What’s Ahead in 2010?
By Al Heller
The CPG manufacturers best able to answer the ‘what-if’ questions of trade promotion planning will separate further from category competitors in 2010 – as retailers drill down more intensely and seek greater performance certainty from events.
By 2011, some experts feel, it will be pretty much expected for category captains and others vying for influence with chains to simulate events, and refine them for specific markets and customer constituencies, before chains commit to programs.
This recession has tipped the power balance more in retailers’ favor because consumers are spending down on foods and beverages, and they are trying and liking private label alternatives. “Many companies with strong premium brands are anticipating a rapid rebound in consumer behavior – a return to normality, as after previous recessions. They are likely to be disappointed,” noted Betsy Bohlen, Steve Carlotti and Liz Mihas of the McKinsey Consumer Packaged Goods Practice.
McKinsey said that on average 18% of CPG consumers bought lower-priced brands in the past two years, and 46% of those said the products performed better than expected. That’s one pressure point for manufacturers.
Another cited by trade promotion experts: retailers’ keen promotion analytics by shopper segments (though they know less than CPG about macro-category dynamics). Both the analytics and the strength of private label are prompting CPG to step up with more accurate forecasting that leads to more profitable and targeted events.
Meanwhile, solutions providers such as Synectics Group, DemandTec and Adesso Solutions conveyed in interviews with CPGmatters that their CPG clients feel compelled to collaborate with them to give retailers the quantifiable, high-confidence events and category performance gains they demand.
Private Label’s Impact
Some of the latest thinking on private label and price sensitivity: Since store brands usually sell on an EDLP basis in categories where store brands are strong, CPG should lower everyday prices and promote off of those lower prices less frequently, suggests Wayne Spencer, senior vice president-business development, Synectics Group.
Armen Najarian, senior director, consumer products, industry marketing, DemandTec, cites “incredible price sensitivity at the shopper and retailer levels. Our customers and we define trade price events as including both merchandising with temporary price reductions and everyday price activities. When we build a total plan, it layers in everyday price plans, and layers on top all of the merchandising activities.
“We’ve been in an era of price volatility for two years,” he says. “If commodity prices spike again [as they did in 2008], we’ll see a consistent level of everyday price adjustments. These will be in the mix of how manufacturers plan trade.”
Najarian adds that “CPG accepts as the new reality” that retailers have them actively help manage store brands for them. He calls it a “symbiotic relationship. Retailers look to manufacturers for traffic and product innovations. Manufacturers accept that retailers need to augment margins with private label.”
Promotion Simulations
Tim Vollman, president and chief executive officer, Adesso Solutions, points to Costco’s projection that it would raise penetration of its Kirkland Signature store brand to 37% by the end of fiscal 2012, as a symbol of widespread pressure on CPG by retailers. “They’ve watched brands market, and they are now upping the quality and positioning of their brands in their own right,” he says.
How else is this pressure manifested? Chains want trade events to keep flowing to enhance their price image, but more intelligently through simulations.
“Show me how you can provide a mix of promotion vehicles (scan, loyalty, coupons, for example) and bring it together for me in one picture. Retailers want a simulation of total spend coming to their chains, in order to best allocate that spend,” explains Vollman. “They want to see what would happen with different combinations of vehicles at different spending levels. Until CPG pulls together its entire consumer and trade spend picture, account teams are only able to discuss part of the picture.”
The next wave, he predicts, will be CPG being able to simulate plans for promoting at particular retailers in particular markets, and blending that capability with a promotion planning system.
New Growth Keys
Manufacturers are increasingly being asked to plan trade activities to optimize for specific shopper segments a retailer is targeting. “As retailers provide CPG with analytics on these shopper segments, they expect trading partners to come back to them with more granular planning at the shopper level,” says Najarian.
It all helps lead to a stronger category-level story coming from the manufacturer. “There’s a criticality to being able to tell a category-level story. If a salesperson can’t state why a program is good for a category and a retailer, he’ll have a hard time,” Najarian adds.
More Improvements
CPG companies that are early-adopters of predictive analytics would gain competitive advantage – and become acquirers rather than takeover candidates, predicts Spencer of Synectics, adding that the rest of the trade would have three to five years to obtain the entire package that enables them to optimize their corporate calendars of promotional events.
Separately, he urges CPG to restructure compensation. “Companies promote salespeople for…achieving high sales. But they produce less profit and pursue incremental growth at all costs. They are turning companies into acquisition candidates.”
