April 12, 2004
Reynolds is considering a transition from off-invoice allowances to Marketing Development Funds (MDF) in order to efficiently implement category management. Category management is an industry-wide initiative designed to improve the effectiveness of marketing dollars through efficient promotion, distribution and shelf replenishment, product assortment and new-product introduction. Off-invoicing offers per case discounts to distributors and remains a standard marketing practice that consumes most of the marketing budget. These discounts are usually never seen by the end-users since retailers pocket the savings. MDF is a more efficient practice for utilizing marketing dollars through manufacturer supportive retail merchandising activities, rather than per case discounts. Reynolds will undergo some transition internally and externally, but as a result will effectively achieve its category management goal; reduce inventory costs by more than $17 million; increase profits by more than $26 million; improve its value to its end-users and distributors; and revolutionize marketing practices in the food wrapping industry (Appendix A). Company
Reynolds is one of the most recognized and respected brands in the world, ranking 7th in brand quality perception among 200 consumer products brands (Exhibit 5). This brand awareness also appears in the redemption rates of its coupons, which is 3.7% higher than the industry average. Reynolds' brand image is the key differentiator in this highly commoditized market. Reynolds Consumer Products Division (CPD) has suffered recent losses in market share because of increased aluminum prices, but Reynolds' strong brand has allowed it to persevere. The right marketing plan will allow it to recover quickly. Reynolds, as a market leader, can dictate change in the food wrapping market such as category management. Financially, it can afford to be a risk-taker in the consumer products market, because most of its revenue comes from industrial products. Furthermore, Reynolds has built its brand equity on leadership in innovation and the superior quality of its products, exemplified in Reynolds' use of polyvinyl for plastic wrap rather than less effective polyethylene. Switching from off-invoicing to total MDF to better implement category management would mark another innovation for Reynolds. Customers
Reynolds' customers can be divided into two main groups. One group consists of end-users of its products. Retailers and wholesalers make up the second group of customers. The end-users are price sensitive; however, they are loyal to the brand. End-users will often wait to buy foil if Reynolds is not available or not on sale, rather that buy from a competitor. Retailers and wholesalers also have a strong relationship with Reynolds. In a recent survey, Reynolds was considered the preferred supplier at 30% over its competitors at 23%. Implementation of the MDF system will have a significant impact on all customers. In the long run, it will strengthen all customer relationships with Reynolds. MDF will have an initial price increase of 5% for retailers and wholesalers since it will eliminate per case discounts. However, implementing MDF will increase revenues to distributors through 50% savings in inventory holding costs and increases in sales. These effects are more significant than off-invoicing but less immediate. The cumulative effect of MDF offers a more sustainable, profitable marketing strategy than off-invoicing. End-users will benefit through lower prices and more promotions. Effective promotions such as better displays, coupons, and well-trained sales personnel result in end-users pulling demand. Increases in demand translate into increases in sales and revenues, therefore increases in profit for retailers, wholesalers, and Reynolds. By effectively implementing MDF, Reynolds offers more value to...