UK: Trouble in store?: Ensuring Trade Promotions Deliver Increased Shareholder Value

Last Updated: 16 February 2006
Article by Gerry Boyle and Malcolm Wilkinson

Most Read Contributor in UK, August 2017

Trouble In Store: Time To Take Control Of Trade Promotions

Industry dynamics are forcing control of trade promotion activities to the top of the agenda. The pressure is on to spend more, the mechanics are increasingly complex, and there's ever greater need for provable controls.

At every step of the promotions management process there is the opportunity to create value... or destroy it. The only solution is to take an end-to-end, strategic view of the entire process: people, technology and regulatory issues, your customers' objectives, your financial goals... You cannot make a significant difference simply by focusing on one or two elements of the mix, and there's no silver bullet. It takes a comprehensive approach to really deliver benefit.

What's special about trade promotions?

Spending on trade promotions is certainly a 'necessary evil', driven ever upwards by retailer power and competitive friction.

Used well, trade promotions help to deliver brand objectives and increase share of distribution. Used badly, they destroy profitability, create needless complexity, weaken financial control and hamper the supply chain. It's little wonder that they are the focus of so much attention.

Across the industry, consumer products manufacturers are spending over half of their total marketing budgets and up to a quarter of gross sales on trade promotions. And surveys of the industry show that both manufacturers and retailers are dissatisfied with their returns on trade promotions, but for different reasons. Manufacturers say they are concerned about ROI and delivery of brand objectives. Retailers, on the other hand, are worried about the impact on consumer behaviour, the quality of planning needed to ensure smooth in-store execution and product availability, as well as the promotional value for themselves1. Overall, less than a quarter of manufacturers believe that they get good value from their promotional spend2.

Positive basis for progress

Over the past decade, many consumer products businesses have looked to make their sales organisations more effective and efficient: deploying field-force automation technologies, improving channel strategies and adopting best-practice ways of working. This has sharpened up the competitive situation across the market, and has put in place many of the building blocks for an integrated promotions management process. Yet our studies show that only a small percentage of consumer products companies have fully joined those building blocks together, and an even smaller percentage have gone on to take the opportunity for radical change that is available to them.

So the opportunity to gain real competitive advantage is clear. By having the vision to use capabilities that they mostly already have in a new and different way, companies can leap ahead of their competitors. The result? Better return on promotional spend, better use of the sales organisation, and more funds available for investment in brands or for return to shareholders.

Retailers and consumers will also benefit from the better planning, execution and focus, creating a virtuous circle of growth. Recent research from Deloitte into retailer/manufacturer collaboration3 underlines the potential benefits of collaboration. "The real lowhanging fruit lies in joint planning of promotions," commented one industry expert. "The technology exists to unlock $bns of opportunity if we collaborate, especially on promotions," agreed one major manufacturer.

What's standing in the way of progress?

Most consumer products companies are hampered by the complexity of stakeholders and conflicting priorities involved in promotions, and by fragmented processes and systems.

In an ideal world, promotions management activities would flow seamlessly across the organisation, be completely in line with commercial and brand strategies, and be optimised by clear metrics with real-time feedback. With increasing globalisation of companies and brands, different business units and regions have different sales models and commercial dynamics. A common way of managing and evaluating promotions is essential if they are to have any chance of understanding true performance and sharing best practice.

It's time to move from a situation where companies have limited visibility and control over their promotional activities, to more standardised control and execution. It's not enough to have good visibility of volumes and spending. It's not even enough to introduce a 'closed loop' process, where marketing and sales are co-ordinated to some extent, and where they are no longer relying on disparate IT applications and spreadsheets to keep decision-makers up to speed.

A much more fundamental and radical approach is needed...

Critical Success Factors: Joined-Up Thinking, Co-Ordinated Action

A successful promotions management strategy empowers the teams who have to enact it and clearly aligns every in-store action with brand objectives. But what characterises the road map for getting there?

Where do we go from here?

The best consumer products companies are realising a win:win from process and technology improvements. By radically redesigning the way they do business, and deploying much more integrated processes, technology and measurement structures, they can give real empowerment to their commercial teams, ensure every deal delivers brand objectives and improved ROI, and also deliver much more effective control without imposing administrative burdens.

