Return on Trade Investment

Tim clark

5/1/2006

Trade promotion spending continues to outpace sales growth especially for mature consumer products brands, and is typically the second largest expense on the income statement averaging 15 percent to 20 percent of gross sales and 65 percent to 75 percent of marketing spend. Overall, North American manufacturers spend about $500 billion annually on trade promotion. Companies are continuing to spend more and more, yet a recent industry study estimates that more than 80 percent of consumer products manufacturers' promotions are not measured.

Understanding ROI
The issues surrounding retailer trade promotions impact more than just the large manufacturers with thousands of SKUs. Understanding and enhancing both the business relationship and Return On Trade Investment (ROTI) can be a significant competitive advantage for many mid-market manufacturers. By identifying and eliminating events that do not provide a positive return on investment, companies can better allocate funds to support events that not only increase top line sales but also bottom line profits.

Developing trade programs based on fact-based analytics encourages collaboration and innovation; both of which are required to build programs designed to promote customer and brand loyalty.

Companies are quickly learning that a technology solution alone will not automatically deliver successful trade promotion programs. They are discovering that only when the organizational and business process issues are resolved can the enabling technology be used effectively. Elevating traditional trade promotion programs to innovative Trade Promotion Optimization (TPO) strategies incorporates this holistic approach and creates a long-term solution for leading manufacturers.

Food For Thought
Barber Foods is a successful 50-year old mid-market company that produces a premium line of frozen chicken products with strong distribution in the Northeast and Middle Atlantic states. Sales are evenly distributed across the retail grocery, club stores and foodservice channels, and more than 90 percent of the sales and marketing budget is allocated to trade promotion. Annually, the company has only a few Free Standing Insert (FSI) coupon drops. The company has tested radio advertising in a few markets; but does not advertise on radio or TV on a consistent basis. Most marketing is accomplished via trade promoted events. When annual account and channel planning started, events were created on the previous year's information.

The situation was further complicated by an event planning system that was not tied to a real-time event tracking system. These static plans could only be updated manually thus inefficiently alerting the supply chain. This provided an environment where retail partners could adjust events without notifying Barber Foods. Growing demands from across all trade channels for higher trade spend rates, in-store merchandising and pay-to-play pressure were eroding margins and forced Barber Foods to reevaluate its overall trade strategy. It was becoming more difficult to subsidize short-term sales while trying to maintain margins without very significant growth in volume.

Creating the Solution
Clarkston Consulting took a two-phased approach to help Barber Foods implement an effective TPO strategy.
Phase 1: Process Improvement Plan via Maturity Assessment

Beginning with a predefined set of industry best practices for each of the seven steps in the trade promotion lifecycle, Clarkston helped senior management identify the business process and technology changes needed for improvement by:

Conducting interview sessions and workshops with key stakeholders.
Creating an as-is process and functional state.
Pinpointing gaps between best practices and as-is state.
Developing a future state based upon a combination of best practices and pragmatic changes to the organization.
Creating a short-term and long-term road map including, resource needs, training requirements, time commitments, technology improvements and data warehousing needs.

Clarkston identified quick win opportunities for improving trade promotion efficiency across departments for each channel. Improved account planning, budgeting allocation and post-event analytics were the main focus for process improvements. Areas identified are expected to provide a positive return to Barber Foods within six to 18 weeks of implementation.

"We've only scratched the surface of the savings that can be realized from trade promotion optimization," says David Barber, senior VP of sales and marketing, Barber Foods. "We will leverage this process across all of our retail partners to build more effective trade programs moving forward."

Phase 2: Business Analytics Review
The business analytics review evaluated the specific data, systems and analytics used by Barber Foods in trade planning and execution. Data was collected manually from multiple information sources including syndicated scanning, internal shipments, and promotion costs for the purpose of estimating ROTI for selected retail accounts. Upon completion of the analysis, Clarkston made recommendations to improve trade analytics within the existing systems and available data including the creation of Key Performance Indicators (KPIs) to help sales management measure trade event performance and the elimination of wasteful funding of historically poor events based upon quantifiable evidence.

With these improvements taking place, Barber Foods expects to realize a 1 percent to 2 percent increase in total corporate profits and continued sales growth from the restructuring of its trade promotion budget in 2006.