What is trade promotion for CPG (Consumer Product Goods) companies?

The following is the Promotion Marketing Association (PMA) definition of trade promotion:

Trade Promotion […] is any expenditure paid directly by a manufacturer to the trade or retail factors in a given industry as a set amount on a per unit basis or in payment for a merchandising value provided by the retailer. Trade Promotions [..] include "slotting allowances", "performance allowances", "case allowances", and […] "account specific" promotions. (Text from www.pmalink.org)

This text-book definition is a good start, but trade promotion is much more complicated than this definition might suggest. Synectics Group presents this short history of trade promotion to give you a better understanding of trade promotion.

What is trade promotion management (TPM) for CPG (Consumer Product Goods) Companies?

Trade Promotion Management is the management of all trade promotion activities and business process for the entire life-cycle of trade promotion spending, from start to finish. TPM should include the general tasks of budgeting, planning, creating settlements (payments and deduction resolutions), and post-promotion analysis.

How did trade promotion and trade promotion management (TPM) evolve?

Trade promotion evolved as a result of default, not design. In the Nixon era the administration enacted a price freeze to help stem inflation on retail products. Prior to the price-freeze effective start date, the consumer products industry initiated a significant price increase to protect the inevitable escalation of material cost-of-goods during this period. A bi-product of this across-the-board price-increase on consumer products was the birth of trade promotions in the CPG universe. Consumer products companies dealt back the difference of the old price and new to keep their retail prices to the consumer the same. A harmless strategy to get around Nixon’s price controls has evolved to over a $115 billion annual expenditure, representing an average of 15% of gross revenue, in the consumer products sector in 2005.

In the early stages of trade promotion the retailer began to create merchandising opportunities at a nominal cost revolving around retail price reduction and in-store display. The leading edge manufacturers of the time (General Foods, P&G, Lever Brothers, etc.) aggressively supported the retailers merchandising opportunities and realized a significant sales lift when their products were promoted in-store. This escalation of trade promotion spending by the CPG manufacturer was a win-win scenario for both parties. Tracking these promotion expenditures at this time was relatively simple. A flat dollar rate per case was used which built a fund around which the manufacturer and retailer planned promotion activity. The brand managers at the larger manufacturers internally tracked these accruals against their P&L’s creating the first formal trade promotion management process.

As time progressed in the late 70’s and throughout the 80’s, the retailer became extremely creative in developing new merchandising vehicles with separate costs associated with them. There was the evolution of weekly newspaper advertisements promoting products, television and radio programs, in-store sampling programs, and the evolution of slotting fees for new products just to name a few. All of these programs came with an incremental cost and resulted in a substantial escalation in the trade promotion investment made by manufacturers. The addition of all these promotional programs also began the evolution of the combination of off-invoice and bill-back allowances. The off-invoice allowance was designed to maintain an everyday or promotional retail price point. This allowance, like the initial rate per case allowance, was relatively easy to track and manage.

Over time, retailers realized that they would get these off-invoice allowances even if they didn’t perform all of the required merchandizing and other stated requirements to ‘earn’ the allowance. As this happened, manufacturers began to look for ways to put more pressure on retailers to perform for these trade promotion allowances. Bill-backs had been around for many years, typically being used for in-direct customers that pulled product from a wholesaler or distributor. Manufacturers realized that they could also have more leverage with their direct-ship customers if they layered on additional bill-back incentives. These bill-backs would not be automatically paid to the retailers. Retailers would have to submit paperwork, proving that they performed the necessary tasks to qualify for the trade promotion allowances. Only if the paper work was submitted would the retailer get a check from the manufacturer.

It seemed logical to manufacturers, that they should require documentation and proof-of-performance. Bill-backs became perhaps the first form of pay-for-performance trade allowances. Bill-backs, in theory, did give the manufacturer the ability to pay only for retail performance. However, the dramatic increase in bill-backs, both in frequency, form variations and dollar amounts, had several unintended and unfortunate consequences on the CPG industry.

One consequence was the creation of great inefficiency within the CPG supply chain. Every manufacturer started offering several bill-back programs per year per product. Each required paperwork to be submitted for payment. Retailers and manufacturers soon realized that they had created an administrative nightmare. The technology of the day could not keep up with the information and data processing demands to provide efficient trade promotion management.

Another unforeseen consequence was the rapid and dramatic increase in deductions. With the administrative burden of trade promotions increasing, manufacturers began to take longer to pay bill-backs. Retailers got increasingly frustrated at having to wait for payments. With retail margins being much smaller than those of the manufacturers, retailers’ cash-flow was squeezed by slow trade promotion payments. At the breaking point, retailers decided to simply deduct trade promotion monies that were due. These deductions would be taken on un-related invoices, even further increasing the administrative burden of trade promotions.

Although they were created with good intensions, unfortunately it was the evolution of the bill-back allowance that significantly and irreversibly complicated the trade promotion management world. It would become the genesis and force the industry to create a more formalized trade management approach. This approach would require the field sales force to keep records of their bill-back offers to retailers and tie the expenditures back when the retailer deducted off of subsequent invoices for the merchandising activity (bill-backs).

