How We Think | Articles
Trade Marketing:
New Ways to Leverage CPG Brands at Retail
CPG manufacturers are not getting the same bang for their buck from trade promotion spending, and there are many reasons why. Merchandising activity is up, but overall promotional effectiveness is down. In fact, volume lift from feature only and price reductions decreased in overall effectiveness in over 60% of categories in 2005, according to IRI. That puts even more pressure on display activity to drive effectiveness, at a time when displace space is steadily declining.
Retailers are having more money thrown at them for promotional support than they have vehicles and display space to execute. They know that the power brands will drive traffic and consumer take-away, but they don’t want to turn away dollars for less powerful brands. As a result, retailers create secondary and tertiary events and tactics like Temporary Price Reductions (TPRs) to satisfy manufacturers who want some type of performance event -- not to mention the retailers’ desire to improve margins.
In such an environment of declining merchandising effectiveness and reduced display space, how should manufacturers leverage their brands at retail?
First, it is important to understand what the key drivers of demand are for the brand. From some work at Wal-Mart for one of our clients, we were surprised to learn that having the right mix of distribution at retail impacted their business the most; promotional impact ran a distant second in driving volume. We were able to show them that the mix of their own products could clearly be optimized, and that some of their new products were not as effective as a larger size of an existing brand might be.
It’s not that promotion isn’t important. But it has to be put into perspective relative to all of the other demand drivers available. Another opportunity around assortment is to be proactive with the retailer about reducing unproductive SKUs. That provides better use of space and reduces inventory carrying costs for both the manufacturer and the retailer. This concept has not been quick to take hold due to the manufacturer’s need to get new products placed and the retailer’s ready acceptance of slotting and introductory spending.
Second, manufacturers need to understand which tactics and with what frequency and discount level optimizes the volume lift of the brand. Where most manufacturers tend to go astray on spending effectiveness is if they can’t get the optimal event, they settle for less effective events to either satisfy their management or to make sure they spend the money they have available. That’s not logical, but that is what often happens. In some cases, manufacturers truly expect to get the quality event, but have no control once they commit the dollars to the retailer. This is not necessarily a function of a retailer’s deception. It’s more about having too many products and not enough available merchandising space.
What should manufacturers do with those dollars if they don’t get the quality event or display that will drive volume? Some retailers are creating unique forms of advertising that can impact shoppers at the point of purchase and provide much needed awareness that may be more impactful than a sea of yellow TPR tags on the shelf. One example would be Wal-Mart TV which might be a great vehicle for products that are driven by awareness and not depth of discount and will get a good lift by creating an in-store reminder. Some retailers are driving consumers to a kiosk for convenient meal solutions and associated discount offers. Others are trying targeted sampling events like the Costco road show to showcase new items. Many brands are driven by seasonal availability. In fact, the display rack in season may be the most critical demand driver and the only thing worth paying for, while any other spending only drives inefficiency.
Manufacturers with strong brands and dominant market share will continue to gravitate toward pay-for-performance merchandising activity where they will only pay for what they know will best drive their brands. Brands with less equity will continue to thrive on deeper discounts and sub-optimal performance events until more consumer-centric vehicles are created.
The time has come for many manufacturers -- particularly those with strong brands -- to keep their money in their pocket if they can’t get the quality events they are looking for. The notion of reducing SKUs to the most productive set that represent 90% of overall volume is a cultural change that both the retailer and the manufacturer must address together. There are too many incentives on both sides driving inefficient behavior, and it is less likely to change in the near term.
Here’s the bottom line: if the brand has the equity and share strength, manufacturers should target those activities that will drive volume. Don’t settle for less. If the brand is a good number-three or number-four brand, manufacturers should work with the retailer to develop more consumer-relevant merchandising events to increase business.
Paul Thompson is a partner in the Dallas office of Henry Rak Consulting Partners, a Chicago-based consultancy. We invite you to learn more about the HRCP partner team.
To learn more about HRCP and its services, visit www.hrcpinsights.com.
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