According to Nielsen, consumer packaged goods companies spend a tremendous amount of money promoting their goods and services each year. Some estimates put total spending in the U.S. in 2017 at trillions of dollars. That is a staggering statistic.
Recognizing the level of spending behind trade activity, companies have developed complex and nuanced systems to manage their trade promotions more effectively. Yet despite the spending levels, and the additional "eyes" through TPM teams, recent research suggests that only one-third of trade programs make money.
Clearly, there is some percentage of companies that subscribe to the "This is just how we’ve always done it" philosophy. But as convenient as it would be to assume that as pervasive thinking, most companies operate with a more rational and thoughtful approach than that.
For many more companies, trade spend is a convenient mechanism to realize critical volume targets, against which much of the sales and marketing organizations are incentivized. For others, the critical decision driver is one of competitive fear more than strategic choice.
In a world where CPG companies have weathered unparalleled transformation in a very short period of time, and where competitive pressures are at their most intense, adjusting trade spending and creating any vulnerability at retail is not a lever to be pulled.
However, unchecked (or at least unreviewed and expertly managed) trade spend can become the slow bleed that ultimately undermines the broader brand and business objectives. In today’s business environment, where companies are scrounging for every last ad and promotional dollar, there has to be a better way.
Put differently, CPGs have an opportunity to move with conviction to a world flush with incremental resources to invest in ad spending and spending on PFME (product fixed marketing expenditures). We understand it sounds too good to be true, but we can tell you that such a world exists — and you should run to it, quickly!
The following are three key steps to begin aligning against this strategy immediately:
1. Internal Evaluation of Trade Spend
The first step in improving trade spending begins with a detailed and critical review of current levels. This likely falls into the "obvious but true" category. But like most things, how this analysis is conducted is more important than that this analysis is completed.
Conduct a profitability assessment by trade, by region, by customer, and by SKU. Take the time to understand where the profit resides in your trade spend today, or put differently, which trade activity actually grows the business. Disaggregate what drives the successes, and use that intelligence to intuit what is falling short elsewhere. Making strategic choices, grounded in true ROI understanding, around which trade spend to reduce and which to grow will inherently stack the deck in favor of more profitable actions and grow overall ROI considerably.
2. Align External Partners with the Strategy
Understandably, adjusting trade spend levels across retailers without full-knowledge dissemination and/or shared goals can — and will — leave you vulnerable.
As a result, our teams have found great success at reducing trade spend effectively when adjustments were made in conjunction with improved incentive and sales targets with key customers. To be clear, what we're suggesting is leaning into your retail winners. We take this approach for customer prioritization, management decisions and nearly every other facet of business decision-making; we're merely suggesting it's time to bring this thinking to retail spend as well.
Specifically, creating key business metrics against strategic SKUs/packs, new item penetration, seasonal participation and other activities against which retailers can align allows for a win-win for manufacturers and retailers.
Re-invest in Ad and PFME Spend to Support Future Growth
After completing the first two steps, teams marvel at the incremental dollars they are able to locate every time. These incremental dollars are then available for thoughtful reinvestment — in trade money for successful retailers, in advertising and marketing spending to further strengthen the brand, in other initiatives that work harder to build strong brand relationships with priority customers vs. building vulnerable volume with consumers likely to ditch you for the next, better promotion.
When laid out in this manner, the next steps and returns on those investments are glaringly obvious. But the returns realized are just as stark and motivating. It takes stepping out of the trade spend "do loop" to evaluate the current state and envision a better future one. Take the first step today.
About the Author
Don Johnson is a principal at The Cambridge Group. He has more than 15 years of experience working with consumer packaged goods companies.