Squeeze Play
The criminal case of Gino DeLuca is unlikely to trigger a major shift in negotiations in the in-store marketing industry. That’s happening on its own.
DeLuca, a former director of Gillette Co.’s permanent merchandising systems department, was indicted in April for allegedly taking $600,000 in kickbacks from display vendors. DeLuca pleaded not guilty. No trial date is set yet.
DeLuca allegedly demanded cash and gifts from four display firms in exchange for $1.26 million to $15 million-plus in business per company. The 22-year Gillette veteran controlled $30 million to $40 million in annual display budgets, and allegedly told his subordinates to give business to the four firms (instead of companies that weren’t paying kickbacks), in addition to steering contracts to the four himself. Deluca allegedly ignored Gillette staffers’ concerns about poor quality of goods and services from Interesting Display and Ideas, Inc.
When Gillette found out DeLuca was soliciting kickbacks from vendors, it fired him (in August 2002) and went to the U.S. Department of Justice. Gillette is revamping its permanent merchandising systems department and hasn’t named a replacement for DeLuca.
Boston-based Gillette won’t take further legal action against DeLuca, nor will it comment on whether it will take legal action against the four suppliers: Top Marketing, Interesting Display and Ideas, Inc., Dascal and Associates, all based in Quebec, Canada, and San Diego-based MGM Graphics. The Justice Department won’t comment on whether it’s investigating the companies, which allegedly gave DeLuca more than $600,000 in cash, real estate, automobiles, free travel and retail products.
In the old days, many supermarket deals came with personal perks. Such favors used to be the way to get an edge in the fierce competition among commodity players, especially in tight niche markets such as printing and packaging. Then the Justice Department shook things up in 1999 and 2000: Its investigation into collusive practices in the point-of-purchase advertising and display materials industry resulted in the conviction of nine corporations and at least 28 people at Philip Morris, Heublein, Inc., Hiram Walker & Sons, Warner-Lambert Co., Austin Nichols & Co., Lorillard Tobacco Co., Joseph E. Seagram & Sons, William Grant & Sons and Domecq Importers.
Since then, the overall business climate has become intolerant of questionable ethics following corporate misconduct at Enron and Worldcom — and closer to home, the current Securities & Exchange Commission investigation of accounting irregularities at Royal Ahold.
Personal gifts tied to trade deals “were falling out of favor, but will fall faster now,” says Cannondale Associates Partner Ken Harris. Kickbacks still go on more than anyone wants to admit, but the stakes are higher now: Courts are handing out serious jail time for fraud. DeLuca faces up to 85 years in prison and $4 million in fines if convicted and given consecutive sentences for all five counts of mail fraud, 10 counts of wire fraud, one count of money laundering, and two counts of false tax returns (for 1999 and 2000).
But in-store marketing companies are still feeling heat. As personal payment wanes, they face growing price pressure from packaged goods clients. Packaged goods companies have been pressing for price cuts from in-store vendors for three or four years, prompted in large part by negotiations with Wal-Mart. CPGs weary of bending to Wal-Mart’s price demands have turned around and applied the same pressure to their own vendors, leveraging their scale to trim prices.
One food company promised Wall Street it would save a set amount of money through merger efficiencies, then told suppliers how much to cut prices so the food marketer could deliver, says David Diamond, exec VP for Catalina Marketing Corp. “Some did, some didn’t,” he says. “To comply, you either have to mess with your margins or your revenues.”
At the same time, CPGs are bringing their purchasing departments into negotiations — a trend affecting all marketing services, not just in-store work. CPGs bring their procurement experts in as ethics insurance — to keep marketing staffs from doling out business based on personal relationships — and because procurement staffers are skilled at buying goods for less. That price-only mentality may be fine for raw materials, but it diminishes marketing services to commodities.
Recent RFPs emphasize cost too much. “It’s shortsighted to view the medium from a cost standpoint,” says Dick Blatt, executive director of Washington, DC-based trade association Point of Purchase Advertising International [POPAI]. “Our research shows that when you drive costs down, you diminish sales. There’s a direct correlation between the quality of at-retail marketing and a lift in sales. [Price-centered] RFPs drive out great creativity that makes for effective retail marketing.”
In-store vendors in segments with fewer suppliers — such as floor graphics and in-store couponing — are more insulated from fierce price cuts. “Offering a proprietary product and being the only one in the category provides a little bit of shelter,” Diamond says.
Of course, the best way for in-store marketing companies to differentiate themselves is via proprietary services and products. But the bad economy has stalled CPGs’ new-technology tests, and marketing firms can’t pitch new services without in-market results. Without R&D, marketing firms risk further commoditization — a Catch-22 that eventually could set the stage for the kind of corruption that leads individuals like DeLuca to demand personal favors. If in-store marketing firms are forced to compete only on price and can’t afford to develop new products, the worry is that the only advantage they’ll have in negotiations is personal favors. “A commodified market leads to corruption,” Diamond says.
“You would hope for better,” Harris adds. “Relationships don’t have to be built on the kind of negative foundation of personal gain. Plastic is plastic and wood is wood, but design isn’t a commodity. Neither is production, especially for sophisticated display designs.”
POPAI established a code of ethics (see sidebar) and has collaborated with the Justice Department since 2000 to educate POPAI members on proper sales protocol. “We care about the integrity of the industry,” Blatt says.
DeLuca had been a POPAI board member; POPAI dropped him when Gillette fired him. POPAI offered to help the Justice Department, and conducted an internal review “to be certain that none of the alleged actions of Gino DeLuca financially compromised POPAI,” Blatt says. “Situations like this challenge good organizations to be ever more diligent to protect and preserve their stated values. … POPAI deplores any unethical and illegal behavior that would damage the credibility of our association, its members, or the point-of-purchase advertising industry.”
The pressure to do right and do well continues.
Code Read
Point of Purchase Advertising International’s code of ethics is published in its Standards of Practice Manual in six countries. Members agree in writing to uphold these values, or face sanctions:
- Abide by all federal and state laws while maintaining the highest level of integrity and honesty
- Communicate clearly and comprehensively all relevant company policies prior to entering into a relationship, including pricing and ownership issues
- Possess awareness of and adhere to P-O-P industry trade practices and standards as issued by POPAI
- All members are asked to sign a form illustrating that they, and their companies, comply with the industry’s standards of practice, as published by POPAI
Source: POPAI, Washington
