Improving Foodservice Trade Spending Why U.S. foodservice manufacturers need to link trade spending to business performance
The foodservice industry is emerging from one of the leanest periods in its history. The recession caused people to reduce both their number of visits to restaurants and their spending levels. With tepid revenue growth, a trend that may outlast the recession, foodservice manufacturers are tightening their belts and putting trade spending squarely in the crosshairs. In the U.S. foodservice industry, the number and types of players are proliferating and foodservice manufacturers are struggling to manage a newly complex network of distributors, partners and promotional programs (see figure 1 on page 2). Between the manufacturer and the operator (of restaurants, institutions, catering services and others) is a large and growing group of middlemen. Local distributors are potentially moving to the regional level. Mid-tier distributors are joining buying groups. And operators are forming group purchasing organizations (GPOs) to increase their leverage over manufacturers. Each one wants a discount via trade marketing funds, because each claims to own the operator. Amid this increasingly complex route to market, the current or future roles of the various players are not at all clear (see sidebar: Who s Who in the U.S. Foodservice Route to Market on page 4). At the same time, the foodservice industry is just beginning to come out of one of the worst periods in its history (see figure 2 on page 3). In such a challenging market, somebody s profits are going to suffer. To make sure you are not that somebody requires an understanding of the ongoing changes in the market, a principlebased trade strategy and some smart bets. It is time to improve trade spending to improve business performance. Trade Spending is Misaligned Despite reduced sales, manufacturers trade spending has continued to increase. For those unfamiliar with the industry, foodservice resembles retail in that 15 to 20 percent of a manufacturer s gross sales revenues go directly to the distributor or operator in the form of trade funds. Trade spending refers to money taken off the invoice or paid back to the distributor or operator as a rate per case; fixed payments made to distributors and operators in the form of signing bonuses and growth programs, among others; and deviated pricing offered to obtain operator business. This trade spending was originally designed as an incentive for signing up or preferential treatment, but has since become entrenched as a negotiating pawn in the industry s complex power relationships. In a survey last year by The Hale Group, 80 percent of manufacturers reported that trade spending as a percentage of sales stayed the same IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney 1
Figure 1 In foodservice, the route to market is becoming increasingly complex Yesterday Manufacturer Corporate distributor Local distributor Operator or facility manager *GPO is group purchasing organization. Source: A.T. Kearney analysis or increased between 2009 and 2010, despite the decline in sales. 1 Part of the problem is that the complex foodservice ecosystem is changing, with new players seeking to exert their influence. Not only is it challenging to keep track of the negotiations and the physical flow of product across all of these participants, but also nearly all of them expect trade funds from the manufacturer often on the same 1 The Hale Group 2010 Trade Survey Today Manufacturer GPO* Corporate distributor Buying group Distributor (region and market) Redistributor Local distributor Operator or facility manager Product flow Purchasing negotiations case of product. Furthermore, in some cases, these partners may be double dipping, or receiving multiple trade programs on the same delivered case. Given the large and growing number of players and distribution channels, manufacturers are challenged to (1) make smart trade investment decisions and (2) link investments made in a channel back to improved sales. Indeed, one of the biggest problems is demonstrating the link between trade spending and business performance. Very few manufacturers can link trade spending to a specific distributor or operator program, and even fewer can link trade spending to an actual increase in a product s sales. Why does any of this matter? It matters because manufacturers need to be able to make informed investment decisions. For example, let s say a manufacturer makes a strategic decision to increase growth in the healthcare segment by increasing its sales to hospitals and nursing homes. The manufacturer decides to continue its strong partnership with a national distributor and rely on the distributor s sales force to push its brands with healthcare providers. However, at the same time, hospitals and healthcare providers decide to enter into a group purchasing organization and rely on the facility manager or GPO for product assortment decisions. So our hypothetical manufacturer may be losing out on sales to a competitor that has generated better pull via an aggressive GPO trade marketing program. Here, despite making the strategic choice that healthcare is important, the manufacturer has failed to support it with an appropriate trade program. Reconfiguring the Trade Spending Strategy From our perspective, the current foodservice trade environment is unsustainable, and the onus is on manufacturers to take bold steps to gain 2 IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney
