CPGs to Increase Trade Spending
Amid SKU Rationalization
By Rose Anthony
CPG companies typically spend anywhere from 10 to 30% of gross sales on trade promotions to drive demand in retail channels. This expense is eclipsed only by the actual cost of goods at these manufacturers. So the strategies, tactics and technology choices firms make can have a significant impact not just on sales, but the bottom line as well.
New research finds consumer packaged goods manufacturers struggling to buy down price with retailers as fears rise over being rationalized out of their category. Meanwhile, the rebounding economy has CPG companies looking to win back customers as nearly half will spend more on trade promotions this year.
According to the study commissioned by MEI Computer Technology Group, there is an increased emphasis on improving trade promotion management effectiveness, as CPG manufacturers look to bolster the value and return on their trade spend, and capture wallet share from consumers. Despite the current climate, nearly half of all respondents (42%) said they will spend more on trade promotions in 2010, while only 8% said they would spend less. This represents a clear shift from last year as nearly the same number of CPG firms (38%) said they were planning to reduce their spend due to the unfavorable economy in 2009.
Retailers are also putting pressure on CPG firms, as they continue to take every possible deduction in order to maintain their profits. In fact, respondents were tied on what posed the biggest business challenge when dealing with retailers. Pressure to buy down price and retail execution/remaining in compliance to promotions were cited by nearly a third (31%) respectively, followed by pressure from store brands and SKU rationalization.
Trade promotions are a substantial and important strategy within CPG firms, yet cost and complexity often appear as barriers to change. To make the most of their trade investments and to better meet the needs of consumers and retailers alike, one-third of consumer packaged goods companies said they would use packaged trade promotion management (TPM) software this year to improve business performance. According to the study, four out of five cited improving promotion effectiveness as the most important business imperative for adopting TPM (80%), followed by improving sales forecasting, gaining better visibility into spend and deductions, and predicting the effects of promotions.
“Trade Promotion software helps improve control across the organization by providing a centralized system for planning, executing, reconciling and analyzing trade promotions,”said Lorne Schwartz, chief executive officer of MEI. “Today, the national brands are struggling to compete against store brands which often results in CPG firms having to either buy down price or risk being rationalized out of the category altogether. By leveraging TPM software, manufacturers can manage their business the way they want and make well-versed, critical decisions confidently, which results in improved profitability.”
MEI surveyed 52 Fast-Moving Consumer Goods firms in May 2010. Using common questions from the 2009 survey for trending purposes, this year’s research was designed to identify the importance of effective trade promotions and to better understand the need for improving current capabilities through process and technology initiatives.
JUNE 2010
Web Portals for Smaller Retailers
Could Amp Up CPG Trade Events
By Al Heller
CPG manufacturers have a way to offset the effects of SKU rationalization being waged by Walmart and other large retailers. It goes beyond caving in to demands to manage private labels and cutting product prices to protect their branded shelf space at big chains.
Rather, CPGs could create a collaborative Software-as-a-Service (SaaS) Web portal that empowers the regional operators and independents they’ve shunned for so long to customize aspects of branded trade events for their stores, says Peter Ingram in an interview with CPGmatters. He is the founder of BlendedBusiness, a shopper and retail marketing consultancy, and co-founder of The Fifth Channel, a technology venture that helps organizations build marketing and operation management applications.
Unlike traditional tools in this vein, the technology Ingram suggests would be a “marketing application mash-up” that helps retailers centrally manage all communications channels and tie in information from the other key operational systems to align all stakeholders at every workflow step.
A modular dashboard design that is simple to use is key to making it work, said Ingram, who emphasized the solution must work in parallel with retailers’ existing systems and processes. Tools on such a portal would, in part, resemble a “light” version of powerful trade promotion programs offered by companies such as DemandTec, Synectics Group, Predictix, APT Technologies, G4 Analytics and others. The portal might integrate functionality from these companies or others.
Smaller retailers that access the portal could individualize their experiences (to suit the markets they serve, formats they run, and financial considerations, for example) and participate in many more CPG brand promotions. This portal would also enable collaboration—between the retailers and the brand, as well as between fellow retailers. It’s a far cry from the call center approach to which many retailers have been subjected for more than a decade.
