Reynold Company

Reynolds Metals Company: Consumer Products Division

Case Analysis

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 both groups of customers.

Competition

There are three direct competitors: DowBrands with Ziplock, Saran, and Handi; First brands with Glad; Tenneco with Hefty. End-users tend to use these products interchangeably, which could threaten Reynolds' market share. Currently, competitors implement marketing strategies similar to Reynolds, like off-invoicing allowances.

Environmental issues within the food wrapping market are forcing Reynolds to change its marketing strategy. There has been a 50% increase in promotional spending in the last 10 years and product margins continue to decrease. Making brand awareness, brand loyalty, and price are the most competitive factors. Reynolds ranks high in awareness and loyalty, but sine it has the highest price in the market competing on price would be counterproductive.

Reynolds has the opportunity to secure a competitive advantage within this market. By implementing MDF, Reynolds will set the standard for promotional efficiency. The direct competitors will likely exploit Reynolds' off-invoice reductions to gain shelf space and alliances with retailers. In this case, competitors will gain a temporary increase in sales and market share. Once retailers and wholesales realize the savings of MDF and the profit increases, competitors will lose their brief advantage and be forced to transform their current ineffective off-invoicing process.

MDF and Implementation Tactics

Compared to off-invoicing, MDF better addresses the goals of category management: more effective promotions, distribution and shelf replenishment, and new-product introduction. Implementing 100% MDF offers the most efficient and effective use of marketing money, but requires some significant organizational changes within CPD and with Reynolds' retailers and distributors.

MDF dollars are used to increase in-store promotional activities resulting in better displays and advertisements, a reduction in regular shelf-prices by 10% and five additional weeks of promotions. During promotional weeks, sales soar 150%. Retailers and wholesalers see increased sales through the implementation of MDF. Supporting activities to retailers will also allow CPD to advise them on the most effective ways to launch new products. End-users gain five additional weeks of promotions resulting in lower prices. Off-invoicing does not produce these gains for either consumers or distributors. Reynolds will realize at least $26 million increase in revenue annually (Appendix A).

A total conversion to MDF will offer costs savings to Reynolds