Sunday, August 9, 2020

Settling for Less: The Challenges and Opportunities of Manufacturer Coupon Clearing

Let’s talk about coupon clearing.

More specifically, the last stage of the Life of a Coupon process that delivers the processing of the coupon and the settlement of face-value funds between the manufacturer who issued the coupon and the retailer who accepted it.

A recently announced partnership between Quotient Technology and Mandlik & Rhodes, a smaller coupon clearing house, promises to shake up the duopoly Inmar Intelligence and NCH Marketing Services have enjoyed for decades, and to provide better services and lower costs for CPGs. Will that come to pass? We’ll see. But to really understand what’s possible and what it would take to disrupt the coupon clearing industry, let’s take several steps back for a brief overview of the business of issuing, processing and clearing of manufacturer coupons.

Clearing is a key step of the coupon value chain, which we introduced in our previous blog. It’s invisible to the coupon-loving consumers, yet critical to providing a stable, predictable, and scalable industry infrastructure for manufacturer coupons.

As a former member of the ACP (Association of Coupon Professionals), I had the chance to observe coupon processing and clearing from the inside. It’s a fascinating business and while you may be chuckling over the fact that there are enough people to form a trade group for coupon processing and clearing, I can assure you that this is a massive, entrenched and complex industry that lives off the “7 cents handling” you read about in the legal copy of your typical manufacturer coupon.

Manufacturer coupons are a form of brand currency that is issued by consumer packaged goods (CPG) companies to achieve a variety of brand objectives, such as encouraging new product trial or reengaging lapsed customers. These coupons are redeemable at any retailer that accepts manufacturer coupons and typically carry a face value for a fixed amount off the product price.

There are also coupons for “free product”, “buy one get one” (BOGO), and a variety of other consumer value propositions. They are known as “hard-to-handle” coupons and must ultimately be converted to a nominal dollar value that the retailer can subtract from the subtotal amount of the consumer’s shopping basket, for which they will eventually get reimbursed by the CPG that issued the coupon.

Yes, you heard that right, the retailer fronts the payment to the shopper and then obtains payment at a later date from manufacturers. Hence the “7-cent handling fee”.

And the scale? Well, with 267 billion coupons issued in 2019, according to the 2019 Inmar Promotions Industry Analysis, at an average face value of $1.55, the gross value of coupons issued was $387 billion. Granted, only a fraction of all coupons get redeemed – Inmar data shows, consumers redeemed 1.74 billion coupons in 2019. But that’s still over $2.5 billion in coupon face value being exchanged among CPGs, consumers and retailers, yet little information is captured or provided at the basket level about what actually happens at checkout.

And I’m not even talking about advanced data analytics that track the consumer behaviors over time by associating their identity with their current and past purchase data. Even basic data, such as whether the product, for which the coupon was issued is actually in the shopping basket, or whether the coupon is still valid, are not captured or checked in any systematic way.

Let’s take a closer look at what is in place today when a coupon is issued and what is actually happening when a customer presents it for redemption at checkout.

The bulk of (paper) manufacturer coupons are still issued through newspapers and shared mail vehicles, and they arrive at homes ready to be used at any store that accepts coupons. No walled gardens, no store account or membership needed – these are truly omnichannel offers that allow shoppers to pick their preferred retailer without losing the savings opportunity or having to plan where they shop or juggle multiple store loyalty cards.

Paper manufacturer coupons have several key elements printed on them: a face value or offer description, a usage restriction or purchase requirement, an expiration date, legal copy, and a machine-readable linear barcode, formerly called a UPC-A, but since replaced by a more data-rich two-dimensional databar, known as a GS-1.

When a consumer checks out, the coupon is scanned and the GS-1 code provides the retailer’s POS system with the basic instructions needed for redemption – no cashier intervention needed in this process. The GS-1 contains a “manufacturer code” that tells the POS which manufacturer has issued the coupon (e.g., Procter & Gamble, General Mills, Johnson & Johnson). It also tells the POS which family of products (e.g., Tide family, Big G cereals) falls within the restrictions of the coupon – this is known as the “family code”. Finally, it communicates the face value of the coupon to the POS so it can deduct that amount from the customer’s subtotal, if products that match the family code are present in the basket.