The evolution of the deduction by the retailer created the need for a more systemized approach to managing this growing expense. As a result, deduction management systems evolved to track expenditures against specific manufacturer brands at specific retailers. These systems provided a comfort level to brand managers and gave them the ability to track the trade promotion liability by retailer, by brand, rolled-up to a total brand liability. The combination of this type of systemized approach to tracking the growing trade promotion expenditure, in addition to the solid profit margins that were being enjoyed at this time, provided the brand managers the tools they needed to deliver the bottom-line profit contribution objectives.

In the late 80’s and throughout the 90’s, trade promotion management required a more detailed and organized pre and post promotion analytical approach. Consumer product categories matured. The brand manager’s best ally, the new product line extension, met resistance from the retailer as a result of not generating incremental category volume and profit. The trade expenditure cost continued to exponentially increase. This cost increase was in large part a result of the retailers rapidly shrinking net-after-tax profit. This accelerated negative trend resulted in a significant reduction in the solid profit margins that the CPG manufacturers were enjoying throughout the 70’s and 80’s. As a result of these economic circumstances, the spreadsheet evolved as a promotion planning tracking tool. The spreadsheet combined with a systematized approach to deduction clearing organized trade promotion management and began to place emphasis on the pre-promotion planning, post-promotion management as well as top-line analysis. In the mid 80’s the evolution of scan data provided by IRI (Information Resources, Inc.) and ACN (A.C. Nielsen) provided an analytical component that could begin to measure the sell-through of a promotion as well as the sell-in.

It was at this point that all of the critical components of trade promotion management were beginning to be executed (budget/quota, planning, deductions/payments, pre/post promotion analysis). As the trade promotion investment made by the manufacturer continued to grow, so did the scope and magnitude of the trade promotion management team. Large manufacturers invested significant dollars to develop a department that would act as an intermediary between marketing and sales. Their charge was to manage the effectiveness and efficiency of the trade promotion investment. This focus enabled manufacturers to keep a closer watch on what was budgeted vs. what actually was spent to identify potential trade promotion overspends. At this point in time trade promotion management was light years behind the evolution of trade spending, TPM was far from a perfect science. The necessary information to evaluate trade promotion effectively could reside in as many as 6 different data silos in an organization. Budget information was used by the finance department, deduction information would reside in the financial administration area, syndicated data could be in the market research area, shipment data could be found in the invoiced area of the ERP system and the life blood of analyzing a successful promotion, planning, would be in the hands of the sales force. In many cases it could take weeks to compile the necessary information from these disparate groups to begin post promotion analysis. The fact that the plans that resided on spreadsheets were dependent on constant updates to reflect changes from the field, created massive liability gaps on what was offered to the retailer vs. what headquarters was looking at. Although progress was being made in the constant monitoring of trade spending effectiveness/efficiency there was still significant room for improvement.

In came the age of technological advancement that would provide the opportunity to access all of the pertinent information in what many call the data warehouse approach. The data warehouse provided the opportunity to have all of the silos integrated into one information area for the next generation of trade promotion management. It became possible to transmit adjusted plans via the Internet to provide a synchronized view of the actual liability. Shipment data could be fed in real-time to this system via automated electronic data linkages. Financial data (deduction/payments) could be cleared against a specific promotion plan creating the opportunity for an accurate variable contribution P&L by promotion event, promoted group or brand, rolled up to a specific retailer. This same financial data could be electronically exported to the appropriate ERP GL’s for accurate financial liability reporting. Syndicated data could be electronically fed into the trade promotion closed-loop software for sell-in vs. sell-through reporting capability. Trade promotion management had evolved to a point where all operating areas of an organization had a synchronized view of the impact of the trade spending liability. Major surprises were minimized and information was available in time to adjust promotional tactics and strategies on unprofitable trade promotion spends.

It is logical to surmise that with the advent of the closed-loop trade promotion management system solution, the spiraling out-of-control world of trade promotion spending is now manageable. The technology is available now to manage accurate liabilities of this incredibly mismanaged investment. What do we mean by mismanaged? Let’s dissect the facts;

More than $115 billion is invested annually representing on average 15% of the CPG manufacturers gross revenue.

Less than 50% of this substantial investment ever reaches the consumer.

Margin erosion over the past 10-15 year period for both the retailer and the manufacturer has been substantial.

Over that same time period Wal-mart, a focused retailer investing in technology has gone from a 0% share of the
    retail grocery business to over 20%.

The next frontier in the evolution of trade promotion management will involve the collaborative use by the retailer and manufacturer of the technology available today to manage trade promotion spending in real-time for mutual gain. We believe collaborative trade promotion management utilizing the technology available today, can enable a retailer/manufacturer working together to match what Wal-Mart built over the past 20 years in as little as 20 months. Implementation of the technology is only scratching the surface; the real focus has to be on the words collaborative, mutual and paradigm shift. The combination of these powerful and attainable ideas could bring us back 180 degrees, to a time long ago when trade promotion resulted in mutual incremental sales volume and profit, for both concerned parties.

Using the right combination of TPM strategy, tactics, and software tools, trade promotion still has the potential to deliver positive results for both manufacturers and retailers.