CPG SOLUTIONS
Trade Spending Challenges Smaller CPG Companies
By Dan Alaimo
Although trade promotion spending can be 10-30% of a consumer packaged goods company’s gross sales, few companies – particularly small to midsized manufacturers – know what they are getting for their money.
With consumer preferences shifting to private label, and retailers reacting to this trend with SKU rationalization that cuts out national brands, manufacturers need to catch up with their trade dollars. This means an investment in specialized trade promotion management technology, especially for nearly half of the companies that still rely on Excel spreadsheets to do this increasingly complex job, says Rob Bois, Director of Product Marketing, MEI Computer Technology Group Inc.
Trade spending growth has been flat lately after several years of increases, but it has not decreased, and will start rising again in the near future, Bois emphasizes. “It’s still a huge chunk of money and the biggest challenge that most CPG companies have is managing trade. They don’t know what kind of return they are getting on that investment,” he says.
There is a great deal of data – syndicated, point-of-sale, company sales – but not much of it is available in time to analyze a promotion while it is going on. “It’s very difficult for them to change direction on a promotion mid-stream because they don’t receive accurate real-time feedback on how it is performing. In some cases, they don’t have the right metrics in place to determine the profitability of a promotion,” Bois says.
Meanwhile, the tight economy has given retailers more control in their relationships with suppliers. “Historically, that balance of power between the manufacturer and the retailer has been on a pendulum swing back and forth, but in this kind of economic environment, the pendulum has swung far in the direction of the retailer,” Bois notes. Many CPG companies have reacted by cutting prices, which may increase demand in the short-term, but isn’t a sustainable strategy long-term, he says.
All of these challenges are exacerbated among small to midsized CPG companies, creating an industry of “haves and have-nots,” he says. “First, they have less influence with the retailers because they are not the category captain. Second, they don’t have the same resources available to buy downstream data that they need to help them make better decisions. So it can become a vicious cycle because they don’t have beneficial data and information to go back to the retailer to demonstrate why they should perform another promotion.”
Tracking retail execution is another challenge for the smaller manufacturer. “Small manufacturers don’t have the ‘feet on the street’ or the technology available to them to audit the stores,” Bois says.
If a large retailer takes an unexpected deduction, a smaller manufacturer has to carefully consider what to do. “Often, we hear that if a deduction is under a certain dollar threshold, they might just clear it without investigation because they have bigger fish to fry, or they have to triage where they are going to spend their time and effort,” he notes.
Since they are not category captains, there’s even a fear of damaging the relationship if they do push back, Bois says. “Manufacturers may be more apt to take an unexpected deduction from their biggest retailer because they don’t want to tip the apple cart.”
One big advantage of trade promotion management software, like MEI’s TPM solution, is it provides all departments of a CPG company with the specific information they need, Bois says. A spreadsheet approach can’t do that.
“You have this loop where each part of the organization may have very different goals and metrics they are driving toward, even though there may be a broader goal for the whole company.” Aligning those goals and metrics “is one of the more complex and multidimensional processes within a CPG company today. There are a lot of nuances to it,” Bois notes.
- Headquarter Planning Creating a “top-down” operating plan outlining volume, revenue, trade and profit objectives.
- Account Planning Managing the base forecast and creating incremental promotions, while measuring them against key headquarter ratios.
- Account Execution Ongoing maintenance of the account plan, allowing updates to forecasts, while tracking actual results.
- Reconciliation Clearing of deductions, creation of payments and allocation of spending to individual promotions.
- Analysis Creation and downloading of critical volume, sales, trade and profit reports.
“We basically manage every step of that workflow in a centralized TPM application so that everybody is reading off the same hymn book. They might be viewing and analyzing the data
in different ways, but it is a single system of record for all of the company’s promotions,”
Bois says.
MEI’s TPM is a hosted product, so there is no software for the customer to install, and a faster learning curve for users. MEI has over 30 clients including: Sunny Delight Beverage’s Co., Kettle Foods, Marcal Manufacturing LLC, Annie’s Homegrown, Pinnacle Foods Group, Morton Salt, and American Pie.
“We also find that most CPG companies don’t buy a TPM system anticipating that they are going to lower trade spending. It happens sometimes. But the reality is, we haven’t seen trade spending levels shift dramatically. They want to make sure that they are spending it much more effectively,” he notes.