All the coupons redeemed by customers are physically placed in the cash register drawer, collected daily, stuffed in plastic bags [yep!], and shipped off to the retailer’s clearing house (or more specifically, one of its processing centers in Mexico), where they are counted by hand [you heard that right!] and then sent on to the CPG manufacturer’s clearing house for verification and payment of the aggregate face value plus handling fees back to the retailer.

This system, as established and reliable as it is, is not without some serious problems:

No Product Matching
One such problem is that a meaningful number of retailers do not support family code listings within their POS systems, so they only check for manufacturer code matches. This means that a coupon could be good only for Kellogg’s Corn Flakes, but if the customer has Rice Krispies in the basket, the coupon would still clear when family code is not supported and manufacturer code is all the POS checks for. Obviously, not an outcome either the Corn Flakes or Rice Krispies brand managers intended or budgeted for.

No Expiration Check
Another major gap in the redemption process – expiration dates. Retailer POS systems do not check for the validity or expiration date on paper coupons. That task is left to the cashier, who generally is focused (and measured) on the speed of the checkout process, and therefore has little incentive to slow down and check for expired coupons. Real-time expiration checks, table stakes for your debit or credit card transactions, just do not exist for coupons. The result is that a meaningful number of coupons are redeemed past the intended end date of the promotional campaign set by the CPG brand manager. Imagine if retailers accepted expired credit cards…
No Transaction Trail
Finally, once the checkout process concludes and the coupon is placed in the cashier’s drawer, it is completely dissociated from the purchase transaction that redeemed it. No digital trail links the coupon with the consumer or the transaction – it’s a black box from checkout through processing. The process in that last phase is managed by a series of agents who simply authenticate that the coupons are real and were redeemed at a particular retailer. General statistics can point out anomalies, such as extraordinary amounts of redemptions or redemptions happening outside of the geographies where the coupon was intended for, but a one-to-one match of coupon to product – let alone coupon to consumer – does not happen at-scale, or in many cases, at all.

The industry relies on what’s essentially an honor system that uses technology from the 1950’s to manage billions of dollars in remittances to retailers from CPG’s. If it seems antiquated, in the age of cloud computing and high-speed broadband, to rely on such a clunky analog, manual system to manage the validation, processing, clearing and remittance of so much money – well, it is!

So what can be done to improve things; what’s possible? And what’s preventing the industry from taking these steps toward progress?

The GS-1 databar has many additional features and functionalities that are “optional fields”, and if used properly, would significantly tighten up the transaction rules and validation processes at checkout. But none of this granular checkout information is within the direct or real-time purview of the clearing house or the CPG – it is all dependent on the retailer and their POS vendor to make the changes necessary to capture and utilize this additional information in real time.

The industry has tried to update with the formation of The Coupon Bureau, which among other initiatives, attempts to institute a real-time call to a universal “positive/negative file” in the cloud to check the validity of an offer.

But there are powerful and persistent forces in the industry that still stand in the way of these process improvements.

Retailer (Dis)Incentives
First and foremost, it’s the retailer. Implementing the additional features of the GS-1 databar, or venturing further into more advanced features, such as controlling for multiple redemptions of the same coupon by the same customer (referred to as “coupon stacking prevention”), require substantial changes to the retailer’s POS and transaction systems. These end up being complex and lengthy IT integration projects that also carry the possibility of slowing down or disrupting the vast volume of daily transactions these systems process. This is the kind of risk to revenues and customer experience retailers are very reluctant to take, even in the name of process efficiencies, better data, and overall advancement.

In addition, the current loose, archaic system is actually a source of “alternative revenues” for retailers. At 7 cents per coupon, with 1.74 billion coupons redeemed per year, that’s more than $120 million in handling fees across all retailers who accept and process manufacturer coupons. The incentive to disrupt the clunky existing system and jeopardize this significant and highly profitable revenue stream is just not there for most retailers.

