Insight on Trade Promotion Management for Consumer Goods Industry

Dears,

Today, CPG manufacturers must deal with continuing increases in retail channel power, new regulatory requirements and a realization that “second place” is not good enough. By developing Customer Management capabilities that combine strategy, technology and process, CPG companies can create more efficient — and more profitable — customer interactions. Strategies that increase customer intelligence enable CPG companies to manage investments in consumer segments and channel partners for optimal financial performance throughout the CPG Lifecycle.

THE TRADE PROMOTIONS CHALLENGE

Spending on trade promotions by CPG manufacturers and retailers has grown steadily over the last 50 years, becoming the second largest P&L item after cost of goods sold across the industry (average trade promotion expenditures account for 13% of gross sales). Industry spend is greater than $120 Billion

per year, with annual growth rates of 5-8%.Just cutting spending on promotions is tempting…a 5% reduction in promotional spending across the board potentially improves net earnings 10% or more. However, the core issue that needs to be addressed is promotions effectiveness. Effective promotion management can reduce cost while increasing revenue. The ongoing “mad scramble” for shelf space will continue to reinforce the need for trade promotion spending. Yet, research study data has shown that only 30% of CPG manufacturers manage promotion profitability; only 15% of all promotions are truly profitable. More broadly, research suggests that up to 90% of trade promotions in the industry fail to deliver positive ROI. Further, two thirds of companies believe value from promotion spending is “fair” to “poor,” with 85% of these believing in efficient promotion is a “very important” issue.At the same time, new accounting and compliance regulations,including Financial Accounting Standards Board (FASB) rules

changes and the Sarbanes-Oxley Act, are elevating the importance of trade promotions/funds management IT initiatives in the CPG industry.

MAXIMIZING TRADE PROMOTIONS EFFECTIVENESS THROUGH INTEGRATED, COLLABORATIVE SOLUTIONS

There is a high potential for savings in trade promotions, based on costs, extreme variances in

effectiveness and an exponential effect on the bottom line. There are two kinds of trade promotions—corporate promotions and account promotions.

Corporate promotions are company-wide promotions of a product or a brand. Accounts can participate in corporate promotions which are run for a specific time period and contain the objective of the promotion, suggested tactics, and other information. For example, a beverage company decides to promote a new product by running a corporate promotion with the recommended tactics of a temporary price reduction (TPR) and in-store displays.

Account promotions are more specific promotions and can be based on a corporate promotion. A plan

is a group of account promotions that depicts the results of account promotions, such as spending and volume.

This scenario is an example of a process performed by brand managers and key account managers.

A large beverage manufacturer has just developed a new brand of fruit-flavored beverage. The brand manager for the new brand decides that a corporate promotion to promote the new brand will be launched for the following year. The corporate promotion recommends a temporary price reduction (TPR) and a themed in-store display as tactics during Week 10 of that year. The key account manager for a large chain of grocery stores is responsible for creating account promotions to generate incremental volume and brand awareness. After creating an account plan, she can add to the plan the corporate promotion and other account promotions that she creates. She uses the promotion simulation feature to evaluate how a given promotion will perform at her account. After deciding to run a promotion at her account, she adds the promotion to the account plan. Then, she selects the promoted categories to include in the promotion. The selected promoted categories contain the products that the key account manager includes in the promotion. These products are designated as promoted products. For each promoted product, she creates a deal to indicate how much the grocery chain is paid and the source of funding. When the key account manager completes these steps, she submits the account promotion to her manager for approval by changing the status of the account promotion. Her manager has several

options in evaluating the account promotion, ranging from rejecting to approving the account

promotion, pending review and acceptance by the customer. After the account promotion is approved internally, the key account manager seeks acceptance from the account.

Integrated, collaborative Promotions Management solutions offer a range of benefits from legal compliance to exponential bottom line improvements. These benefits are inherent to the specific topic of Promotions Planning & Management, but they also improve capabilities in other closely related areas of Customer Intelligence solutions for CPG companies.

FIRST STEP TOWARDS EFFECTIVE TRADE PROMOTIONS

The first step in establishing an effective Trade Promotions Management capability is an assessment of a firm’s strategies, processes and technology supporting TPM. This assessment enables consulting companies  to determine where an organization currently sits on a capability/maturity scale and partner with it to address critical opportunities across these areas. Leveraging our experience with CPG companies we work with  clients to define a set of actionable next steps, constructed within a well-defined program of work, for an organization to improve from its initial maturity positioning. The reason for failure is due to Loosely Managed Trade promotions.

Loosely Managed Trade Promotion

• Trade promotion data is captured manually or not at all.

• Few persons deployed to evaluate market impact of major trade promotions.

• Account sales managers free to construct their own promotion levels and dates.

• Sales plans are driven from retailer requests rather than brand/marketing strategies.

• Few new products survive at retail after six months.

• Highest order weeks are at end of company fiscal quarters.

• Operational shipment forecasts rarely accurate.

• Finished goods inventory exceeds industry norms.

• AR trade deductions increasing.

• Trade deductions increasingly written off as not able to be collected

How to build a Tightly Integrated & Managed Trade Promotion

• Trade promotion five to 10 percent of gross sales.

• Trade promotion data is captured automatically and shared with other company systems.

• Promotion performance actively evaluated and included in sales managers “performance” reviews.

• Much of trade spending is in the form of pay for performance.

• Senior management dictates narrow range of promotion levels and specific dates.

• Sales managers must get specific approval for promotions that are “off strategy.”

• Sales plans are strictly a function of expressed marketing strategies.

• Sales force measured on account profitability.

• Customer order patterns consistent with consumption patterns.

• Shipment forecasts reasonably accurate and improving.

• Finished goods inventory below industry norms and decreasing.

Organizations must plan promotions collaboratively across product/brand management, marketing, sales, various external partners and supply chain operations to ensure that true promotion ROI can be predicted and measured.Promotions that appear effective by influencing large lift for specific product/account pairings may look attractive to account managers focused on volume quotas. However, often these short-term results are enjoyed at the expense of longer-term brand/corporate strategies. The lift may come at the expense of other product volume (cannibalization), or hidden supply chain costs may be incurred to enable the promotion lift.To maximize Trade Promotions Effectiveness at the enterprise level, CPG companies need to implement solutions supporting the involvement of multiple departments and disciplines, allowing for collaborative consideration of how promotions activities impact their overall business.

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