A trade spending P&L value equal to 15% of gross revenue is pretty common in highly competitive, commodity categories. How have we gotten here? Why is it such a painful topic to address? There are many business factors that influence this (e.g. product performance, consumer preference, assortment, eCommerce, economy, environment). I am going to focus on four dynamics within the scope of the sales team, often interrelated, that I think stand out.
Leverage. In the limited scope of pricing and promotion, leverage has been firmly on the “buy” side of the equation (retailers, wholesalers, and distributors). Going back to the mid-90’s, Walmart built a market dominance that enabled them to pressure manufacturers for lower and lower net costs. This then trickled through to the rest of the market seeking to match Walmart prices. Now the market has consolidated to just a few companies owning most of the retail banners we all shop in. All of these factors resulted in ever escalating subsidies in the form of trade spending. Manufacturers have found themselves in the unenviable position of having little leverage in pricing & promotion negotiation.
Priority. Like any other situation, there are competing priorities. If someone recognizes they need to improve their health, but doesn’t put effort into changing their behavior, improvement is not achieved. Someone may recognize the need to improve the return of trade spending investments, but if it isn’t made a priority chances are there won’t be much of a change.
Self-interest. Some find it advantageous to maintain a status quo that does not include clear understanding the effectiveness of trade spending dollars. Ambiguity and opaqueness becomes a friend.
Challenges with Adapting. Usually the intent is not nefarious, but there is still a problem. Executing day-to-day business activities is a full-time job in and of itself. Skill sets that are very good at one thing are not as well suited for other activities. Carving out time and resources to change direction is really difficult.
What to do?
The first step, as they say, is to admit there is… an opportunity. Of the four factors listed above, it is difficult to gain leverage until you have overcome the other three. Not all situations are the same, but a typical scenario we see is a small consumer goods company in which purpose-built tools have not been a priority. Teams establish their own processes and create basic tools. The day-to-day transactional management of the business and upkeep of the basic tools requires full-time attention. The resulting lack of transparency creates conditions where self-interest perpetuates potentially bad investment of trade dollars. The result is that business leaders don’t know how the money is being spent, and don’t have the ammunition to challenge their teams to act differently.
The second step is to decide that you are going to do something about it. Trade spending is probably your second biggest P&L expense. Adding technology that streamlines data collection and management, eliminates manual management of data, should be able to deliver a benefit that is 2-3x larger than the investment you make in the technology. Compare this to the opportunity and benefit of competing initiatives.
The third step is to activate. Establish the sponsor, budget, & timeline of the project and make it a priority. There will be short-term pain, but it will pay off in the long run.
The result of the first three steps gets you to a point where you will have the ability to identify where your investments are paying off (or not). At that point, you can properly value the investments you are making in products and customers. There are, undoubtedly, other factors, but getting a clear and deep view of your own product and customer investments will play a part in gaining leverage in pricing & promotion negotiations.
About AFS TPM Retail
AFS TPM Retail makes consumer goods sales, finance, and operations professionals more efficient and arms them with the insights they need to drive better financial outcomes. More than 20,000 users across 120+ companies use AFS TPM Retail to manage all aspects of the trade planning process: objective setting, account planning, settlement, & analysis.
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Also read: CPG Trade Spending: An Ounce of Prevention is Worth a Pound of Cure