Trade Spend Transformation

Transcription

1 Trade Spend Transformation Overcoming Fear to Generate Value Transforming trade spend across brands and channels can be daunting. Six steps can help any organization overcome the fear of change to eliminate ineffective spend and reinvest to capture growth. 1

2 Trade Spend: A Large Spend with Significant Inefficiency Over the past decade, consumer goods companies have struggled to sustain double-digit growth amid pressure from the global economic slowdown, intense competition, and changing consumer trends. Leading companies have grown primarily through geographic and product portfolio expansion. However, many neglect trade spend, a significant growth lever that represents 25 to 30 percent of gross revenue (see figure 1). Figure 1 Typical gross-to-net structure (varies by market) Gross-to-net spend is typically underestimated due to low visibility on total discounts 25-30% 100% 8-10% 6-8% 4-6% 4-6% <3% <1% 70-75% Gross revenue Everyday pricing/ price discount Consumer promos Schemes and rebates Trade offers In-store visibility Others Net revenue Source: A.T. Kearney analysis Trade spend is often uncontrolled, deeply entrenched in product legacy, and unaltered, which limits the overall return a company can get by investing in sales across brands and customers. In our experience analyzing retail sales for companies across Asia, we have found that at least 30 percent of sales investments have a negative return and, worse, create artificial dependencies. Trade spend is often uncontrolled, deeply entrenched in product legacy, and unaltered, which limits the overall return a company can get by investing in sales across brands and customers. Many consumer packaged goods (CPG) companies struggle to challenge their legacy payouts and instead use a one-size-fits-all approach that lacks innovation. Several practices are typical: Heavy investments in high-contribution, high-pull brands regardless of the brand s response to trade spend 1

3 Similar discount levels for all customers regardless of their individual growth potential A lack of focus or structured programs for top stores in general trade Although most organizations are aware of these inefficiencies, many are reluctant to embrace solutions that are working in other functions, let alone look for new solutions. Changing trade spend across brands and channels can be daunting in the face of questions such as, If I reduced specific promotions, what volume of sales would I lose? and How would my key customers react if we were to stop this trade offer? Many organizations fear making a change, believing it is easier and safer to do nothing. This fear can be overcome by understanding that a successful trade spend strategy has the same elements as other successful strategies: sound planning leading to good design underpinned by strong data and executed by a confident, engaged team (see figure 2). Although each company has unique issues, six elements can help any organization transform its trade spend. Figure 2 Trade spend effectiveness framework Strategy and planning ROI approach and targeted payout structure 1. True trade spend: capture data 2. Total payout benchmarking: take a zero-based view 3. Measuring ROI: embrace tools for schemes and promotions Design Analytical scheme redesign and total retailer payout-based reset 4. Dynamic strategies: redefine and map at each level Execution Change management and long-term capability building 5. Strong leadership: communicate with confidence 6. The selling story: enable external communication and keep it simple Source: A.T. Kearney analysis 1. True trade spend: capture data Too often, companies have a limited understanding of the true trade spend, which tends to get lost amid an array of list prices, schemes, offers, and programs. The total payout to the retailer may be comprised of six or seven components with no clear link to brand, channel, or zone objectives. Not only are payouts administratively complex, their value diminishes over time as the promotion gets absorbed as a base expectation. The first step is to accurately capture data. Simple mechanisms, whether automated or semiautomated, can be incorporated into enterprise resource planning. Spend accounting systems 2

4 can break down components, indicating the true retailer margin paid according to factors such as brand, unit, location, or channel. Many organizations have taken this path and published simple dashboards to make this data visible to the whole organization. Then, common baselines can be identified. Better data capture brings an array of benefits: More accurate perceptions of retail margins. In both general and modern trade, retailers perception of the total margin is often 3 to 5 percent lower than the actual margin the company pays. Greater sales call productivity. Simple schemes with clear goals supported by data can enhance sales call productivity by 10 to 15 percent. No matter how experienced the salesperson is, a sales pitch is much more effective with a limited number of simple offers, especially in general trade where the interaction period is short. More effective internal measurement and tracking. Retailer payout sits across a variety of functions, brands, and profit and loss heads. Understanding the true margin across levels allows for meaningful examination of all spend. Getting data capture right also ensures readiness for advanced sales analytics when a company is ready to make the investment. This creates a virtuous circle, streamlining the organization s internal measurement and tracking. Retailers perception of the total margin is often 3 to 5 percent lower than the actual margin the company pays. 2. Total payout benchmarking: take a zero-based view Comprehensive benchmarking is crucial for taking a zero-based view of the true earnings of the retailer and the types of payouts for similar brands. In most organizations, this knowledge is held within the sales teams. However, it needs to be fed into central spend planning. This can be done by introducing new processes or having the sales force use simple handheld devices to capture data about the competition. This data pushes organizations to take a zero-based view of spend and creates an environment of constant challenge. We have seen many leading brands reset their payouts by 1 to 2 percent, either by making a direct cut or by making the entire construct more hardworking and paying for performance. 3. Measuring ROI: embrace tools for schemes and promotions Measuring the return on investment (ROI) is a well-known solution that applies to almost every short- to medium-term trade spend input. However, in most organizations, it is not an institutionalized practice, even in annual budgeting exercises. Despite a large share of offers as much as 30 to 40 percent exhibiting marginal or even negative return, most organizations do not know which ones are ineffective. It is essential to overcome an entrenched mindset that sees these investments as entitled budget for a brand. 3

