Predictive Trade Analytics
Helps CPG Align with Retail
By Al Heller
Retailers have consistently charged CPG with too much self-interest, and too little focus on what it takes to build categories and make stores stand out in their pursuit of valuable shopper segments. But with today’s heightened emphasis on trade promotion events, experts say the fast-evolving discipline of predictive trade analytics could shift the emphasis away from CPG to the retailer.
More specifically, predictive and analytical capabilities could bring notable added value to
key accounts at a pivotal time when many are rationalizing SKUs and accruing margins with
a private label emphasis. By establishing authority in trade events, a CPG company could help protect both the integrity of its promotion plans and its branded shelf presence in
Simply put, predictive trade analytics uses data and modeling science to assist in making better decisions around pricing and promotion execution. It enables trading partners to optimize trade funds, simulate events in the planning stage, and use post-event diagnostics to judge effectiveness, impact by shopper segment, and improve ROI.
In a recent webinar co-presented by Armen Najarian, senior director-consumer products industry marketing at DemandTec, and Polly Rowland, the former director of sales strategy
at Kraft Foods, common trade promotions shortfalls that might prompt retailers to push CPG
to acquire this capability were listed: Just 61% of trade promotions generate incremental volume, just 62% are fully implemented at all locations, and promotions raise out-of-stock incidents by 2.3%. Moreover, 16% of trade promotions are unprofitable and nearly 30% of trade funding goes to the retailer’s bottom line (she sourced figures from Trade Promotion Management Association).
With trade spend more than 60% of a CPG company’s marketing budget, “it is hard to find a more significant clear-cut financial opportunity,” said Najarian.
He estimated a $2 billion (annual sales) manufacturer that spends $300 million on trade (15% of sales, close to the national average) could improve trade efficiencies enough to expand gross margin dollars between $6 million and $18 million within six months. He also felt that about 25% of billion-dollar-plus CPG companies “have taken steps or have implemented advanced predictive capabilities around trade.”
To adopt predictive trade analytics is “more of a journey than a destination,” said Najarian, from the point an organization readies itself for new capabilities to address market and customer needs. “It gives better visibility into performance metrics and the ability to say, ‘If I structure price at x and merchandising at x, what would that mean for revenue and profitability.’ It’s good solid business intelligence that needs to be there,” he said.
To advance a CPG company from readiness to full adoption, it takes senior leadership willing to commit to both the monetary investment and organizational change; better-aligned business processes and empowered teams leverage the new capabilities. This happens over a period of months while the company progresses technologically from validating data to periodic price modeling, and then to selling-in retailers that this tool will help to serve them better.
It is often a cross-functional team of Trade Strategy, Sales and related disciplines including Brand Management that effectively spearheads a CPG company’s adoption. As senior leaders project a vision of the future state, this team of power users helps bring that to life by sharing early success stories.
By using the software, Rowland said, CPG account teams can improve their retailer collaborations through:
- Stronger events lineup as weak events get culled
- Single-number goal shared by both trading partners and all disciplines within CPG, and
- Cross-functional visibility to the return on investment, explained Rowland.
CPG can acquire predictive trade analytics either as Software-as-a-Service, or hosted on company servers and computers; the latter requires IT involvement and maintenance, added Rowland, noting as well that if a consultancy is hired to support the integration, it should have a strong background in trade analytics and “understand your organizational challenges.”
To determine the suitability of a technology partner, Najarian suggested several questions as thought starters:
- Is the solution complete?
- Does it include the ability to manage data?
- Do you believe in its scientific modeling?
- Is it delivered Software-as-a-Service, or to be hosted on your servers?
- What is the providers’ record on delivery excellence?
- Are there meaningful benefits measurements?
- Are user-support processes robust enough for your needs?
- Can the agreement be tailored to your company’s growth plans, objectives and scalability?
- Cross-functional visibility to the return on investment, explained Rowland.
Najarian took the webinar audience through examples that illustrate the power of predictive trade analytics. The before: an event was lucrative for CPG, but bad for the retailer because it drove down category dollar sales, equivalized unit volume and retailer profit, and also cannibalized private label sales. The after: the recast event (buy one, get one with display at 60% ACV) was still good for CPG (an 88% lift in promoted product dollar sales), and effective for the category and the retailer too, because it drove 3.1% category sales and profit lift, and only nominally affected private label volume.
Al Heller is co-author, Consumer-Centric Category Management (Nielsen/Wiley), and president, Distinct Communications, LLC.
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.