Advertising versus Sales Promotion: An Examination of the Japanese Food Industry, 1976-2008
Changju Kim, Yingzi Xu, Kenneth F. Hyde
The issue of increasing sales promotion at the expense of advertising has been examined with growing concern over the last two decades. This study provides an exploratory analysis of the issues of allocation of marketing communication budget in the Japanese food industry: advertising for the long-term versus sales promotion for the short-term. Based on data collected from Nikkei Need-FinancialQUEST (Nikkei Digital Media, 2011), an increase in marketing budget allocated to sales promotion relative to advertising was observed in a time series analysis study from 1976 to 2008. The use of sales promotion budget has a two-fold effect on financial performance: the sales promotion budget is positively related to sales volumes and negatively related to profitability. Managerial implications of these findings and areas for future research are discussed.
Research shows the weakened power of traditional advertising in a diversified media environment; the growth rate differential of sales promotion relative to advertising has become noticeable in recent years (Kim, 2010; Li, Lee, Lee, and Griffin, 2011). However, in spite of qualitative and quantitative research in the last two decades, there is a gap concerning the outcomes of advertising and sales promotion budget allocation decisions in the industrial sector.
The aim of this article is to give a better understanding of whether the paradigm shift in budget allocation from advertising to sales promotion exists, and if this is the case, how marketing firms’ financial performance is affected in regards to sales volume and profitability. To address these issues, this study examines the budget allocation decisions for advertising and sales promotion from the perspective of short-term versus long-term objectives (Quelch, 1983; Achenbaum and Mitchel, 1987; Buzzell, Quelch, and Salmon, 1990; Jones, 1990; Low and Mohr, 1999, 2000; Rossiter and Percy, 1997).
The issue of increasing sales promotion at the expense of advertising has been viewed with growing concern by both practitioners and academics over the last two decades. In this context, considerable attention has been paid to the fundamental changes in the advertising-to-sales promotion ratio (Quelch, 1983; Johnson, 1988; Buzzell, Quelch and Salmon, 1990; Messinger and Narasimhan, 1995; Ailawadi, 2001). Partly as a result of the growing buying power of retailers, manufacturers have been reducing their commitment to advertising activities and spending much more on trade promotion and consumer promotion. The rapid growth in the relative proportion of trade promotion compared to total sales promotion is remarkable.
This study seeks to identify the changes in the relative emphasis on communication strategy at the industry level in Japan over an extended period of time. Therefore, we propose:
H1: The proportion of the marketing communications budget allocated to sales promotion, versus advertising, has increased in Japan. H2: The proportion of the marketing communications budget allocated to sales promotion increased sharply around the time of the collapse of the bubble economy in 1991.
In regard to consumer package goods manufacturers, the growth rate of sales volume may be lower than of the growth rate for sales promotion (Teramoto, 2001). This is not surprising due to the saturated market in Japan. A short-term perspective is defined as the degree to which management emphasizes short-term objectives and tasks, generally one year or less, and thus encourages short-term results (Burke, 1984; Rossiter and Percy, 1997). The short-term results of a sales promotion strategy are illustrated in an increase in sales volume. Yet the effect of sales promotions on sales volume does not last particularly long. This is because the carry-over effects of sales promotions are relatively low, compared with the level of purchase during the promotion period (Cotton and Babb, 1978). Often a company using sales promotion aggressively has a difficult time selling the products at full margins. Consumers would expect or demand lower prices all the time, so sales promotions may result in decreasing profitability for the firm (Rossiter and Percy, 1997; Jedidi, Mela and Gupta, 1999; Low and Mohr, 2000, Teramoto, 2001). Therefore, we propose: H3: Expenditure on sales promotion is positively related to sales volume. H4: Expenditure on sales promotion is negatively related to profitability.
In order to test the hypotheses, time series analysis of financial data in the period 1976-2008 was undertaken (Otsuki, 1998; Teramoto, 2001; Kim, 2010). This study focuses on the Japanese food industry. First, the food industry has been broadly accepted in past research along with the consumer packaged goods sector. Second, the food industry is one of the most challenging industries to have experienced changes in market conditions in recent years. Data was collected from Nikkei Need-FinancialQUEST over a period that exceeded three decades (fiscal years 1976 to 2008 inclusive). The data was gathered from all food manufacturing companies that provided public information on financial performance. The sample includes companies currently listed on the stock exchange as well as others that are no longer listed. Data on 10 firms that provide advertising, sales commission and promotional expenses for the entire analysis period are analyzed separately to test the hypotheses. Consistent with previous research, this study considers the total amount of sales commission and promotional expenses as sales promotion. The study analyzed the relationship of sales promotion with total sales (sales volumes) and profitability (return on sales, ROS). To test the hypotheses stated earlier, simple linear regression was employed. For hypotheses 1 and 2, the dependent variables are advertising and sales promotion; the independent variable is the year. For hypotheses 3 and 4, the dependent variables are total sales and ROS, and the independent variable is the relative proportion of sales promotion in the total marketing communications budget.
Research findings show that the relative emphasis on sales promotion relative to advertising has increased in the Japanese food industry, in the period 1976 to 2008. This change occurred around the time of the burst of the bubble economy, in fiscal year 1990. Subsequently, analysis shows sales promotion is positively related to sales volume increase, but negatively related to profitability. The relative proportion of budget allocation between advertising and sales promotion is a critical issue in today’s environment with its challenging market conditions. Therefore, strategic decisions regarding budget allocations need to consider the importance of short-term sales increases while simultaneously maintaining high profitability by building the long-term brand franchise through integrated marketing communications (Eagle et al., 1999).
Keywords: Marketing budget allocation, Sales promotion, Advertising, Short-term vs. long-term, Effects of sales promotion