Leverage cloud, digital and analytics to address burgeoning trade promotions spend
Trade promotions spending is one of the big cost item for most CPG companies. The average promotional spend for the industry is close to 15% of revenue, while some companies even spend 20% of revenue on trade promotions. Other big ticket items on the financial statements are cost to procure raw materials and contract manufacturing & packaging. Even though these cost more than the trade promotions, they are “low margin” and “high cost to change” operations. Also major companies have gone through rounds of supply chain optimizations in past decades, leaving limited scope for further rationalization.
Promotions on the other hand have been least analyzed expenditure for a CPG company. Most companies prepare their promotion programs as a copy of previous year’s programs, and do less changes thereafter, if any. For the purpose of analysis, we can categorize the trade promotions spend in two broad areas – retailer incentives and consumer directed promotions:
- Retailer incentives – securing retailer’s shelf space, displays and advertising spaces
- Consumer directed promotions – coupons, BOGOs, % / $ price off
Until now CPG companies have seen trade promotions spend as necessary and have not been able to limit promotional spend due to fears of losing market share to the competition. But advances in technology have provided the industry some tools to target this cost for optimization.
Here are 3 things CPG companies can do to analyze, optimize and reduce 30-40% of trade spend within a short span of time:
A) Leverage digital tools to optimize in-store presence
Digital evolution is multi-pronged solution which is applicable to our problem statement mentioned above:
Jump on E-commerce bandwagon-
The products portfolio within whole CPG industry is easily marketable and distributable through various shipping choices available. While establishing e-commerce presence would certainly have initial establishment cost, but in short span of time the companies would be able to have better control on marketing and pricing aspects of their business. Also since leaders in the industry have already established marketing websites for their key brands, adding e-commerce to the sales channel mix would not be a very intensive process.
The dilemma becomes to determine the suitability of the products to digital sales channel. But this is where Amazon and Walmart are proving that anything that sells in stores, can be sold on digital fronts. Amazon and Walmart have backing of their strong cross industry product mix to optimize the pricing and logistics for the customer. For the CPG companies, this becomes a challenge. However the CPG companies who have big product portfolio (such as Nestle, Kraft & Heinz, PepsiCo) can bundle their products or partner with complimentary manufacturers to establish economies of scale. Establishing logistics would be still a big challenge in this scenario, but not impossible, if powerful minds work together.
Some examples for this would be Nestle bundling its pizza, ice cream and prepared meal products for a party package. Other example would be to establish partnership with PepsiCo and include its soda and chips in the mix. This would be no different than how CPG companies work with entertainment and media brands. Say, Hasbro’s Disney branded products where Hasbro pays royalty to Disney for each toy sold.
As the digital sales start to pick up, CPG companies would attain better bargaining power and would potentially result in lower negotiated trade spend with retailers.
Embrace Digital Marketing as preferred platform for consumer centered trade promotions
It is a well-researched fact that for most consumers decision process starts before entering the retail store. The influence of traditional marketing channels (television, radio, flyers) is proving out to be diminishing compared to the escalating costs of these channels. While at the same time, more consumers are joining social media channels and are remaining active on social media.
Facebook’s Q2 2017 result show that it now has over 2 billion unique users on its platform. Of those 2 billion users, 1.3 billion are using Facebook on daily basis. This has resulted in its stock hitting all time high at $175. Similar statistics are being observed across other social platforms.
Digital marketing on the social media is nothing new, but the reach of these social channels is increasing exponentially. Companies can leverage these social platforms to execute and track their marketing campaigns at fraction of cost in comparison to in-store displays (as example). Through social channels, it is becoming increasingly effective for companies to reach their targeted consumer profiles and promote their products while spreading awareness of corporate social initiatives attuned with consumer’s moral and ethical standings.
While with increase in social channels and ever changing user preferences, it is becoming complex to decide the right approach to digital marketing. That is where the new tide of social tools is coming into mix to allow mass spread of campaigns across several channels with a single click.
B) Utilize sophisticated reporting tools to identify trends, and execute targeted trade promotions through segmentation
Reporting tools have come a long way in last decade. What required months to prepare a customized report now takes a matter of clicks. With multitude of reporting choices available today, every company is in constant state of determining the right fit for their organization. To make things simple, effective reporting require 3 components:
- Data warehouse – such as SAP BW, Terradata
- End user reporting tool – such as Micro Strategy
- ERP / business solution integration – such as SAP R/3, JDE, Manugistics, Peoplesoft, CRM
While reporting out of standalone data warehousing tools meets the needs of most businesses of yesterday, today the sophisticated end user reporting tools are able to provide insights which are easy to understand and right out-of-the-box actionable.
How reporting can help in bringing out insights specific for trade promotions varies from case to case basis. Potential example (one out of many) would be to use reporting tools to drill down on specific markets and execute campaigns where need exists in comparison to national campaigns.
Until 3 months ago, one of my clients used to see their products sale lagging in a specific state resulting from which they used to execute hefty promotions across the state.
Recently implemented reporting tool and custom dashboard provided new insights in consumer’s shopping trends across their markets detailed by individual cities. One that stood out was that they were instead strong in most of the cities within the state except for a few where they were not. By limiting their promotional spend in lagging cities in comparison to the whole state, they are now able to reduce the promotional spend in state of NY by 60%. Also campaigns in the specifically targeted cities are able to provide them a better consumer conversion and ROI on trade spend. The client is not redirecting the associated saving from this shift towards other strategic initiatives.
C) Analyze past trade promotions and optimize future plans, leveraging power of cloud
TPA and TPO tools have been available to the industry for over a decade now. These tools provide sophisticated trend analysis and model simulation capabilities. Understanding the benefits, all CPG leaders embarked on journey of costly implementations and adaptation cycles. But very few so far have been able to achieve the desired outcomes of being able to adapt future promotions based on past performance.
Recent shift in technology towards cloud computing applications and data as a service is enabling integration of various data points’ seamless and cost effective solution. These solutions are providing capabilities to bring in multitude of data and perform complex automated analysis to deliver insights right at the hand of the decision makers.
Utilizing the right mix of technologies, CPG companies today are integrating their trade planning tools, historical trade data and shipment volumes / POS data from 3rd parties with cloud based algorithms, and are able to schedule automated event triggered insights to be sent to trade planning team.
Having the insights at the right time on the promotional execution performance (ROI, volume uplift etc) and being able to understand actionable outcomes to alter future promotions can save a significant chunk of promotional spend. How the cloud based algorithms are developed, and what business outcomes are expected can be established on case to case basis and would depend on business needs. But here are a few examples to provide some realistic examples:
- Automated trigger to notify the trade planners on specific promotions which are not meeting the planned targets on pre-established metrics
- Automated reports to list the future promotions where the planned volume or discount rate is not realistic based on the historical promotions
Given examples above, a reporting and analytics tool can go only as far as recommending the changes to the trade planners. Ability to act on the insights in time, is what differentiates leaders of the industry than the rest.
Have more insights? Feel free to share in comments section!