Fast Moving Consumer Goods companies are copping it from all sides. When it comes to the price they can charge for their products, they are negotiating with retailers who have more market power than ever before.
As for the cost of their operations, suppliers have already cut to the bone, squeezing out that last ounce of productivity.
With little room to move on either price or cost, what can producers do to stay afloat, let alone grow their profit?
The answer is both simple and incredibly complex: they need to master the dark art of trade spend.
Trade spend is that untidy mixture of discounts, rebates and listing fees that are applied in varying degrees across different products through multiple channels and outlets. It is often a single line item in a budget but it can mask a tangled web of faults and confusion.
Trade spend can cause marketers to go grey and financial controllers to go bald.
For many companies, the amount they spend on trade promotions is often greater than their net profit.
For suppliers to find a sustainable business, they need to focus on trade spend — not as a one-off or ad hoc project, but done with discipline as a daily activity.
In Australia, the sums involved are sobering: one recent report by the Australian Food and Grocery Council put annual trade spend from just a small representative sample of food and grocery suppliers at more than $4 billion.
Our estimate is that the total trade spend for the alcoholic drinks industry in Australia alone is north of $2 billion — which would be at a similar scale as the profit generated by these businesses.
The reckless buying of sales volume is not a strategy that is likely to promote long-term profitability. As a lever for growth, trade spend is remarkably difficult to monitor and raises significant challenges in measuring its return on investment.
How many marketers and sales people can put their hand on their heart and state with confidence which of their promotions has been most effective, and through which outlets?
Often just to get a list of the last 200 promotions done is impossible without significant effort. Yet trade spend is the one activity that, if mastered and administered with discipline on a daily basis, can produce sustainable profits for FMCG producers whilst building brands, rather than “trading them”.
The first step is to understand the data. In our work with FMCG clients across the Asia Pacific, we know that their problem is not access to sales data — it’s what to do with it, and how to find the time or expertise to analyse the information, let alone produce reports that will actually help them grow their business.
This graph demonstrates the improvement in gross profit per unit after the introduction of new trading terms for a supplier.(Source: Lexia Analytics)
Many suppliers find themselves trapped in a form of “spreadsheet hell”. Their IT systems produce vast quantities of data generated through various sales promotions, but it’s messy: so many SKUs through so many outlets.
Yet, most companies don’t want or need the firepower (and the massive cost) of an enterprise-level business IT solution to process the results. So the marketers are left using spreadsheets to try to get a handle on what the data is telling them.
What FMCGs should be focusing on is finding the right analytical services to manage and interpret data whilst building the internal capability to correctly analyse the data.
It's the sort of work we are doing across the Asia-Pacific and an increasing number of Australian FMCGs are realising the impact this can have, in delivering insight into exactly what they are spending with which customers and for which brands and with a definitive value of their return.
This allows management to apply better, faster and more consistent business decisions which will ultimately improve their profitability – in our experience, companies can quite quickly improve their bottom-line by 5-10% of total trade spend.
A good example is an Asian beverages business that was recently able to halve the number of monthly promotions it was undertaking when trade spend analysis showed them which of their campaigns were unprofitable and which had a positive Return-on-Investment.
The result was a more efficient targeting of trade spend that earned more money for the manufacturer.
While there has been a lot of discussion about the growing power of the large retailers in Australia, with Coles and Woolworths reported to have 55%-60% market share of grocery spend, FMCG suppliers would do well to remember the thousands of independent retailers still out there.
Of course, dealing with a large number of smaller outlets does add to the complexity of analysing the returns on trade spend.
Again, understanding the data is the key. Suppliers in most cases don't have a lack of data, they just don't know what to do with it.
Going with evidence, rather than going with your gut, is far more likely to grow the bottom line, especially in an economic environment where even a few extra percentage points of profit growth can mean the difference between success and failure.
When you are dealing with a mix of large and highly fragmented retailers and a low-cost environment, every dollar of trade spend that is saved goes direct to the bottom line.
Taking a serious look at trade spend — from an IT and analytics perspective — is the one lever left to manufacturers to help drive growth in this hyper-competitive market.
[Jelle de Jong is Managing Director of Lexia Analytics, a sales analytics business delivering commercial solutions primarily in the Asia-Pacific region. He worked for five years with McKinsey & Company and Partners in Performance, as well as six years with international beverage company Diageo in London and Australia and Unilever in the Netherlands. He holds an MSc (System & Control Engineering) and an MBA from INSEAD.]