Those companies who are slow to adopt new ways of working will struggle to maintain distribution without increasing promotional spend: either losing market share, or damaging their ability to invest in brand development.

So, there's a really big opportunity in the way that consumer products businesses manage promotions, and some real imperatives from the market place to act now. The ultimate destination, and the path to get there, will be different for every single organisation. But the most successful programmes seem to have several factors in common:

  • Get the vision right, and clearly identify how it delivers shareholder value.
  • Get the organisation and measures aligned behind the vision.
  • Make the right changes to processes and technology, to 'join the dots'.

The characteristics of success

No consumer products business could survive without a strong organisation strategy, brand strategy or supply chain strategy. But despite around 25% of top-line revenues going into trade promotions, how many organisations have a clear promotional strategy? All too often promotions are seen as a 'tactical' measure. Articulating a clear vision for your commercial execution capability (sales organisation, channels, pricing, promotions) is essential.

Although the retailers are traditionally seen to be driving the shortterm, tactical approach to promotional planning, our research4 indicates that their attitudes are changing. These comments from major retailers were typically of the responses we found: "[We] want more joint planning, especially for promotions." "There is great potential in joint planning of promotions." "Promotions present a big prize." The climate is ripe for the manufacturing community to take a more strategic view.

To ensure that the overall organisation strategy is executed in the most effective way, resources need to be deployed to the areas that will really drive shareholder value. This means balancing investment in brand, commercial resources and partnerships, and the supply chain; based on a clear, quantified picture of how all these factors drive shareholder value. Only by making these wider comparisons about where to invest, and how to balance short-term and long-term actions, can consumer products companies develop an effective model to make trade promotions work positively for them.

Aligning the team

Just about the whole organisation is involved in trade promotions: the sales force, brand and category teams, finance and supply chain. But the functional roles and responsibilities that make each of those functions excellent at what they do don't necessarily help the promotions process to work. The challenge is to get roles and skills aligned right across the process, and to back this up with alignment of measures that drive the right behaviours: from the senior leadership right down to the field execution team.

The best companies are building these aligned measures into their KPI framework, and automating the feedback loops to drive action based on leading indicators, rather than just keeping score after the event.

The joined-up approach

The most effective approach to trade promotions tackles people, process, technology and compliance issues in an integrated way.
The key actions are to:

  • Empower the sales organisation and change the focus of controls – allowing marketing and sales to focus on selling and improving the bottom line. This starts with a different kind of financial planning process, setting financial parameters and target returns rather than a fixed investment plan. With new systems and processes to control those parameters, manual approval becomes the exception rather than the norm. This enables the sales and marketing teams to make better decisions because they feel in control, with the brand and commercial logic embedded in their actions.
  • Integrate processes and technology – to create 'one view of the truth'. Control with empowerment is only possible thanks to recent technology advances. Several commercial technology solutions allow you to create this kind of environment. But their implementation has to be driven by integrated, streamlined business processes and appropriate cultural change. The result? Greater certainty on volumes and cost over the year and lower risk to the business.

These in turn enable you to:

  • Improve ROI – by focusing resources on the best opportunities: because at last you have reliable data to help you recognise those opportunities.
  • Ensure more effective regulatory compliance – by translating policies and controls into a core set of parameters underpinning commercial decisions.

Actions To Drive Shareholder Value

To create ROI from promotional activities, there must be a clear link between what CPG companies spend on trade promotions and shareholder value. To help understand that link, Deloitte has developed a proven framework (based on our ValuePrint methodology) that can be used to assess at all aspects of promotional optimisation together, to achieve the right mix for each different organisation. Typical value-driving actions that emerge include:

Growing revenues by:

  • Re-engineering target setting and budgeting processes, and aligning sales force and channel compensation.
  • Transforming your funding philosophy to a performance/accrual-based approach.
  • Evaluating and optimising pricing and merchandising (tactics, mix, duration and timing).
  • Aligning head-office planning more effectively with field planning and in-store execution.