Figure 2 The U.S. foodservice industry is emerging from one of the worst periods in its history U.S. foodservice nominal sales growth (%) 1 6.0% 5.7% 5.8% 7.1% 6.2% (2004 2008 average) 2.4% 0.4% 0.3% 1 Excludes alcoholic and non-food sales Source: Technomic Foodservice Time Series (September 2010), 2011 forecast as of 24 January, 2010 3.7% 2004 2005 2006 2007 2008 2009 2010 projected 2011 forecast control of trade funds. Manufacturers must start treating their trade dollars as an investment, not merely as a cost of doing business. Trade spending needs to return to its original purpose as a way to invest in future growth investing in promising markets, partners and customers. Know who s making decisions at what levels. Trade funds must be directed at the point of decision. This philosophy is more difficult to execute than it sounds, however. It requires manufacturers to know who the decision makers are at each level of a consolidated distributor: Are decisions made at the level of the local operating company, the regional market or the national corporation? (Note that it does no good to base your investing decision on where the authority should be.) Additionally, manufacturers must have data to answer the necessary questions and calculate the return on investment (ROI), which requires visibility: How will a trade dollar spent at this level stimulate demand? Why is this level the proper one at which to cut through the complexity of the network and the various private-label pressures to influence individual customers? What form will that influence take? At a more advanced level (which should be a long-term goal) the questions and answers should involve not only visibility but also hard data for example, a previous initiative targeted X with $Y and yielded increased sales of Z. Although such changes will come about eventually, it will not be easy for all players to IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney 3
instantaneously set up the accountability and visibility required to provide meaningful ROI figures. While the industry is moving toward that goal, manufacturers should, at a minimum, inform decision makers about total investments made with that customer across the local, regional and corporate levels (for distributors) and at the corporate, business unit and operator levels (for facility managers and GPOs). Secure a growing advantage. Meanwhile, the beauty of an investment-minded manufacturer is that there is less knee-jerk reactive thinking to trade spending and more preemptive, long-term thinking. Rather than weighing only the one-time effect of a decision, the focus is on gaining a longer-term advantage. In large part, this involves looking outward to understand and measure performance across distributors, buying groups and GPOs, among others. But it also involves looking inward to ask, What defines performance for us? Six Steps to Transform Trade Spending To gain control of trade spending, we recommend the following six steps: 1. Define trade. Delineate exactly what repre- Who s Who in the U.S. Foodservice Route to Market The route to market in the U.S. foodservice industry is becoming increasingly complex as more players enter and traditional roles blur. The following offers a quick guide to this new value chain. Group purchasing organizations (GPOs). These are third-party buying organizations that purchase goods for multiple independent and chain operators, but do not take title of the goods. The primary service offered to GPO members is the negotiation of purchasing discounts or a lower landed price. Examples include Foodbuy and Avendra. How have they changed? While many originated to serve a specific segment (healthcare, for example), they ve grown in reach (in breadth of segments and size of operators targeted) and, in many cases, replaced procurement organizations in making assortment decisions for operators. Buying groups. The main function of buying groups is the consolidation of purchases and the provision of support for its distributor members. Examples include UniPro Foodservice and F.A.B., Inc. How have they changed? While they were originally intended for small local distributors, larger organizations have joined in order to leverage the richest trade programs. Local, regional and corporate distributors. These distributors provide product delivery, credit, sales representation and other services to operators, restaurants and institutions. Examples include Sysco and U.S. Foodservice. How have they changed? They have added regional decision-making bodies to manage local warehouses, yet their coordination and influence on decisions affecting manufacturers is unclear. Redistributors. These are product and order consolidators that specialize in serving distributors that buy select products in less-than-truckload quantities. Examples include Dot Foods and Honor Foods. How have they changed? Redistributors have grown in importance as manufacturers realized their ability to serve distributors that are more difficult and expensive to handle. Facility managers. As a company that operates and manages foodservice facilities for other establishments, a typical facility manager might be a university cafeteria. Examples include Sodexo and Aramark. How have they changed? As their procurement capabilities have grown, facility managers have created their own group purchasing organizations to serve operators not under management (Sodexo s Entegra is a good example). 4 IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney
