Optimizing trade promotion investments while achieving profitable growth
Consumer packaged goods companies spend billions of dollars on trade promotion. If they optimized their investments, they could spend less while driving increased profitable growth, argues Gary Singer.
Consumer goods companies spend over US$200 billion a year on trade promotion, such as discounts, displays and special offers — e.g., buy one/get one free offers (BOGOs). For many, it’s the largest item on their profit and loss (P&L) statements, exceeded only by cost of goods sold. Yet their investments in this area do not necessarily deliver the profitable volume expected, and have not done so for decades.
In our experience, around half of all trade promotion initiatives actually lose money. Yet companies persist with the practice nonetheless. Reliance on trade promotion has become an ingrained part of how the industry works.
To make their trade promotions more effective, companies have invested in better processes, resources, and tools/software to manage their spend. But this has had little sustainable impact on the core problem. Across the industry, trade spend continues to rise, while volume and profit margins are becoming harder to sustain or grow.
Deeper change is needed. Companies need to address trade promotion spend so that it makes serious improvements to bottom-line profits. They need to move beyond trying to better manage trade spend and instead find ways to optimize the return on their investment.
Companies have largely avoided any significant attack on their trade spending, but that position is fast becoming untenable.
Trade promotion spend has grown at a time when companies have been cutting other costs aggressively. In an era of flat margins, they’ve been desperate to improve profitability, often under pressure from private equity owners or activist investors.
Most cost cutting has focused on corporate overhead, back office and administrative expenses, and supply chain efficiencies. This has yielded improved operating margins but has not done much to address growth and — in most cases — revenues have actually declined.
Many companies have increased the list prices of their products, in the hope that this will stem falling revenues. However, such moves tend to result in a corresponding loss of volume and/or market share. To fill that gap, companies have resorted to even greater spending on trade promotion.
This creates a paradox: companies would like to cut their spending on trade promotion, but their strategies are actually forcing them to spend more on trade promotion.
Some companies have tried to break out of this vicious circle. We’ve seen them pilot new analytical tools, develop centers of excellence in analytics, and simplify “closed-loop” planning, execution, and analysis.
These are all steps in the right direction. They’ve helped companies find ways to plan promotions better, to have greater visibility and control, and to make people more productive.
More recently, we’ve seen companies making the bold choice to cut trade spend and accept the risk that sales volumes may fall. Their expectation is that the sales they maintain will be more profitable.
This is a refreshingly new approach, and the kind of strategy that’s needed. The challenge is to implement it with the insights and clarity needed to confidently tip the scales away from hope and toward expectation.
Ultimately, it’s about moving beyond the desire to manage trade promotion spend better and, instead, enter a position where you can optimize your return on trade spend investment. In other words, finding a sustainable balance between cost, volume, revenue and profit margins.
A balanced transition to optimized trade spend demands the following:
- Find and manage the right balance between cost savings/margin improvement and any consequent fall in sales volume/market share
- Move beyond tactical pilots to fully embrace the ongoing use of analytics to optimize trade promotion spend
- Be disciplined enough to make tough decisions about cutting trade spend that does not improve bottom line profits, and do so by working with trading partners
- Think about trade spending more widely, to include payment terms, volume rebates, etc.
- Identify a better balance between short-term profitability and the long-term capabilities needed to sustain results
Companies need to decide what’s most important for them: cost reduction or volume growth? Then they need to accept that a reduction in trade promotion spending may come at the cost of volume or share, at least in the short term.
They can do this with the confident expectation that optimized trade spend will deliver profitable growth inside a known time frame, if they achieve the kind of balance outlined above.
The next step is to answer some key questions:
- What pressures are you facing relative to trade promotion spending?
- Which areas of trade spending are addressable and which are out-of-scope, e.g., long-term contracts?
- Where can you find “quick wins” that have a near-term impact, e.g., “non-working” trade?
- How will you balance short-term margin gains with long-term capability?
The details of how companies address this challenge will vary. But the important first action is to think about trade spend differently.
Previous approaches to managing the vast spend on promotion are valuable up to a point but will not deliver sustained, profitable growth without a new mindset.