Reducing costs by:

  • Rationalising and simplifying special packs, make-ups, promotional SKUs, and re-engineering the special pack process.
  • Developing tax-efficient promotional planning, accounting and legal entity strategies.
  • Evaluating customer profitability and developing efficient cost-to-serve strategies.
  • Reducing invalid deductions and write-offs.

Improving working capital management by:

  • Reducing deduction days, and outstanding and invalid deductions.
  • Integrating field sales forecasting and demand planning to get a single version of the truth.

Enhancing risk management by:

  • Changing the control philosophy from 'review and approve' to 'empowerment within parameters' – increasing up-front control while reducing the administrative burden and empowering the sales force.
  • Reviewing and quickly adjusting compliance policies and procedures in risk areas such as pricing and accounting regulatory changes.
  • Setting up automated controls and reporting, with early warning capabilities.

Feel The Benefit: A Structured Approach Pays Dividends

The bottom line benefits of taking a co-ordinated approach to trade promotions management can be much greater than just improved promotional ROI.

What's it worth?

Our studies of promotional benefits show that addressing the promotions challenge in an integrated way has a very significant impact on bottom-line performance: not by spending any less on trade promotions, but rather by eliminating unprofitable activity, getting higher returns from the good promotions, and eliminating unnecessary costs in the supply chain. This means a 1% improvement in promotional ROI delivers even more at the bottom-line over the course of the promotional cycle, as well as top-line growth from improved promotional uplift. The company also benefits from the resulting elimination of unnecessary complexity, as the number of unprofitable promotions is reduced.

Taking Control Of Trade Promotions: Five Realistic Benefits

  • Increased promotional effectiveness – greater ROI, typically returning 5-10% of promotional costs to the bottom line, as well as reduced sales administration and sales opportunity costs, and lower cost per incremental unit.
  • Better delivery of brand strategy – because your promotions are explicitly and inextricably linked to your advertising and brand objectives.
  • A more effective sales team – because they're empowered to make tactical decisions within pre-set parameters that support overall brand strategies, not drowning in admin.
  • Smoother, more efficient supply chain – because volumes forecasts are more accurate, so there are fewer changeovers, rush shipments and raw material write-offs.
  • Better deduction and post-audit management – with up to 40% fewer write-offs, a typical 25-30% reduction in DDO cycle times and 5-10% fewer deductions, on top of a 20-30% reduction in amounts paid to retailers.

Some Real-World Examples

One UK drinks manufacturer has been closing the loop on promotions with new processes, systems and an accompanying cultural change programme. The radical changes start with the commercial planning process, where brand and category objectives are pre-set within the promotions that an account manager can choose from – exceptions can still be made for customer demands, and the approvals process focuses on these exceptions rather than mainstream promotions.

Execution of promotions is both flexible (to enable faster response to customer and competitive pressures) and integrated – with one set of forecast data shared for sales volume projections, supply-chain demand forecasting and financial planning, and used to drive all necessary execution. That same single set of data forms the basis for consistent promotional evaluation to help the sales and category teams learn what's working and what isn't in a timely and consistent way.

With one set of data driving everything, and control by exception being the norm, the accompanying cultural change is paramount. The real key to getting closed-loop promotions to work well is to ensure everything is "right first time" – investing time up front in getting the set-up of promotions exactly right so that everything can flow through seamlessly. When a sales organisation has been used to processes involving plenty of manual intervention, that seemingly-simple change requires lots of sustained focus, attention and support. But the results now being seen are certainly worth it!

Another example of a seemingly-simple change stands out. A US food manufacturer has changed their processes to allocate promotional funds dynamically on the basis of customer returns – really rewarding the good customers and giving more commercial flexibility to the sales teams. That vision rewards good customer partnerships and good sales effort – naturally ensuring promotional funds are targeted in places that are delivering extra ROI to the bottom-line. Getting there has required a major change to processes, systems organisation and behaviours – and again, the results were definitely worth the effort.

Footnotes

1 Cannondale survey, 2003.

2 AC Nielsen 2002 promotions survey.

3 Hanging in the balance: The realities of retailer/manufacturer relationships, Deloitte 2004.

4 Hanging in the balance ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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