For the future, Bois concludes, CPG companies are going to start renewing their emphasis on innovation. In an economic downturn or recession, “once companies realize there’s only so much they can do by slashing their own costs, and then trying to cut costs to their customers, the only way to get out of that vicious cycle is to innovate. I think that it is going to be a combination of product innovation and promotional innovation,” he says.
“Some of them are getting beat up right now, and getting rationalized out of the category, but this is how they can turn it back around and compete more effectively. I don’t know if we are going to see that this year, but it is going to happen in the next couple of years.”
Will CPG Manufacturers Reduce
Brand Promotions, TPRs?
By Al Heller
CPG manufacturers began pumping more dollars into trade events in 2009 to avoid lowering their baseline prices on food products, yet still enable retailers to compete on promoted prices. Now they may be trying to wean off the practice. They wonder if they’ve reached the saturation point on brand promotions, and if they should run fewer or less-deep discounts.
Consider General Mills, one of the CPG leaders that have decided to invest in the non-promoted sales growth of its brands. Jeff Rotsch, executive vice president and head of the worldwide sales organization for General Mills, told Wall Street analysts in a recent conference call that “the company has been able to decrease trade cost per case in each of the past four years. We entered this year with a goal to hold our trade cost per case flat to last year, but…promotional activity has been increasing in the industry.
“As we look out in the second half, we see a few product lines where we’re going to need to increase our merchandising activity in order to protect market share,” he added, according to the transcript posted on Seeking Alpha. “As a result, we now expect our overall trade cost per case will be up modestly over last year, but still will be below rates from two years ago.”
CPG companies have picked a tough time to try to pull money away from trade – witness the General Mills concession regarding trade cost per case. Consumers have switched to lower-priced channels to save, and sometimes switched to alternate lower-priced brands or private label to save further. This has emboldened retailers to push branded manufacturers into new roles as makers and marketers of the store brands they compete against at the shelf.
Not only do retailers love the high margin percentages on private label, they believe that many of these consumer savings strategies will sustain long after a hoped-for rebound in the economy begins.
Retailers have been aggressively promoting private label brands in this troubled economy to further accentuate the price disparity versus name-brand counterparts. This aggressive promotion has forced name-brand manufacturers to spend more aggressively rather than risk further, and potentially permanent, share loss. Most manufacturers have been forced to reach back into their pockets to give back trade reductions or add to an already growing budget.
“Retailers look at the base and promoted volumes of categories, and the brands within categories. These ratios vary throughout the store,” explained Paul Thompson, managing director, Henry Rak Consulting Partners, a Chicago-based consultancy. “For example, allergy products are high-need when people seek relief, so the category has a high proportion of base sales and is less promotion-sensitive than cereal. If a ratio falls out of line, the retailer can claim ‘your events aren’t effective enough.’”
CPG manufacturers have an opportunity to bundle promotions of their brands more effectively to add greater incrementality – to move more volume and appeal to more consumers, according to Thompson. “Portfolio promotion bundles should be determined by the consumers that each of the brands address [adults, children, health-driven consumers in cereals, for instance], as well as the eating occasions. For example, cereal is a variety-driven category and promotion bundles should appeal to consumers’ variety of needs. When on promotion, people will buy multiple brands to stock in the pantry.”
He contends that manufacturers are trying to find the sweet spot for promotions. “Most manufacturers want to maintain the quality of promotion events – at a reasonable discount to the consumer that conveys value and triggers purchase, but is not so deep as to impair profitability, and not so deep as to train them to only buy at that price point.”
Yet that sweet spot is different for category leaders compared with weaker brands. “It is easier for manufacturers with strong brands to rebalance their marketing mix away from trade promotion spending. Brands that are number one, number two, or lower depend more on promotion because many of them compete more directly with private label or price brands,” Thompson added.
So what should non-leaders do to define the role of trade in supporting their brands?
“CPG manufacturers must determine first if consumers are evaluating their brands against national brands or against private label,” he stated. “They also need to understand how consumers make purchase decisions within their categories. These insights will give them their true competitive frame and help define the brand’s points of leverage in the category.
“If they are up against private label, and they are unable to change their marketplace position to be more equity-driven,” said Thompson, “they have to figure out the critical price gap they need to maintain against private label in order to be competitive, and figure out how they can stay there while maintaining profitability.”
Al Heller is co-author, Consumer-Centric Category Management (Nielsen/Wiley) and president, Distinct Communications, LLC.
FEBRUARY 2010
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.”
