|
Description
Allowances from the manufacturer to the retailer to promote its goods have been around for a very long time. They can take various forms and may total more than 20% of the cost of goods sold. Retailers naturally have sought these allowances, especially after a 1984 IRS ruling let them be recorded as income. Bookkeeping became increasingly creative in the late 1990s leading to new accounting regulations in the wake of Sarbanes-Oxley, 2002. Have these regulations diminished trade promotion allowances? Apparently not. A study of the three years post--"Sarbox" finds such allowances have only changed in nature.
Introduction
Trade promotion allowances in the European and United States are more than 200 years old and some might argue that they date to the earliest stages of commerce. This specialized group of allowances offered by the supplier to the customer--normally a retailer--offers an incentive for the retailer to promote one supplier's goods over those of another.
The allowances are most often referred to as "co-op" or co-operative advertising allowances, but, in reality, they comprise a group of possible allowances for a retailer's sales of a particular product, store fixtures, distribution, in lieu of warranty, damaged goods, and so on. The complete group of allowances can equal more than 20% of the cost of goods sold (COGS) and, because of this impact on COGS, retailers who are price-driven will seek the maximum amount of these allowances from their suppliers. A current list of trade promotion allowances is shown in Figure 1.
[FIGURE 1 OMITTED]
The history of trade promotion allowances is not covered in any depth in the literature; however, there are some traces that permit a partial history of their origin to be constructed. The earliest of these are within the legal systems of both England and the United States and are contained in several cases seeking repayment of one sort or another. One of the components of damages being sought by various plaintiffs is the recovery of "consideration" for the sales of goods. Since trade promotion allowances are, by definition, provided by a supplier to the retailer for the purpose of promoting that supplier's goods or services over those of other suppliers, the fact that "consideration" was provided for this purpose by a supplier to a retailer meets the modern definition of a trade promotion allowance.
The earliest example is from an 1847 English case (Oldham and Mansfield, 1992) in which the plaintiff was seeking damages that included not only the cost of goods on board a ship that was sunk during wartime, but also return of monetary consideration that had been provided the defendant with the expectation that the defendant would use it to help his sales force increase sales of the plaintiff's goods. The case was Clement v. Dupre (Great Britain. Court of Chancery. Great Britain. Court of King's Bench. et al., 1764) in which Clement--an English cloth merchant--purchased woven goods from Dupre's weaving factory in Paris. Clement took possession of the goods in Paris and would pay Dupre at a future point. Clement then attempted to transport the goods to England, but the merchant vessel was sunk because France and England were at war at that time. Lord Mansfield held that French merchants could bring suit against English merchants in an English court of law for the recovery of damages if the goods in question were not wartime contraband. In the proceedings, Dupre provided detailed costs his firm had incurred as a result of the transaction with Clement, including an itemization of the monetary consideration provided to Clement for the sale of goods. The total damages recovered in 1847 were 106 [pounds sterling], of which 11 [pounds sterling] was designated for the consideration for selling the goods in the London market. Adjusting for inflation at 3% per year and converting to U.S. dollars, the sales would be valued at more than $20,000 dollars in today's market and provide for over $2,000 U.S. or 10% consideration. This research finds this to be the earliest documented instance of a trade promotion allowance.
Trade promotion allowances continued as a business strategy and became an integral part of doing business in Europe. As those business models expanded to the United States, so apparently did the practices surrounding trade promotion allowances. Accounts of the early settlements in the United States include references to signs and other identifying marks that were provided by the English manufacturers to their resellers in New England (Lord, 1969). His accounts of westward expansion in the United States mention not only goods and supplies to stock stores in the new territories, but also the transport of materials needed to display and sell them (Prucha, 1953). Successive works also start to document the economics surrounding this development of trade in the new territories (Prucha, 1990; Prucha, 2000; Teichova and Matis, 2003). Expansion of the U.S. Army was an integral part of the settlement of the West. As the Army established westward camps, settlers who provided necessities of daily life to the soldiers set up shop within those encampments (United States War Dept. and Lieber, 1863; United States War Dept. [from old catalog] and Scott, 1876). Various historical accounts of military post traders' businesses contain detailed specifications as to how much space the trader may occupy and what transportation accommodations... |
More articles from SAM Advanced Management Journal
Cultural barriers to improved organizational performance in Saudi Arab..., March 22, 2007
Looking for additional articles?
Click here
to search our database of over 3 million articles.
|
%20%20&position=1)