sents trade funds as opposed to other funds such as terms-of-sale discounts, cost-driven net pricing, selling expenses and brand marketing programs. 2. Understand where funds are going. As discussed earlier, track trade funds by route to market (distributor, operator, GPO) and by type (fixed fees or lump sums, variable rates per case, growth programs or net price). 3. Develop a trade strategy. The foodservice division will have to engage in defining strategic goals: Does performance mean increased market share, profitable growth or some other measure? Is it best accomplished through preferred or solesourced status, new product slots, culinary participation, more-visible branding or other techniques? Armed with such performance requirements, foodservice leadership can then tie investments in trade funds to these measures. 4. Put guardrails in place. A trade-spending investment strategy is only as good as its execution. Yet the sales force treasures its flexibility. A manufacturer needs principles to balance these two pressures thinking of it in terms of guardrails helps clearly define the requirements for investment outside of these principles (see sidebar: The Challenge of Transformations). 5. Implement processes and tools. To execute the plan requires clearly defined processes supported by analytic tools. Because trade spending involves an overlap among sales, marketing and finance functions, the roles of each must be delineated up front. 6. Build capabilities. If properly implemented, performance-based trade-spending initiatives should improve over time, as data accumulates on what has worked in the past. The Challenge of Transformations Most manufacturers have done well in planning their trade fund transformations, but few have followed through with the execution. Why? Trade funds are often treated as an expense item based on the previous year s figures, and siloed in either finance or sales. Trade funds were simply a tax on the profit-and-loss (P&L) statements, something that had to be paid and couldn t be changed. Increasingly, however, management is successfully seeking cross-functional input into trade planning activities, and developing trade fund strategies that are tied to performance objectives. But execution can prove more difficult. Trade funds were traditionally delivered as fixed programs with no proof of performance. And negotiating practices, program structures and contracts varied widely across regions, groups and customers. With so much depending on the institutional knowledge of program veterans, it has proved difficult to implement reforms that are both workable and effective. Developing and communicating clear, consistent tradespending guardrails and delivering funds as variable programs tied to at least some progress toward demonstrated proof of performance has been a work in progress. Likewise, the ad hoc, unexamined nature of traditional trade fund management has made it difficult to create new internal organizational structures dedicated to managing trade funds and measuring their effectiveness against targets on an ongoing basis. For example, most trade tools today are spreadsheets created within the division. Although some companies are successfully moving toward tools directly linked to corporate financial management and sales support systems, others still have room for improvement in this area. The good news is that there are clear, concrete steps in execution and management to help achieve properly considered strategic objectives and improve profitability. IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney 5
But this will be true only if the manufacturer invests in the internal skill sets, tools and resources to track ongoing performance and manage trade funds accordingly. Clearly the transformation to performancebased trade spending requires hard work. It cannot be accomplished through mere lip service. But it can be done, as demonstrated by manufacturers experiences in retail. Foodservice executives get weary of comparisons to retail, and justifiably so: There are important differences between the sectors. But the fact remains that retail has developed effective ROI analyses of trade funds and implemented performance-based strategies for more than 10 years. It is long past time for foodservice to learn from these experiences, accommodate the unique aspects of its complex ecosystem and apply similar principles to its own operations. One Food Manufacturer s Approach A.T. Kearney typically assists companies in developing performancebased trade programs in three phases (see figure). The trade assessment phase involves collecting data on existing trade funds and processes, then identifying opportunities for improvement. The program development phase involves collaborative development of strategies, principles, organizational structures, processes and tools, with action plans to implement them. The execution support phase involves launching the program with rich support for go-to-market efforts, so that employees feel empowered to sell successfully under the new ground rules. This Fortune 500 food manufacturer with a foodservice division recently completed an assessment of its trade program, defined performance requirements and launched a new strategy all within six months. Our team was brought in to help lead the review process. The company did not have a consistent approach to trade investment across customers or an understanding of its approach across channels. Its ad hoc processes and vague decision-making process resulted in confusion and conflicts between sales and marketing. From our analysis, we developed a comprehensive understanding of the relationships among trade investment, various routes to market and customer profitability. While the company s sales, marketing and finance functions worked