growth was 20 percent. Only about 40 percent of respondents said the boost came from existing clients, which means new business was the primary factor.

For 2001, 68 percent of agencies and suppliers expect growth, with 74 percent saying it will come from new clients. With the dot-com craze over, the questions arises as to where all these new clients will come from. (Let the pitches and bidding wars begin.)

Perception of Promotion

Asked which statement best describes their use of promotion, 57 percent of marketers said they employed an equal mix of strategic brand-building and tactical sales initiatives. The main thrust was tactical for 31 percent, strategic for 10 percent. Those results imply a step back from 2000, when only 21 percent said they viewed promotion as a tactical tool.

However, a new question asked this year suggests that the status of promotion is still on the upswing: Asked which statement best described the role of promotion in the overall marketing mix, 31 percent said it was the core component and 51 percent an ancillary component of their integrated marketing plans; only 14 percent said they employ it as a stand-alone program.

Measurement Tools

Not surprisingly, incremental sales are still the primary way brands measure the success of promotions. However, 46 percent of agencies/suppliers identified sales as the main method, compared with 58 percent in 2000. This year, more respondents said their work was judged by response rates (19%), awareness (10%), and a combination of data (9%). Redemption rates were also cited by fewer respondents this year, suggesting a move away from coupons and rebate programs.

ROI Tools
What is the primary measuring tool for your clients?
Sales	45.8%
Response rates	19.4%
Awareness	10.2%
Other (Mix)	8.8%
Redemption Rates	4.2%
Source: PROMO Magazine

The “typical” success rate for campaigns was 6-10 percent when measuring by sales and 2-5 percent when measuring by response or redemption rates. “I’d like to know who some of these agencies are if that’s their typical success rate,” joked PMA chairman Bob Fallon, speaking at the association’s annual Update conference in March (where these results were first released).

Favorite Tactics

Asked which three strategies/tactics were the most important to their overall program, marketers most often selected co-marketing (37%), event marketing (31%), and tie-ins and alliances (26%). Those responses were drastically different compared with 2000, when coupons and direct mail were the two leading tactics. Sponsorships also gained more attention this year, while P-O-P and premiums received less. The importance of sweepstakes, contests, and games remained relatively even (See chart).

Fallon suggests that this year’s results, with their emphasis on alliances and interactive marketing techniques, “reads more like a wish list than reality,” especially in a down economy. “You may find these people actually moving back to more traditional tactics,” he suggests.

Partnership Plans

As implied above, most marketers plan to increase or hold steady the number of strategic alliances they develop — which is a great way to maintain costs while increasing activity. Most of the increase will come from additional partnerships with retailers, followed by entertainment tie-ins and cross-promotions with brands outside the company (See chart).

Targeting

About 31 percent of marketers said they will increase spending on campaigns for specific ethnic groups — almost twice as many as said they will increase spending overall. The figure shows the increased need to target promotions by demographics rather than conducting broad campaigns.

However, only 26 percent of respondents said that more than half of their efforts are targeted to specific demographic groups, while 38 percent said fewer than one in 10 were targeted. Those results suggest a hesitancy among brands to move away from broad campaigns that provide the most return — even if they don’t produce the best results. This tendency was clear in the couponing segment over the last two years, as CPGs stepped back from targeted programs in favor of mass campaigns (See Couponing, pg. S14).

The Internet

About 49 percent of marketers said they devoted at least six percent of their total budgets to Internet-based promotion in 2000, compared with 35 percent in 1999. Fifty-one percent said they will allocate at least six percent in 2001, while fewer (6% vs. 12% a year ago) said they’ll devote more than 30 percent. The growth slowdown reflects declining ad budgets among dot-com companies as well as an increased focus on integrated campaigns rather than Internet-only efforts on the part of traditional marketers.

Favorite Flavors
What strategies/tactics are most important to your overall promotion strategy?
Co-marketing	37.3%
Events	31.4%
Tie-Ins/Alliances	25.7%
Direct mail	25.5%
Coupons	21.6%
Games, Contests, Sweeps	19.6%
Sponsorships	19.6%
Source: PROMO Magazine

As the Internet is accepted more as a promotion-driven channel and less as an advertising medium, more funding is coming from promotion budgets. Still, the bulk of dollars are being diverted from ad coffers (43% in 2001, compared with 40% in 2000). The percentage of marketers using consumer promotion funds for Internet endeavors rose from 21 percent in 2000 to 26 percent this year.

Only 20 percent of agencies/suppliers said they derived more than 50 percent of revenues in 2000 from Internet-related activity; 61 percent said the channel accounted for 10 percent or less.

Wireless Expectations

Asked if they expected wireless devices to become a significant channel for delivering promotions in the next two years, 67 percent of marketers and 44 percent of agencies/suppliers said no. Answering in the affirmative were 27 percent of agencies/suppliers and just 10 percent of marketers, with the rest expressing uncertainty either way.