The
Evolution of Trade Promotion Management (TPM)
What is trade promotion management (TPM) for
CPG (Consumer Product Goods) companies?
The following is the Promotion Marketing Association
(PMA) definition of trade promotion:
Trade Promotion […] is
any expenditure paid directly by a manufacturer
to the trade
or retail factors in a given industry as a set
amount on a per unit basis or in payment for
a merchandising value provided by the retailer.
Trade Promotions [..] include "slotting
allowances", "performance allowances", "case
allowances", and […] "account
specific" promotions. (Text from www.pmalink.org)
This text-book definition is a good start, but
trade promotion is much more complicated than
this definition might suggest. Synectics Group
has presents this short history of trade promotion
to give you a better understanding of trade promotion.
How did trade promotion Trade promotion and
trade promotion management evolve?
Trade promotion evolved as a result of default,
not design. In the Nixon era the administration
enacted a price freeze to help stem inflation
on retail products. Prior to the price-freeze
effective start date, the consumer products industry
initiated a significant price increase to protect
the inevitable escalation of material cost-of-goods
during this period. A bi-product of this across-the-board
price-increase on consumer products was the birth
of trade promotions in the CPG universe. Consumer
products companies dealt back the difference
of the old price and new to keep their retail
prices to the consumer the same. A harmless strategy
to get around Nixon’s price controls has
evolved to over a $115 billion annual expenditure,
representing an average of 15% of gross revenue,
in the consumer products sector in 2005.
In the early stages of trade promotion the retailer
began to create merchandising opportunities at
a nominal cost revolving around retail price
reduction and in-store display. The leading edge
manufacturers of the time (General Foods, P&G,
Lever Brothers, etc.) aggressively supported
the retailers merchandising opportunities and
realized a significant sales lift when their
products were promoted in-store. This escalation
of trade promotion spending by the CPG manufacturer
was a win-win scenario for both parties. Tracking
these promotion expenditures at this time was
relatively simple as a result of a flat dollar
rate per case sold built a fund that the manufacturer
and retailer planned promotion activity around.
The brand managers at the larger manufacturers
internally tracked these accruals against their
P&L’s creating the first formal trade
promotion management process.
As time progressed in the late 70’s and
throughout the 80’s, the retailer became
extremely creative in developing new merchandising
vehicles with separate costs associated with
them. There was the evolution of weekly newspaper
advertisements promoting products, television
and radio programs, in-store sampling programs,
and the evolution of slotting fees for new products
just to name a few. All of these programs came
with an incremental cost and resulted in a substantial
escalation in the trade promotion investment
made by manufacturers. The addition of all these
promotional programs also began the evolution
of the combination of off-invoice and bill-back
allowances. The off-invoice allowance was designed
to maintain an everyday or promotional retail
price point. This allowance like the initial
rate per case allowance was relatively easy to
track and to account for.
Over time, retailers realized that they would
get these off-invoice allowances even if they
didn’t perform all of the required merchandizing
and other stated requirements to ‘earn’ the
allowance. As this happened, manufacturers began
to look for ways to put more pressure on retailers
to perform for these trade promotion allowances.
Bill-backs had been around for many years, typically
being used for in-direct customers that pulled
product from a wholesaler or distributor. Manufacturers
realized that they could also have more leverage
with their direct-ship customers if they layered
on additional bill-back incentives. These bill-backs
would not be automatically paid to the retailers.
Retailers would have to submit paperwork, proving
that they performed the necessary tasks to qualify
for the trade promotion allowances. Only if the
paper work was submitted would the retailer get
a check from the manufacturer.
It seemed logical to manufacturers, that they
should require documentation and proof-of-performance.
Bill-backs became perhaps the first form of pay-for-performance
trade allowances. Bill-backs, in theory, did
give the manufacturer the ability to pay only
for retail performance. However, the dramatic
increase in bill-backs, both in frequency, form
variations and dollar amounts, had several unintended
and unfortunate consequences on the CPG industry.
One consequence was the creation of great inefficiency
within the CPG supply chain. Every manufacturer
started offering several bill-back programs per
year per product. Each required paperwork to
be submitted for payment. Retailers and manufacturers
soon realized that they had created an administrative
nightmare. The technology of the day could not
keep up with the information and data processing
demands to provide efficient trade promotion
management.
Another unforeseen consequence was the rapid
and dramatic increase in deductions. With the
administrative burden of trade promotions increasing,
manufacturers began to take longer to pay bill-backs.
Retailers got increasingly frustrated at having
to wait for payments. With retail margins being
much smaller than those of the manufacturers,
retailers’ cash-flow was squeezed by slow
trade promotion payments. At the breaking point,
retailers decided to simply deduct trade promotion
monies that were due. These deductions would
be taken on un-related invoices, even further
increasing the administrative burden of trade
promotions.
Although they were created with good intensions,
unfortunately it was the evolution of the bill-back
allowance that significantly and irreversibly
complicated the trade promotion management world.
It would become the genesis and force the industry
to create a more formalized trade management
approach. This approach would require the field
sales force to keep records of their bill-back
offers to retailers and tie the expenditures
back when the retailer deducted off of subsequent
invoices for the merchandising activity (bill-backs).
