Invest in Technology
To Improve Effectiveness
By Dan Alaimo
Trade promotion spending is on the rise, but many consumer packaged goods companies need to keep up with the latest trends and technology to make the most of it.
With 190 million people using the Internet to research products and get coupons online, the “moment of truth” has shifted from the store shelf to the home, said Steve Steutermann, research director, consumer products, AMR Research, Boston. For example, 80% of consumers now select their products prior to shopping.
“The shelf isn’t in Kansas anymore,” he said. “The traditional practice of buying off the shelf is changing, and changing very rapidly. You have to think about trade promotion practices in terms of scale and global realignment.”
Private label sales and coupon use are also increasing, he said. Store brands accounted for 20% of the market basket in 2009 and are projected to go up to 25% in 2010. Coupon redemptions were up for the first time in 10 years, driven by online offers, according to Steutermann.
One Internet example he highlighted was Alice.com, an e-commerce site that combines product selection, shopping lists, coupons, purchasing and free shipping. “In its first three months of existence, Alice.com had over 1 million hits on its Web site. If that trend continues, that site will be visited more often than a Safeway or Kroger coupon page,” he said in a recent webinar hosted by RetailWire.com.
Even though trade promotion spending is increasing, AMR Research finds that effectiveness remains very low, according to Steutermann. CPG companies are investing in technology to address this. They plan to spend $4.1 on trade promotion technology in 2010, with 17% of companies saying they will continue to increase their spending, and 69% reporting that they will spend the same.
However, old technologies like Excel spreadsheets and other desktop applications are still the norm among 59% of companies surveyed by AMR for harmonizing data and calculating trade promotion effectiveness. Other approaches: 36% reported using homegrown software applications; 29% used packaged enterprise software; and 17% outsource the analysis to a third party.
He said a big challenge is that no one technology provider has a total solution. “That has caused a lot of the stops and starts in trade promotion over the years.” There are a lot of pilots where companies use multiple software vendors to attack different issues, he added.
The starting point for CPG companies is clarifying a definition of trade promotion, he said, outlining six focus areas:
- Strategic optimization (market mix analysis) targeting demand insight groups. This should answer questions like: How to best spend money? What is the right mix of advertising, trade and price?
- Tactical optimization targets trade fund managers, and answers: What is the best tactic for promotion? And, what is the baseline demand for the market period?
- Account and channel planning targets account teams. After a tactic has been determined, the company needs to answer: What’s the baseline lift for the category at an account? What are the best decisions for the account team and the channel of trade?
- System of record, which targets finance and marketing users, and should answer: How to account for funds against plans? How profitable are the plans? And, could they be more profitable?
- Settlement, targeting finance users, and answering how to manage deductions, bill-backs and accounts.
- Market execution, targeting account teams, answering how compliant are the trade programs, and how effective were those of competitors?
“The trade promotion landscape is evolving along with the technology. It’s important to be clear about the definition of trade promotion in your organization because it will allow you to address your needs,” Steutermann said.
Pricing is increasingly elastic, and “there are a lot of predictive tools coming online that will address the management of price gaps, while getting away from how we traditionally market ourselves around pricing.” For example, “in the future, there will be pricing technologies that will address that and be able to optimize pricing against whatever objective the retailers and manufacturers are trying to reach,” he said.
Retailer compliance remains another challenge to effective trade promotion spending, according to Steutermann. “Retail execution still needs to be solved. There are some good technology providers out there that can help.”
To make trade promotions more effective, companies need to address both internal and external chasms, said Navin Dhananjaya, product head, retail and CPG Analytics, Infosys, headquartered in Bangalore, India. He also spoke during the webinar.
“The internal chasm is related to business functions like sales and marketing operations, and the companies’ lack of an integrated approach to managing trade promotions. The external chasm is about the absence of a consistent and tangible method of collaboration in planning between retail and CPG partners,” he said.
By improving trade promotion systems, “the majority of the benefits will accrue from sharing and collaborating information across functions inside the company and with trading partners. Retailers need to be an integral part of this partnership to contribute and leverage their insights in a more collaborative manner,” Dhananjaya said.
“We have a changed consumer,” Steutermann concluded. “This is a consumer who is harder to target and reach, which puts pressure on making trade promotions more effective down to the store level, or store-cluster level. Understanding value is absolutely critical, along with understanding your shopper and how to reach that shopper through a changing trade promotion landscape. Promoting effectiveness also is critical. The tactics are shifting to couponing and reaching the consumer at home, and on their digital devices.”
JANUARY 2010
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.