For CPGs, the portal would be a bridge to thousands more stores that drive significant revenue and help leverage against large chains. Short-term volume would rise, and long-term these stores could be venues for test programs and campaigns that help refine integrated marketing for their brands.
Why is this vital today? Retailers believe that fewer products on shelves can simplify consumer purchase decision making, reduce inventory costs, and improve category performance—so many are ratcheting up the pressure on brands.
By using technology to economically and feasibly reach the multitude of smaller stores with high collective buying power, CPGs could stir much new productivity while fostering closer ties with their retailers.
“Although CPGs expend less effort to sell into regionals and independents, the marquee brands of these retailers may have stronger relationships with their shoppers, and therefore act as stronger advocates for the name brands they sell,” said Ingram.
The portal that includes self-serve automated tools for local-store marketing (LSM) has been popular in the franchise world, where owner-operators of automotive manufacturers, quick-serve restaurant chains and petroleum/c-stores, for example, access resources in online libraries to plan events and order signage and other materials.
“When dealing with supermarkets, CPGs should make the platform so easy to use that it creates an entirely personalized experience between the small retailer and the brand,” added Ingram. “Take the same one-to-one marketing approach that brands use for consumers, and put it into the retailer relationship. These ‘light’ yet proven solutions can give retailers more control over the manifestation of trade events in their stores, or enable them to generate their own versions of events.”
CPG does offer such tools to retailers now, though they are often limited to marketing campaign elements such as POP, direct mail and promotional merchandise. A new twist on the LSM concept could make it “a critical part of retailers’ operations, helping them assess the performance of their organization from a number of perspectives on the fly,” said Ingram. He suggested planogramming, pricing and promotion optimization, inventory management, media optimization and more could be integrated, along with a powerful content management library (a “Digital Asset Management,” or DAM system), a robust, highly scaleable data warehouse, and a dynamic analytics tool.
How would this play out? A CPG account executive or call-center representative would inform retailers, “We have a new program that costs you nothing and will help you market and sell to your shoppers more effectively. Let me e-mail you information on how to log on to the system. We will give you a customer interface to manage your promotions with our brands. This will become your planning and working tool, where you can find assets we make available for you. This will also become a new relationship portal for you. On it, you can begin to house your database of shoppers and market to them.”
To develop such a portal in-house would take a “six-figure investment” for a CPG, Ingram estimated, although he noted costs could vary depending on the solution’s complexity. For example, a mobile version of the application on smartphones for the CPG sales force to use when calling on retailers would be an incremental cost. Yet with the advent of SaaS and cloud computing, CPG could team with third-party solution providers to build and operate such technologies with far less front-end capital outlay and low ongoing costs, he noted. “Also,
CPG may be able to integrate existing tools they use into the platform, rather than starting from scratch.”
If the CPG supplier were significant enough, such as Kraft Foods, retailers would still find the portal beneficial to use, even if the portal were limited to those brands alone. Smaller CPG could leverage such portals to encroach on category shares, especially if their tools are fairly robust and enable retailers to go further in their use—perhaps to let them “think through store layouts, category adjacencies, have loyalty program overlays, and even manage trade events for other brands,” said Ingram. “If I were a CPG supplier, I’d still retain exclusive rights to my category —I’m not in the business of helping my direct competitors—but I might offer the retailer functionality to manage other non-competitive categories without limitation. This ensures my brand is well-served, yet keeps in mind that a tool limited to one brand or category may be less valuable to and less used by retailers.”
The beauty of offering a robust portal to retailers is “the more they use it, the more ingrained the tool becomes with the retailers’ business. It has high potential to be a ‘sticky’ application. Meanwhile, the more the retailers use this system, the more CPG suppliers can see on their end, the more precise their store profiles can be, and the better they can understand and manage these retail accounts,” Ingram stated. “That translates into a more effective way to build and service retailer relationships.” For retailers, portal use helps align stakeholders such as category managers, merchandisers and store directors, and makes marketing more efficient, saving time and costs and improving campaign compliance.
In an era where profitably servicing key grocer accounts is an increasing challenge, collaboration with regional and independent operators is a strong strategy, especially when technology makes this strategy more possible to implement.
Al Heller is co-author, Consumer-Centric Category Management (Nielsen/Wiley) and president, Distinct Communications, LLC.
