Why do some manufacturers prefer retailers deduct than to pay by check?

Why would a CPG manufacturer not only accept deductions, but go as far as to make them the primary and preferred method of payment for their retail-division trade promotions?   To answer this question, we need to compare checks and deductions.  Let’s start with checks.

Paying trade promotion by checks used to be the primary and preferred methodology several decades ago.   When payment by check was dominate, manufacturers had more leverage than retailers.  The top 10 retailers had far less market share than today, and retailers relied on the Manufacturers for critical information.   Manufacturers paid companies like Nielsen for in-store audits to get valuable category and market share information.   This data advantage enabled large manufacturers like P&G, Unilever, Kraft and others to require retailers to wait for a check to get paid for trade promotions.  Retailers had little choice but to wait for the check.

However, the balance of power shifted to the retailer with the advent of the UPC, retail scanners and computer power able to process big data.

IRI created the CPG information revolution with their Behavior Scan service.  It quickly made Nielsen’s bi-monthly manual store audits obsolete.  The corner stone of IRI’s business model was to give free UPC scanners to the retailers for free, in exchange for the weekly movement data.   Fast forward more than 30 years, the CPG industry is now dependent upon syndicated and POS data for accurate trade promotion analysis, category perspectives, price elasticity, and many other uses.  Manufacturers are at a severe disadvantage unless they purchase syndicated data from IRI or Nielsen, or barter for POS (point-of-sale) data from the retailer.

So with that history, what about checks today?  Bottom line, retailers have the leverage to refuse payment by check:

  • Retailers now have the power of information.
  • The top 10 retailers now have a near lock on brick-and-mortar CPG sales. Just think Walmart and Kroger.
  • Retailers have eroded the one-dominate brands with private label and store brands.
  • New organic and third-tier brands are ready to replace the #1 brand if necessary.

This CPG reality means that retailers can decide if they want to wait for a check, or if they will deduct.  Some retailers tell the manufacturer that they will wait “x” days for payment before they will deduct.  It is this choice that creates the challenge for checks.   For manufacturers that still issue checks to direct customers, the check must be cut and sent, AND processed by the retailer within ‘x’ days to prevent the deduction.   If the manufacturer sends a check but it’s not processed in time, the manufacturer has now double-paid for the trade promotion.   This situation isn’t known until the deduction is researched by the manufacturer and matched back to the original event.  Think of all the extra non-productive work this creates for the manufacturer and the retailer.

Ok, so what about deductions.    What are the challenges for only using deductions to pay for trade promotions?   From a retailer perspective, this can be the preferred method.  Assuming there are frequent purchases from the manufacturer on which to deduct, the retailer is in control.  What’s not to like?

From a manufacturer perspective, every deduction must be quickly researched and matched back to the correct promotion.  Unless every deduction is correctly expensed to the appropriate promotion, there is no way to know if the retailer is only deducting for amounts earned and due.  If the research isn’t done quickly, the retailer can deny the manufacturer’s dispute.   Processing trade promotion deductions quickly and accurately requires a TPM solution.

With a TPM solution to process deductions, the manufacturer has eliminated the un-necessary work, and potentially double and triple work.  Eliminated is creating the check, then processing a deduction for the same event, and then the work to dispute a deduction, re-invoice and process the repay.  A TPM solution helps the manufacturer validate the retailer’s deductions to confirm deductions are accurate and without double dips.

If the manufacturer has a TPM solution, paying trade promotions through deductions doesn’t have to be a burden.