Every year, consumer packaged goods (CPG) companies spend billions of dollars on trade promotion and, year over year, they tend to increase that spend. According to a study from Strategy&, CPG companies invest about 15 to 20% of their revenue on trade promotions – with ROI generally decreasing in such a highly competitive marketplace. And although some companies don’t really understand what they get in return for these significant investments, others have emerged as leaders in optimizing their trade management and getting the most out of their trade dollars.
In the recently published study, Strategy& – formerly Booz & Company, now a member of the PwC network – surveyed a set of CPG companies of various sizes across a variety of sectors, asking them about their spending on trade, their customer planning practices, and how their trade agendas affect their sales forces in the field. The survey revealed that a majority of CPG industry professionals struggle with overspending and ineffective trade management. Many of them are also unhappy with their current customer planning strategies, are dissatisfied with their planning and execution tools, and believe that their trade funding programs are ineffective.
Although this environment understandably causes frustration among CPG industry executives, the survey findings also revealed some good news and pointed to an untapped opportunity. A handful of companies that participated in the survey appear to have taken a more efficient and effective approach to trade management, having invested in building end-to-end capabilities from customer planning through to the shelf. These industry leaders have a clear idea about what they spend, where they spend it, and what their return on investment is. And they’ve leveraged the data to create insights into what works and what doesn’t to guide better decision-making in the field.
Ultimately, the survey demonstrates that it isn’t just big companies that are able to develop best-in-class capabilities. Each CPG company – regardless of size or scale – is at a different place in the journey to drive incremental value; the key is to identify which practices will add the most value, on a case by case basis.
Various factors contribute to the widespread trade management dissatisfaction within the CPG industry, but one of the biggest factors is that overall spending continues to remain much higher than desired. Most of the companies surveyed – 85% – indicated that they are spending significantly more than they believe they should on trade. And more than half believe their trade funding programs are ineffective. Respondents also indicated that their organizations are investing too much in short-term price and promotion events, which they have less control over. They would prefer to spend those dollars on other marketing and consumer-focused activities.
Planning and execution tools also continue to be a significant area of challenge. Seventy percent of respondents said they are dissatisfied with the systems they use. The survey revealed that companies tend to rely on a tangled web of spreadsheets, enterprise-grade systems, and homegrown applications to manage the end-to-end process, often unsuccessfully, and to the frustration of the sales team. Even the leaders from the survey reported that many of their capabilities depend on highly manual processes and interventions as well as disconnected and disparate systems and tools to manage this portion of their business.
For example, understanding what types of activities drive profitable return is a critical capability. While many leaders have invested in the development of this capability, they are still heavily reliant on manual, time-consuming processes to clean data which leave little time for analysis and are heavily error prone. The result is a lot of disinformation around what actually drives profitable events that leads to confusion and mistrust.
Follow the Leaders
Several of organizations surveyed were identified as industry leaders; that is, companies that are implementing best practices and reaping the financial benefits. However, even those that emerged at the front of the pack have room for improvement; no one company felt it had a handle on every aspect of its trade spend. But those in the lead are certainly on the right path. Here’s what they are doing well:
- Leaders have a clear understanding of what types of activities and events drive profitable return. They know exactly where their trade promotion dollars go and understand the ROI of this investment. They then leverage insights based on this understanding to build better plans, change the mix of activities they invest in, and drive increased profitability in conjunction with the efforts of field teams and retailers. In fact, some of the CPG companies we’ve worked with have achieved 10 to 25% profit improvement as a result of more effectively managing their trade promotion and customer planning efforts.
- Leaders have invested time and energy in developing and maintaining funding structures that more effectively match investment dollars with opportunity, referred to as “performance-based funding.” As a result, they are able to be more transparent with customers in terms of what levers are available to earn higher amounts of funding. This helps to drive a more collaborative relationship with retailers as it focuses both parties on a common goal.
- With regard to planning, leaders are apt to share greater responsibility for the overall profitability of the business with the sales teams. This includes incentivizing field sales on more than top-line volume or dollar targets, such as net revenue and profit contribution. Additionally, these leaders are pushing their sales teams to take ownership of driving the overall business in addition to the trade plan.
- Leading CPG companies have invested in systems and tools – such as trade promotion management, post-event analysis, customer planning, and trade promotion optimization – that enable and support these capabilities.
Companies that are seeking to improve their returns and profitability from trade should follow in the footsteps of these leaders. They should look at their end-to-end planning and trade management processes to identify areas that present key opportunities for improvement. In doing so, it is important to focus – at least initially – on areas that the entire company can rally around. In our experiences guiding clients to implement trade management systems and processes, it often takes only a few practical steps to begin seeing positive gains.