Two sides of the same argument

Here’s a new acronym for you. ECR. If you don’t pepper your conversation with the phrase Efficient Consumer Response now, chances are that you soon will.

ECR is widely regarded as a technical, logistics discipline, and in the UK especially, marketers have been very stand-offish about it.

It is all about ensuring that the right goods end up on the right shelves at the right time – and the British supply chain is incredibly efficient compared to the US, from where ECR hails. This, it has been argued, is one US import we don’t need.

If that’s been your view so far, get ready to change it. ECR is about to take off in a big way. And far from being a specialist logistics matter, its biggest impact could be on marketing itself.

ECR’s sudden European debut is being driven by four things. First, leading manufacturers and retailers have realised they learned the wrong lessons from America’s first ECR experiments.

As the story goes, ECR first got off the ground when the chief executives of Wal-Mart and Procter & Gamble discussed their relationship in the non-threatening environment of a fishing trip. What they realised was that each one’s attempt to maximise his own efficiency and profitability was creating costs and problems for the other side.

P&G, for example, had fallen into the habit of using frequent coupon-based money-off promotions. That meant Wal-Mart had to stuff its warehouses full of P&G products in preparation for the shopping stampede, give them extra space on the shelves, and generally invest its time and money ensuring the promotion went well.

In response, it took advantage of the promotion by “buying forward” (buying large quantities of stock on trade discount to sell later at a higher margin when the consumer promotion had ended).

This, in turn, had a rebound effect on P&G. One minute its factories were working overtime to meet huge surges in demand. The next minute they were on go-slow, because Wal-Mart (and others) had piles of stock sitting in their warehouses. To clear some of the backlog, P&G marketers would then come up with a great idea: how about doing another price promotion? And so on, and so forth.

This, the two sides realised, was a lose-lose-lose situation. Both sides incurred extra supply chain costs and consumers became confused and cynical in the face of fluctuating prices. A policy of every day low pricing, on the other hand, would deliver assured value to the consumer, cut the direct costs of promotions as well as the added costs of manufacturing and stock ups and downs. It would also reduce friction between the two sides.

The misconception was that all this was simply a supply chain matter. In fact, what had started out as a “mere” logistics exercise had ended up changing the face of US consumer goods marketing. Without ECR, every day low pricing would have been still-born.

This, Europe’s new ECR enthusiasts recognise, is a key lesson. For them, category management is as important an ingredient of ECR as supply chain efficiencies. “The most important result [of ECR] is not improving logistics – cutting costs and splitting the difference – but overhauling the way we do business,” says Jan Andreae, president of Albert Heijn and co-chairman of the newly formed ECR Europe Executive Board. “Logistics is only the starting point,” agrees Heinz Wierzorek, chairman of Coca-Cola Germany’s management board and Andreae’s co-chairman. “Next will be promotions, assortment and how to create the right products.”

That’s the second reason for ECR’s sudden popularity. Never have so many marketing powerhouses got together to push such an initiative. The ECR Europe Board has 18 members, split equally between manufacturers and retailers. The manufacturers are Coca-Cola, Danone, Johnson & Johnson, Kraft Jacobs Suchard, Mars, Nestlé, P&G, Sardus and Unilever. The retail list includes the UK’s Tesco and Safeway.

The third reason is that the board has come up with some compelling numbers. A sponsored study by Coopers & Lybrand estimates that if grocery marketers across Europe embrace the principles of ECR, they will be able to cut $33bn of cost out of the supply chain, or 5.7 per cent off consumer prices. “This is not technical peanuts, it’s Big Money,” says Dr Gerd Krampe, a main board member of German retail chain ASKO Deutsche Kaufhaus. And, as Bill Bishop of US marketing consultancy Willard Bishop, adds: “Co-marketing opportunities are likely to be much larger than supply chain savings.”

Finally, after a decade of perfecting beggar-my-neighbour strategies, both sides of the manufacturer/retailer divide are beginning to realise they do, indeed, have some common interests. The emergence of discounters and, in the wings, multimedia-based “direct” distributors which bypass traditional shopping outlets, is forcing retailers in particular to sit up and

think. “The [branded goods/retailing] business system as a whole is under threat,” says Peter Harding of US ECR experts Kurt Salmon Associates.

The solution? Instead of playing “pass the parcel” with costs and complexity, manufacturers and retailers need to co-operate to make the whole concept more efficient. Coopers & Lybrand partner Philip de la Chambre says: “ECR requires that companies stop playing hide and seek with each other.”

The fascinating question over the next few years will be how far all this warm and wonderful rhetoric gets translated into reality – or not. Judging by the way Europe’s ECR pioneers are talking about their pilot experiments, they have already made progress in that direction. But, as Dr Krampe warned a packed ECR conference in Geneva recently, the major barriers may be internal, not external. “We are talking about major shifts within internal power structures,” he warned. In branded goods companies, one of the key focuses of that shift is going to be the role of the marketing department.

Until now, dismissing ECR as a US fad has probably been a sensible thing to do. Marketers who try doing that in a year’s time risk being marginalised.