Post first published 10/24/12 in the “MENG Blend” on the Marketing Executives Networking Group website – www.mengonline.com.  The destination site for leading marketing executives looking to stay ahead of the curve. We have more than 1800 of the leading marketing minds in the world eager to meet, communicate, help and share our expertise.

It shouldn’t come as a surprise to anyone in consumer products trade promotion spending has been and continues to be out of control – $60B+ in the U.S and $500B+ per year globally and growing – according to the Boston Consulting Group.  A lot of reasons exist, manufacturer/retailer consolidation due to winners/losers, Wall Street pressures for quarter to quarter earnings increases, brand commoditization, growth of private-label – just to name a few.  The Boston Consulting Group published a white paper in September, 2012 called “Paying for Performance – Trade Spending for Profitable Growth”.  In it they found trade spending dollars grew faster than revenues in 75% of the surveyed product categories.  It also grew faster than volume in 90% of product categories outpacing growth in other P&L line items.  The net effect is retailers’ profitability continues to grow at the expense of the manufacturer.  This dynamic is driving more and more manufacturer consolidation and/or exit of product categories once considered core to a manufacturer’s business.

The study included nine U.S. based consumer product companies in four product category groups a) food and beverage, b) household and personal care, c) wine & spirits and d) other.  They found a fundamental disconnect between trade spending and retailer performance using these dollars.  The complete white paper is linked below and is a good read.

“Paying for Performance” – Boston Consulting Group

The study also found trade spending is widely dispersed – not only among channels, but also retailers in those channels – with sometimes the best performers not always getting the highest rates (e.g. Wal-Mart for example).  This is due in part many big box retailers are not necessarily reliant on trade spending to drive their business models.

The report identified 3 ways to improve returns on trade spending investments. 

1.    Prioritizing trade spending investments with “winning retailers” delivering profitable growth.

Not surprisingly, manufacturers can boost trade spending ROI by reallocating trade spending investment to “winners” – those customers providing the largest profits, distribution and/or volume growth.  Within bounds of legal requirements, these superior performers should get higher trade rates and weaker performers should get less. 

2.    Analyzing returns and applying insights systematically advancing retail event performance

In addition to prioritizing spending, manufacturers must understand how to design and execute promotional plans to yield the highest returns.  Alot of category management tools currently exist that can assist with pre-event planning, event execution, post-event analysis, and lessons/insights from prior programs events.  Surprisingly, manufacturers don’t effectively use these tools enough to help really analyze the success/failure of their trade programs.  The result is more and more dollars going to either price/enhancing retailer margins and/or customer relationships.  In addition, mature consumer products also helps to commoditize product categories which can reinforce price reductions and/or growth of private label.

3.    Designing a trade promotion structure to pay retailers for performance, rather than relationships/activities.

The survey identified 3 major trade structure types:

  • Pay for relationship: trade dollars negotiated with customers with no link to activities/performance.
  • Pay for activities: trade dollars based on event plans – a lump sum or accrual based spending program based on customer activities – no metrics.
  • Pay for performance: trade dollars “earned” based on retailer event performance metrics.

Eight out of the nine surveyed companies had either pay for activities or performance based trade structures – most seemed to have a blend of both.  In either case allocating trade funds entailed making choices and tradeoffs while adhering to three broad trade plan principles: simplicity, consistency and transparency.  If done correctly, this can build a level of trust between the manufacturer and retailer focusing on “win/win” issues vs. “win/lose”. 

Specifically, an effective pay for performance trade program had 4 major core elements:

  • Earning mechanisms: Differential rates based on distribution and/or good/better/best strategies
  • Spending guardrails:  Fund can be spent among brands in a business unit, but customers can’t overspend funds that aren’t “earned” within that unit.
  • Strategic and transition funding: Strategic funds capitalizing on competitive opportunities and transition funds addressing changes in product lines addressing customer inventories.
  • Administrative rules:  Earned vs. actual spending quarterly reconciliation, no forward buying and/or diverting. 

Caveat:

Obviously, the nine U.S. based surveyed companies had leading market positions in their served markets which provided enough critical mass to make effective trade structure changes.  However, situations exist where other mitigating factors can complicate process improvements in trade spending.

1.      Manufacturers/brands not having leading brands or have strong brand equities:  For example, investments in traditional/digital media spending and/or new product innovations should take priority before working on redesigning trade programs.

2.      New emerging retail channels like mortar/brick vs. online retailers:  Issues like growth in dollar stores, “showrooming” and declining trade classes may make some customers reluctant to implement trade spending improvements.  Balance sheet and/or credit issues might make these customers more focused on generating cash flow to support their operations vs. process improvements.

Nevertheless, if pay for performance programs are designed/implemented correctly it is possible not only to reverse the trend of growing trade spending, but also to reduce trade spending levels by 2-5% annually (according to the study).  This will go a long way to “rein in” the trade spending” monster.

Rick Steinbrenner
Chief Marketing Officer/Principal, Brand Marketing Advisors
www.globalbrandguy.com
The Global Brand Guy