POS Provider Inertia
Leading POS operating system providers, like Toshiba Global Commerce Solutions and NCR, command the lion’s share of the installed base of checkout terminals across the top retail chains – including food, drug, dollar, mass, and discount club classes of trade – where the bulk of CPG products are sold. With only a handful of POS companies handling virtually all brick-and-mortar retail transactions involving the purchase of any CPG product, these companies are in a great position to be innovators and aggregators who create the kind of data connectivity across retailers that has long eluded the fragmented U.S. grocery landscape.

POS providers could be creating pre-integrated coupon processing apps on their platforms and making them available for retailers to switch on with their next operating system release. They could be collaborating with the CPG manufacturers who issue the coupons, the coupon distributors who get them in the hands of consumers, and with clearing houses who handle the post-redemption validation and settlement process. They could be at the center of a universal digital network that recognizes coupons – both paper and electronic – across retailers, validates them in real time, and provides instant redemption data to CPGs, retailers, clearing providers and the Coupon Bureau. And they could be financing all this innovation and disruption by tapping into the significant amounts of marketing dollars CPGs expend annually to activate coupon campaigns.

But thus far, they haven’t – not in any meaningful way. There are some signs of attempts – Toshiba’s TCx Elevate platform promises to be the kind of open ecosystem that allows third-party value-added apps to integrate seamlessly and be made available to retailers in a near-frictionless way. But retailer adoption is still very low – probably because of the price tag the new platform carries.

Most importantly, POS providers are still stuck in their legacy business model – making money by charging retailers (the old “time and materials” way) for every upgrade, every integration and every little change made to their POS system. There’s an adage among grocery retail CTOs that even the slightest change they request of Toshiba or NCR to their POS systems ends up “taking a year and costing a million dollars.” And that, unfortunately, discourages retailers from investing in the upgrade of their systems and perpetuates the lack of innovation and data connectivity in the industry.

CPG Manufacturer Complacency
Manufacturers have the most to gain from an upgraded, more data-rich and more interconnected system for processing coupons. And they, with their branding and promotional budgets, are the ones who ultimately pay for everything that happens in the media and marketing services industry. They finance every marketing campaign, regardless of whether it’s activated by an agency, by a specialized marketing provider (such as a coupon publisher or a retail broker), or by the retailer’s own marketing team. They should have a lot more say in how their money is spent and what they get back in the way of results, information and transparency.

A number of the large CPG manufacturers are trying to do something about it by supporting the Coupon Bureau and other industrywide initiatives aimed at creating more transparency and traceability of paper coupon redemptions. But, by and large, the CPG community has not yet been effective in getting retailers and POS vendors to do their critical part to drive the necessary change.

So where does coupon clearing go from here? My point of view on this is that manufacturer coupons should be elevated to the level of currency and treated as such. If existing technologies and practices, most importantly real-time validation, used in the credit and debit card industry were applied to coupons, that would go a long way.

Brands should utilize a single industrywide coupon registry, and retailers should access that in real time and follow the entire set of rules incorporated into the GS-1 databar. This means checking for expiration, checking for and adhering to family code rules, etc. And, yes, it means rejecting some coupons at checkout despite the potential friction that would create between shoppers and cashiers. Cashiers have no problem telling a shopper that their credit or debit card was rejected, why should that not apply to coupons?

Going a step further and leveraging even more advanced technologies, such as blockchain, holds the promise of creating full traceability and an immutable central ledger of all coupon transactions – from issuance to distribution to clipping to redemption to clearing and settlement.

To get there, some things need to change – the key industry players will all need to do more than they do today.

Rather than looking to force all coupons to be activated onto their respective closed, proprietary loyalty networks, retailers should embrace the consumer value of universal coupons that can be redeemed anywhere, implement the required system upgrades, and champion the creation of multi-retailer digital networks for activating, redeeming and clearing manufacturer coupons.

POS providers will need to change their mindset and business model to build on their unique positioning and become platforms for innovation and aggregation – a highly attractive strategic opportunity they are currently failing to seize.

And CPGs will need to use the power of their marketing budgets and lean more heavily on retailers to invest in the systems and processes that prevent fraud and mis-redemption and provide the transparency and accountability they need to continue to invest in manufacturer coupons, and allow consumers to continue to reap the benefits of this effective, proven marketing vehicle.


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