together to develop trade principles to guide future investments, we determined the implications on the company s P&L, capabilities and strategic road map. The new trade program included clearly defined roles for each department and a complete set of tools including planning and allocation tools that improved both visibility and accuracy. When the company took the program to market in a pilot involving more than 50 separate negotiations, it improved trade efficiency by 20 percent. Figure: A.T. Kearney s three-step approach to trade programs 1 Trade assessment 2 Program development 3 Execution support Complete database of trade investments (for example, by major customer or route to market) Review current trade-related processes Identify improvement opportunities of trade program Develop implementation road map Develop cross-functional trade strategy and principles Define key roles and responsibilities of trade organization Determine trade processes and tools Devise action plans for implementation both internally (training) and externally (for key customers) Launch program and train primary users Establish negotiation control room support for going to market with select customers Develop skills for effective negotiation Source: A.T. Kearney analysis 6 IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney
Such efforts can stave off losses during these hard times and drive profitable growth. The Results: Growth and Profits A comprehensive assessment of a company s trade program followed by a determination of performance requirements typically yields between 15 to 25 percent in trade efficiency (same cases for less trade) and effectiveness (more cases for the same trade). (See sidebar: One Food Manufacturer s Approach.) In this way, evaluating trade programs is like any other smart business decision: The focus is on programs with high ROI that promise future profitable growth, or on channels that can provide the best access to target segments. While manufacturers begin to examine their trade programs, leaders can differentiate their companies from the crowd by placing strategic bets. After identifying the most strategic route-tomarket you then align both financial (trade) and non-financial (sales organization) resources with the partners in these channels that you believe offer the best path to profitable growth. For example, if your company has decided to focus on healthcare, you might want to partner with facility managers as a channel, focusing on chefs and facility purchasing professionals as the main decision makers, and align your trade investments accordingly (see figure 3). Trade program investment tactics may include signing bonuses, fixed fees, Figure 3 The path to profitable growth Where must we win? What is the right partner (channel) for us? Who are our key decision makers? Where should we focus our trade investment? Segment Channel Decision maker Trade program tactic Healthcare Buying groups Purchasing Status-driven signing bonus K-12 education Corporate distributor Business Other fixed fees unit leaders Local chain Regional chain Local distributor Regional or mid-tier distributor Facility purchasing Choice of: Marketing programs Growth programs? Strategic chain Facility manager Chefs Differentiated pricing Universities Group purchasing organization Consumers Allowances Source: A.T. Kearney analysis IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney 7
allowances or differentiated pricing. A bet is never a sure thing. But a well-informed bet has a good chance of generating competitive advantage. Trade efficiencies not only improve the bottom line, but also free up money to invest in other areas. As food service manufacturers scaled back investments in areas such as marketing and R&D to pay for trade, they lost much of their differentiation in the market. Through increased differentiation in route-to-market, product innovation and branding companies can drive future growth. A Bigger Pie for Everyone Reforming trade spending is an imperative for foodservice manufacturers seeking profitable growth. The industry s tepid sales, rising input costs and convoluted system of distribution channels and partners requires a reassessment of the trade-spending model. But moving toward performance-based trade spending does not mean going to war with distributors and other players, because this is not a zero-sum game. When a manufacturer adjusts its trade spending to invest in high-growth areas, it helps all operators increase their profits, creating a bigger pie for everyone in the industry. Granted, the manufacturer s actions force the distributors, GPOs and other players to make a choice: They can jump aboard, provide transparency and align their own incentives with high-growth activities they follow through on to help maximize the value of those investments or they can stay where they are. Those that choose to join the team can help savvy manufacturers create new, efficient, mutually beneficial ways of doing business. Authors Dave Donnan is a partner in the consumer products and retail practice. Based in the Chicago office, he can be reached at david.donnan@atkearney.com. Joy Peters is a principal in the consumer products and retail practice. Based in the New York office, he can be reached at joy.peters@atkearney.com. Josh Rider is a consultant in the Washington, D.C., office. He can be reached at josh.rider@atkearney.com. Stephanie Seibert is a consultant in the New York office. She can be reached at stephanie.seibert@atkearney.com. 8 IMPROVING FOODSERVICE TRADE SPENDING A.T. Kearney
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