Retailers across all sectors are under greater pressure now than ever before. Store or outlet closures signal either the final end of famous retail and restaurant names or the last gasp remedial measures of businesses struggling like never before. A few weeks ago, Tesco demanded “offensive” discounts from suppliers in a move expected to spark a price war in the UK.
“Britain’s biggest grocer has given suppliers until Friday to accept discounts of up to 50%, which will be partly funded by scrapping promotions. Tesco has pledged to match Aldi’s prices on 500 products after gaining share from the discounter for the first time in a decade during lockdown. Aldi and rival Lidl are likely to cut prices further.” (Source Sunday Times 5th July)
Trade spend has always been a struggle for suppliers. It is often driven by legacy and more often than not is a bigger number than profit on the P&L. Trade terms and promotional spend keeps going up, but the impact keeps going down. It is often justified as a cost of doing business, but too frequently misaligned to the category and customer growth strategy that it should be supporting.
With trade spend representing a top three line item and escalating on the majority of suppliers’ P&Ls and with retailer pressures coming back down the line, it is little wonder that Covid-19 has sharpened the focus on Revenue Growth Management (RGM) like never before.
In this article on RGM we focus on Trade Spend, the third building block within the RGM model below. Our question is… “is your trade spend burning money?”
Revenue Growth Management
This is the fourth in a 5-part series on RGM. We recommend a fast, pragmatic approach with a focus on implementation. Get the RGM building blocks of pricing, portfolio and trade spend in perfect balance, working together to rebuild profitable growth.
Winning suppliers can answer the following questions:
- Which part of their trade terms package is having the biggest impact on performance?
- Which elements of their terms are not structured against the delivery of JBPs?
- What is the contribution of each customer to their P&L and what is their profit contribution to their customers relative to competition?
- Which are the ten best and ten worst promotions undertaken in the last twelve months and the differentiated metrics used to decide?
- Which products generate a positive return on promotional investment and which don’t?
- How deep, how often and when to promote these products?
Quantic believes that:
- Trade Terms and Promotional Spend must strategically support the delivery of category growth objectives already established with customers. Winning suppliers’ Trade Terms are structured to deliver strategic intent and incentivise the cause of volume and not just the volume itself. Their terms are simple, clear, consistent and based on pay for performance.
- In mature markets with strong retailers, Trade Term realignment is less about taking monies off the table and more about reconstructing investment. The allocation of trade investments into an agreed set of buckets with a clearly articulated and defensible policy is only the starting point. The biggest challenge is getting customers onboard and this takes time and perseverance. Winning suppliers build the confidence and capability of their customer facing teams. They equip them with compelling sales arguments and help them stand firm in the face of resistance and threats.
- Customers are more open to consider promotional plans if they are set in a broader category growth context. Winning suppliers understand what an annual category-wide promotional calendar should look like to deliver the customer’s growth strategy. Their own portfolio’s promotion plan is positioned within this context.
- Promotional thinking needs to be better balanced. Certainly, an element of promotional volume is transactional but not all promotions are simply about selling volume. A greater proportion must be strategic. They must align to the category strategy and focus on changing consumer and shopper behaviour to drive growth. Winning suppliers address the following questions for every promotion. Which Growth Driver is it targeting? What is the objective – penetration, frequency, weight of purchase or a combination of each? Which promotional mechanics are best to motivate these changes?
- Promotional objectives must be clear, differentiated and evaluated. Winning suppliers set hurdle rates and understand that the ROI on strategic promotions will be longer than for transactional ones. They put as much emphasis on pre-evaluation as they do on post-evaluation and ensure that learnings are adopted internally and shared with their customers.
Winning suppliers take a total category approach. They think about Triple-Win – the consumer, the customer and themselves, as the supplier. They consider what trade spend optimises for now and demonstrably creates value for the future.
Build a plan that is good for the consumer, customer and you as the supplier. So how do suppliers ensure that trade spend does not just burn money?
Quantic recommends a pragmatic three step approach:
1. Create the Context
Assess the impact of Covid-19 on the here and the now and form a view of the future. Review trade terms structure and policy. Cleanse and restructure the data. Assess what is working and not working. Capture ideas from competitors and adjacent categories. Identify brands, packs and customers to prioritise. Be prepared to flex according to Covid-19 learnings as we move forward and by retailer according to their specific strategies.
2. Build the Plan
Build a Triple-Win plan. Review category growth strategy. Prioritise growth drivers and activation platforms by channel. Confirm targeted shopper behaviour changes – penetration, frequency, spend. Align the Picture of Success covering assortment, price, promotion, merchandising and communication. Build the customer specific trade terms and promotion plan aligned to the strategy. Make performance incentivised.
3. Implement at Pace
Develop the commercial argument and capabilities of the sales team to get customer agreement. Estimate the size of prize and show how this drives shopper loyalty and spend. Implement, adjust and implement again. Be in shape for the busy trading period leading to Christmas.
And don’t forget…
Trade Spend must not be considered in isolation of the other RGM building blocks of pricing and portfolio. You need the perfect balance of pricing, portfolio and trade spend to drive and sustain profitable growth. Click to read the earlier articles on pricing:
Quantic can help you develop and implement a Triple-Win plan. We bring what McKinsey brings at a fraction of the cost and the same positive results. You will have a dedicated team to find a solution to your specific needs. PRACTICAL. FAST. EFFECTIVE. Get into shape for the Golden Quarter. Contact us today!