Paralleling his thoughts, a new report on merger and acquisition productivity from the PricewaterhouseCoopers Transaction Services Practice suggests there could be opportunities for deals in the Consumer Products sector in 2010. The reason: “As retailers continue to pressure [CPG] margins and growth through private label strategies, consumer product companies are accelerating trade spend at the expense of margins. Watch for high-profile combinations as branded companies look to gain scale and negotiating leverage with retailers, while enhancing their scale to drive productivity.”
Al Heller is co-author, Consumer-Centric Category Management (Nielsen/Wiley, 2006) and president, Distinct Communications, LLC.
DECEMBER 2010
How to Improve Promotion Effectiveness
By Lawrence Whittle
Most CPG executives understand that profitable growth can be realized through better use of trade funds, and are aggressively looking for ways to improve the performance of this spend.
In the past ten+ years, many CPG companies have hoped that an investment in a Trade Promotion Management (TPM) System would address this issue. However, TPM systems are designed to improve the accounting, scheduling and management of trade funds (a big challenge in itself), but they don’t adequately address the productivity of trade funds.
Leading CPG companies are now turning to Trade Promotion Effectiveness solutions to optimize the allocation of trade promotion dollars across product/brands and between channels/ accounts, as well as to identify the right merchandising and pricing programs within an account to maximize growth. Such solutions are complimentary to TPM systems; they aim to create a more effective trade promotion plan that is then managed and executed by the
TPM system.
How do these Trade Promotion Effectiveness solutions help CPG companies create a more effective trade promotion plan? They use historical sales data from disparate sources such as syndicated scanner, retail POS (for example, Retail Link) and shipments on a weekly or monthly basis to create sophisticated demand models – algebraic representations of consumer demand. These models, exposed via a proper user interface designed for business people
(not statisticians), help sales and marketing identify the relationship between sales results
and specific inputs such as merchandising, pricing and distribution primary demand as well
as competitive activities at any level (brand, category, geography, channel, account, media type, etc.).
These analytics provide powerful insights into the causes of past performance and are also able to simulate future results from potential trade promotion plan scenarios. In addition, these analytics solutions enable a true mathematical optimization of the plan to achieve various objectives such as maximize sales volume, maximize net sales or increase profits. These optimizations operate within business constraints such as budgets, production capacity, etc.
These solutions are highly configurable and allow a client to incorporate new variables, data hierarchies or business units. They can scale to accommodate the most complex CPG enterprises today.
Trade Promotion Effectiveness solutions provide the following benefits to help companies significantly improve the effectiveness of their trade programs:
Explain Business Results
The analytics permit companies to see the cause-and-effect relationships in their business. This goes beyond “What happened?” and explains “Why did it happen?” More importantly “What will happen under various scenarios?” is also available.
Such analytic models can help companies assess the volume and sales impact of their current trade promotion plan, and will help their team see which promotions are working for which brands in which accounts and why (was it the merchandising, or the discount? How bad did that big competitive promotion hurt?). These analytics will show, for example, that a pricing program is working better at one retailer but not at another one due to higher price sensitivity (elasticity) at the first.
Increase Volume with Same Budget
It is one thing to know what’s happening, but another to do something about it. The second enormous benefit of this type of system is that it permits companies to run multiple scenarios through the system and evaluate the expected impact of each scenario on volume and sales.
Perhaps a better strategy at the second retailer (from the previous example) is increased merchandising? But what type, and how often? The software will tell. Armed with this information, companies can now build their trade promotion plan with the right set of programs that maximizes results. No more playing the guessing game and hoping that their plan will hit the numbers.
Measure Business
This type of solution enables companies to monitor key metrics around their business. Not just the traditional type – sales, expense, activity levels, etc. – but more sophisticated metrics like cost per incremental case, customer profit contribution or marginal ROI for every trade dollar. As companies modify and tweak plans, and as the world around them changes, they will always be up-to-date in their understanding of how their business is truly performing, based on the metrics that uniquely describe their business.
Using Trade Promotion Effectiveness solutions, CPG companies have delivered dramatic results – operating margin improvements of 5% to 10% and revenue improvements of 1%-3% are typical. Leading firms have shown that you can optimize your trade promotion program and deliver more with less. In addition, the sales teams can better understand and communicate internally and externally the state of their business.
Lawrence Whittle is the CEO at M-Factor, a provider of predictive analytics software for marketing and trade investment management for leading consumer products companies.