The evolution of the deduction by the retailer
created the need for a more systemized approach
to managing this growing expense. As a result,
deduction management systems evolved to track
expenditures against specific manufacturer brands
at specific retailers. These systems provided
a comfort level to brand managers and gave them
the ability to track the trade promotion liability
by retailer, by brand, rolled-up to a total brand
liability. The combination of this type of systemized
approach to tracking the growing trade promotion
expenditure, in addition to the solid profit
margins that were being enjoyed at this time,
provided the brand managers the tools they needed
to deliver the bottom-line profit contribution
objectives.
In the late 80’ and throughout the 90’s,
trade promotion management required a more detailed
and organized pre and post promotion analytical
approach. Consumer product categories matured.
The brand manager’s best ally, the new
product line extension, met resistance from the
retailer as a result of not generating incremental
category volume and profit. The trade expenditure
cost continued to exponentially increase. This
cost increase was in large part a result of the
retailers rapidly shrinking net-after-tax profit.
This accelerated negative trend resulted in a
significant reduction in the solid profit margins
that the CPG manufacturers were enjoying throughout
the 70’s and 80’s. As a result of
these economic circumstances, the spreadsheet
evolved as a promotion planning tracking tool.
The spreadsheet combined with a systematized
approach to deduction clearing organized trade
promotion management and began to place emphasis
on the pre-promotion planning, post-promotion
management as well as top-line analysis. In the
mid 80’s the evolution of scan data provided
by IRI (Information Resources, Inc.) and ACN
(A.C. Nielsen) provided an analytical component
that could begin to measure the sell-through
of a promotion as well as the sell-in.
It was at this point that all of the critical
components of trade promotion management were
beginning to be executed (budget/quota, planning,
deductions/payments, pre/post promotion analysis).
As the trade promotion investment made by the
manufacturer continued to grow, so did the scope
and magnitude of the trade promotion management
team. Large manufacturers invested significant
dollars to develop a department that would act
as an intermediary between marketing and sales.
Their charge was to manage the effectiveness
and efficiency of the trade promotion investment.
This focus enabled manufacturers to keep a closer
watch on what was budgeted vs. what actually
was spent to identify potential trade promotion
overspends. Realizing that at this point trade
promotion management was light years ahead of
the evolution of trade spending, it was far from
a perfect science. The necessary information
to evaluate trade promotion effectively could
reside in as many as 6 different data silos in
an organization. Budget information could in
the hands of the finance department, deduction
information would reside in the financial administration
area, syndicated data could be in the market
research area, shipment data could be found in
invoiced area of the ERP system and the life
blood of analyzing a successful promotion, planning,
would be in the hands of the sales force. In
many cases it could take weeks to compile the
necessary information from these disparate groups
to begin post promotion analysis. The fact that
the plans that resided on spreadsheets were dependent
on constant updates top reflect changes from
the field, created massive liability gaps on
what was offered to the retailer vs. what headquarters
was looking at. Although progress was being made
in the constant monitoring of trade spending
effectiveness/efficiency there was still significant
room for improvement.
In came the age of technological advancement
that would provide the opportunity to access
all of the pertinent information in what many
call the data warehouse approach. The data warehouse
provided the opportunity to have all of the silos
integrated into one information area for the
next generation of trade promotion management.
It became possible to transmit adjusted plans
via the Internet to provide a synchronized view
of the actual liability. Shipment data could
be fed in real-time to this system via automated
electronic data linkages. Financial data (deduction/payments)
could be cleared against a specific promotion
plan creating the opportunity for an accurate
variable contribution P&L by promotion event,
promoted group or brand, rolled up to a specific
retailer. This same financial data could be electronically
exported to the appropriate ERP GL’s for
accurate financial liability reporting. Syndicated
data could be electronically fed into the trade
promotion closed-loop software for sell-in vs.
sell-through reporting capability. Trade promotion
management had evolved to a point where all operating
areas of an organization had a synchronized view
of the impact of the trade spending liability.
Major surprises were minimized and information
was available in time to adjust tactics and strategies
on unprofitable trade promotion spends.
It is logical to surmise that with the advent
of the closed-loop trade promotion management
system solution, the spiraling out-of-control
world of trade promotion spending is now manageable.
No question the technology is available now to
manage accurate liabilities of this incredibly
mismanaged investment. What do we mean by mismanaged?
Let’s dissect the facts;
- $115 billion is invested annually representing
on average 15% of the CPG manufacturers gross revenue.
- Less then 50% of this substantial investment ever
reaches the consumer.
- Margin erosion over the past 10-15 year period
for both the retailer and the manufacturer has
been substantial.
- Over that same time period a focused retailer investing
in technology by the name of Wal-Mart has gone
from a 0% share of the retail grocery business
to over 20%.
The next frontier in the evolution of trade
promotion management will involve the collaborative
use by the retailer and manufacturer of the technology
available today to manage trade promotion spending
in real-time for mutual gain. Collaborative trade
promotion management utilizing the technology
available today, will enable a retailer/manufacturer
working together to match what Wal-Mart built
over the past 15 years in as little as 15 months.
Implementation of the technology is only scratching
the surface; the real focus has to be on the
words collaborative, mutual and paradigm shift.
The combination of these powerful and attainable
ideas could bring us back 180 degrees, to as
time long ago when trade promotion resulted in
mutual incremental sales volume and profit, for
both concerned parties.
It seemed like such a simple premise that worked,
is there any reason why it could not work today.
The alternative is to stay the current course
and the end game is not looking too bright. |
