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.
Resolving the trade spend paradox
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.
Replacing hope with expectation
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.
Finding a profitable balance
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, it’s about 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
The journey to profitable growth begins with a strategic choice
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?