5 Trade spend should be based on data. Three factors can make this happen in any organization: Know what factors really matter, and create a simple measurement tool. To measure the true ROI, examine the right before-and-after period of sales uplift. Accurately account for seasonality and category growth, and adjust for alternative trade and consumer inputs. Depending on the context, other factors that impact ROI estimates might apply but should not materially impact the decision. ROI is not a fundamental truth but a heat map tool that will reveal potential problems, trigger root cause analysis, and lead to the right corrective action. Tailor the ROI tool for different types of brands. A variety of principles apply in ROI measurement and ROI acceptability thresholds. Brands must be measured differently according to their intrinsic features: whether they are seasonal or regular brands, mature or evolving brands, or high-turnover versus low-turnover brands. Examples of principles that may be applied to measurement are year-on-year growth versus quarter-on-quarter growth and Nielsen-based natural product growth versus five-year CAGR-based category growth. Make ROI part of the budgeting process. Creating process ownership is crucial to embedding an ROI mechanism. Leading CPGs give both sales and finance the responsibility to deploy the tools, generate qualitative and quantitative data, and then jointly conduct a root cause analysis. These outputs can then feed into sales reviews and budget planning exercises. Digitizing the entire process demonstrates the necessary discipline and improves understanding, connecting the dots for budget approvals. Some organizations also embed discipline by gathering leadership in a sales ROI war room every quarter. In modern trade, making ROI part of the budgeting process means setting up the right pay-forperformance commercial construct through visibility drives and festive promotions (see figure 3). Figure 3 Winning in a modern trade structure Typical modern trade structure Value levers Steady state schemes and price discounts Visibility Festive offers Loyalty and target-based rebates Reset aggregate payout in key accounts via benchmarking on a cost bucket level Redesign visibility payout and schemes to be based on off-take data (primary and secondary) Optimize visibility spend based on ROI analysis on festive versus non-festive periods Optimize consumer price-offs based on ROI analysis on festive versus non-festive periods Introduce volume-linked rebate structures Transparency Pay-for-performance Back-end and front-end margins Source: A.T. Kearney analysis 4

6 Figure 4 Winning in a general trade structure Typical general trade structure Value levers Trade discounts Trade offers Loyalty program/ visibility Harmonize aggregate contractual rebates and discounts via benchmarking on a cost bucket level Standardize contract terms Redesign or remove trade offers based on ROI analysis on festive versus non-festive periods Run focused programs in top stores to drive top-line growth Optimize visibility spend based on ROI analysis on festive versus non-festive periods Trade offer optimization Scheme design simplification Focus program Back-end and front-end margins Source: A.T. Kearney analysis In general trade, rigorous ROI analytics can not only simplify overall scheme designs through benchmarking and standardizing contract terms but also eliminate spend on ad hoc trade offers (see figure 4). 4. Dynamic strategies: redefine and map at each level Segment smartly, defining the right strategy for each of your top brands, channels, and products. It is also important to allow for a flexible approach; different strategies may be necessary. Map each trade spend element to the relevant objectives. A typical way of doing this is with focused loyalty programs or target-based rebates for retailers. These create joint accountability for strong sales objectives and effective pay-for-performance programs. Transforming the value of trade spend requires challenging entrenched investments and constantly innovating with the right measurement principles. Because getting the strategy right is a science that is best learned through trials, pilots, or prototyping, organizations must embrace change and be open to piloting new ideas under controlled conditions. 5

7 5. Strong leadership: communicate with confidence Once new designs are laid out, leadership should effectively communicate the case for change across the organization. Regular updates will encourage people to engage with the new schemes and create a deeper understanding of the rationale behind ROI. In turn, this enables sales employees to own the new strategies and see their role in the subsequent growth. Although this can be built into key performance indicators and incentives, embedding it into the organization requires strong leaders who can make the case for change. 6. The selling story: enable external communication and keep it simple The real impact of a trade input lies in how it is communicated and used in the selling story. Think about how many offers a salesperson sees in a day. What will they remember? Typical questions that companies must ask to simplify the scheme or offer value include: Do we need to segment offers by SKU, brand, or category? What kind and level of segmenting help? Do we need a different list price for each modern trade customer? These questions should anchor the final decisions about scheme structures. For many companies, the sales organization manages the relationship with the external environment, including communicating with digital tools and ready reckoners. Many companies use digital webinars, tools, and apps to enable the sales force to define the selling story, respond to commonly asked questions, and generate excitement with large retailers in addition to managing the multiple engagement programs that help the field force lead this effort and be the champions of change. This change is worth it. In our experience, most organizations unlock significant value: 10 to 15 percent net revenue uplift. Transforming Trade Spend Is Worth It Transforming the value of trade spend requires challenging entrenched investments and constantly innovating with the right measurement principles. By taking a close look at ROI, every organization can eliminate ineffective spend and reinvest to capture growth. This change is worth it and is best driven by setting up a cross-functional war room including sales, marketing, and finance to take a zero-based view of trade spend and capture the pulse of the market. 6

8 Authors Kaushik Madhavan, partner, Mumbai Himanshu Bajaj, partner, Mumbai Olivier Gergele, principal, Singapore Shaurya Ahuja, consultant, Gurugram 7

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