Consumer Packaged Goods marketers (CPGs) have been wrestling with the size, growth, and productivity of their trade promotion spend for decades. While there’s some evidence that budgets are stabilizing and funds are being converted to Shopper Marketing spending, that’s not true for all CPGs and there’s little evidence that trade spend productivity is improving. In our view, underlying reasons for poor productivity include trading partners’ mismatched goals. Said another way, what retailers are looking for from CPG investment is not what CPGs seek from their trade programs. When such a mismatch occurs, the result is a transfer payment from CPGs to retailers that builds little business for either trading partner and does nothing to enhance consumer or shopper loyalty.
It’s ultimately the CPGs’ responsibility to eliminate the mismatches. That’s because trade budgets start with them, and they develop the criteria by which funds transfer. Too few CPGs develop their trade programs with trading partners’ strategic interests in mind. Instead, they plan based on reaching brand volume goals (base plus incremental cases) and doing so by maximizing their trade promotion return-on-investment.
For sustainable improvements to be made, CPGs must understand retailers’ overall goals and what they’re trying to accomplish with shoppers promotionally. Then, trade programs that are well-executed must clearly and measurably deliver against retailers’ goals as well as CPGs’. When accomplished, mismatched goals are eliminated and CPGs’ and retailers’ incentives are aligned.
The tactical advantages of trade promotion have been evident for a long time: retailers enjoy a reduced cost-of-goods-sold which can translate to higher margins, and manufacturers can see a volume spike, at least at the account level. But it hasn’t been at all clear whether such gains are “real”…the dead-net price the retailer pays after promotions may well have been achievable without setting up the machinery that surrounds promotion management and execution. And, if CPGs do enjoy volume gains at a given customer, it’s rarely tracked whether the gains come from future consumer purchases there or from other competitors in the marketplace. But, it’s tough for either party to call a stop, for fear that they’ll lose…something.
Extracting Sustainable Value from Trade Funds
The recent trend of converting classic trade spending to shopper marketing programs is a step toward enhancing strategic relevance, but shopper marketing has yet to approach promotion’s ability to drive quick, and quantifiable volume impact. So, shopper marketing ROI is even murkier for many CPGs to understand, deliver, and improve upon.
Sustainable improvements in trade spending productivity will only be realized when retailers see that it’s in their best interest to improve productivity results. As long as CPGs focus on incremental promoted group volume and cost-per-incremental case to develop and measure trade programming, retailers will see little value in increasing productivity. Real progress will come when CPGs develop trade programming that meets retailers’ strategic needs as well as their own. Real progress requires that CPGs develop good insights into what retailers’ strategic needs are, how they’re meeting those needs today, where the gaps are that trade programming can help close, and a process by which they get retailers to endorse their approach and quantify the benefit which the CPGs’ programs have generated.
Understanding Retailers' Strategic Needs
Most of the food retailers we know have a lot of similarities in terms of the business situations they face: same store sales are up fractionally, but gains are due to food price inflation that has masked customer count declines. Extreme-value competitors are taking dead aim at them, reducing their pricing flexibility and their basket sizes. And, category-killer competitors are siphoning off trips across many center-store categories that have been historical profit drivers. Bottom-line, many serious challenges confront them.
Promotionally, most food retailers seek to leverage the weekly circular to “drive traffic and build the basket.” The front page has been tasked with providing sufficiently “hot” deals to help determine where consumers decide to shop that week. Inside pages exist to drive traffic throughout the store, and especially up and down center-store aisles.
So, it’s clear why many traditional trade programs that are created and pitched fail to stimulate much excitement beyond the category managers; senior retailers have a lot more than promoted group incremental volume and category effects on their minds. One key step in elevating the discussion is to broaden it to address senior management concerns. Here’s a framework for illustration:
As shown above, trading partner conversations that are focused at the product- and category-level have limited impact; they’ll be constrained to category managers. In contrast, trading partner conversations that focus on enhancing store and shopper loyalty can drive senior-level strategic discussions.
The more value that CPGs can add to total store success, the more likely their ideas and programs will be accepted and executed well; it’s simply sound business practice for them to do so.
Retailers View Promotions Differently
Just as CPGs need to evolve their thinking beyond promoted group volume gains, some retailers’ thinking needs to mature, too. It’s highly unlikely that sustainable improvements can be made when retailers are simply looking to “fill the buckets.” Long-term success will be achieved at retailers who are just as committed to building shopper loyalty as CPGs are committed to building consumer loyalty.
There are three key points from the chart above:
- There’s a pretty clear “evolutionary path” that retailers and CPGs each must take before they become shopper-focused.
- To achieve long-term and sustainable progress, both trading partners must be “on the same page,” and
- Not all trading partner relationships will produce sustainable progress; choose wisely.
In this view, organizing all trade activity against building traffic (customer counts) and shopper loyalty is the basis for true collaboration and sustainable productivity improvements. Shopper Marketing budgets are generally a small fraction of the overall trade spend, and aren’t sufficient to “move the needle,” building meaningful traffic and loyalty on their own.
Tools of the Trade
We’re discussing ways that CPGs should broaden their perspectives regarding trade promotion as they plan, execute, and evaluate their programming. Developing the bigger picture includes evaluating competitive activity and understanding customer promotion behavior, to ensure CPGs develop, sell and deliver effective promotions to their trading partners. Compiling and analyzing such information has been labor-intensive with many data gaps and imprecise measurements.
New technology coming to the states from abroad is facilitating access to more complete and precise promotional histories for retailer and competitive activity. The technology features superior data integration capabilities as well, so now sales data can be linked with ad activity to support more accurate assessments of promotional effectiveness. Finally, since the promotional activity is “scraped” nightly from the web, the information is available on a next-day basis.
Keep Score to Receive Full Credit
A lot of good work can go unnoticed and be under-appreciated if it’s not communicated properly to the right audience. In our view, the right scorecard is a foundation; it must capture what’s important to both retailer and manufacturer. While measures will vary by trading partner, here’s a shopper-based scorecard that may serve as a solid starting point:
The critical addition is a set of shopper measures that help quantify promotion’s ability to increase transactions and build basket size.
Scorecards are important, but so is effective communication of intentions and results with the right retail executives. Done right, effective communication sets up a cadence of regular “top-to-top” meetings that are initially based on the right actions being promised and continued, based on good results delivered. As we say, getting the first meeting isn’t so tough but the second meeting is earned.
The Bottom Line
Creating sustainable improvements in trade spend productivity requires CPGs to be “on the same page” with their trading partners’ strategic needs. These needs include rebuilding trips, customer counts, and basket sizes. Today, few CPGs develop and pitch trade programs this way; they’re much more likely to focus on incremental volume and cost-per-case metrics. New technologies are helping to facilitate the job at hand; it’s time for CPGs to get on board.