2011 Trade Promotion Management Trends

MEI and Consumer Goods Technology have teamed up for the second year running to conduct a comprehensive survey about Trade Promotion Management trends, technologies and benchmarks. The 2011 survey included 38 CPG firms of all sizes across multiple roles within the organization. The study uncovers a new set of emerging trends in technology adoption, budget allocation, pricing trends and downstream demand data. CPG companies typically spend 10 to 20% of gross sales on trade promotions to influence retailer and consumer behavior in the stores. This volume of spend represents a huge portion of the expense budget, yet many firms continue to manage and track trade funds with manual processes and desktop tools. Despite signs of economic recovery, CPG companies appear more concerned with getting more bang for their trade dollars instead of increasing spend. At the same time, IT budget constraints are preventing many from investing in technology to help improve promotion effectiveness. This years survey also added some new questions pertaining to the likelihood of price increases, and theories as to who would have to absorb those costs. Most manufacturers agreed they will be forced to raise prices in 2011 after holding back price hikes for most of 2010. Yet few believe retailers will raise their hand to help absorb costs. 2011 Marks a Return to Value Over the past several years, we have seen trade budgets gradually increase as CPG companies identified the need to spend more to compete effectively in a down economy. In 2010, as manufacturing and distribution costs began to rise, the consumer economic climate forced many suppliers to apply more trade funds to buy down prices and remain competitive with private label and store brands. However, the 2011 survey showed that fewer companies are increasing their trade budgets in 2011, and simultaneously more are shrinking budgets. In 2011, 13% of respondents decreased trade spending versus just 8% in 2010. While 38% planned to increase spending, this percentage is down from last years 42%. The remaining half plan to keep budgets consistent from 2010 to 2011.
Figure 1: Planned Trade Spending 2010 & 2011

Perhaps tied to this new budget frugality, we saw a notable shift in 2011 toward an emphasis on improving promotion effectiveness rather than improving deduction reconciliation. In 2010, survey respondents ranked better visibility into spend/ deductions as the leading business problem related to TPM. However, in 2011 this response dropped to the third ranked spot to be replaced with improving promotion effectiveness. Combined with the flat or declining trade budgets, this trend indicates CPG firms are looking to get smarter with how they spend scarce ollars rather than streamlining the settlement process.

Respondents also indicate that the need to predict the effects of promotions has become increasing important. This driver moved into a second place tie, up from fourth place just last year which further demonstrates the trend toward improving the results of promotions instead of reducing overhead. That being said, reconciling deductions still ranked in a tie for second, indicating some challenges remain with the financial settlement process. Surprisingly, even though budgets arent increasing much, reduced spend remains relatively low in importance for the second year running.

Figure 2: Importance of Business Problems Related to TPM 2010 to 2011

The Retail Gap Widens While in some instances tough times bring trading partners closer together, this isnt the case with the consumer products demand chain. The 2011 results would indicate that things have not improved much as the battle over pricing increases has begun. When asked about the greatest challenges in dealing with retailers, retailer execution and compliance with promotions ranked as the clear leaders. While last years survey showed that pressure to buy down. price was equally as challenging, this issue dropped to a clear second place in 2011. As prices finally begin to increase this year after many years of consistency, fewer manufacturers are holding out hope that they can keep buying prices down to compete. In addition, demonstrating joint value with retailers ranked third in this years survey, further emphasizing the lack of interest in suppliers and retailers working together to help absorb rising costs.

Figure 3: Top challenges in working with retailers (each respondent chose their top 3).

Because the recovery in the consumer economy has lagged inflation in commodities, manufacturers and retailers alike did whatever they could through 2010 to keep prices steady. While commodity and transportation costs continued to soar by mid last year, suppliers kept spending to keep the prices on the shelves steady for the recession-worn shoppers. But most knew they could only force prices down for so long, and not surprisingly the 2011 survey respondents agreed the time has come. When asked if they expected to raise prices in 2011, 51% believed prices would increase at least for some brands or categories. An additional 38% were even more pessimistic, believing that prices would increase across the board. Only an 11% minority thought they would not be increasing prices in 2011. Unfortunately, the majority of CPG suppliers expect they will likely be the ones stuck with the bill as manufacturing costs continue to rise across the board. When asked who they believed would bear the greatest burden for absorbing increased costs, nearly 60% stated that they expected it to be manufacturers. Another 38% expected consumers will bear the greatest burden, while a scant 3% (just one respondent) expected retailers would be left with the bill. Admittedly, retailers face challenging conditions coming out of the recession their relatively thin profit margins allow them little room to absorb price increases. However, the sentiment of the suppliers paired with the heightened challenges with getting retailers to comply with promotions indicates the relationships between trading partners are showing no signs of improving.

Figure 4: Will you raise prices in 2011?

Figure 5: Bearing the burden of rising costs

Technology expectations improve, although IT budgets do not. This years survey asked respondents to cite various business dynamics that would justify the adoption of a packaged TPM software solution and the results were encouraging for technology providers. Nearly 80% indicated that the need to improve visibility into promotion performance as well as improving promotion planning and forecasting. Both these needs underscore this years trend toward improving the success of promotional tactics rather than streamlining the processes behind them.

Unfortunately, for many the realities of constrained IT budgets may mean these investments will have to wait another year a particularly concerning indicator as the downstream business challenges continue to worsen.

When asked what business barriers might prevent investments in TPM software solutions, one response rose to the top regardless of company size. In all demographics, cost or lack of budget emerged as the leading barrier. In the case of small CPG firms, inadequate resources further compounded matters (not That being said, over 30% also indicated that surprisingly, many lack adequate IT and overspending on promotions and the financial resources). challenges associated with managing them manually would also drive them toward a packaged solution (only 25% thought that improving the financial settlement process was a driver).

Figure 6: Drivers for TPM Software Adoption

While the requisite dollars may be lacking, the relative lack of operational barriers was somewhat encouraging. Very few respondents cited lack of executive sponsorship, risk, or lack of need as a hindrance to technology adoption. Large organizations are still skeptical that change management and user adoption could be an issue, but this concern is seemingly not shared by small and midsize firms. Most firms seem to agree however that there is a clear need for technology to solve trade promotions challenges. Very few companies cited lack of need, as a barrier to adopting packaged TPM software. Due to a number of different economic factors, CPG manufacturers are once again being asked to do more with less. Trade promotions budgets are not growing and IT budgets are still clamped down, yet these organizations somehow need to find ways to improve promotion effectiveness. No longer are they as concerned with streamlining the deduction reconciliation process, but they do want better visibility into where their scarce dollars are being spent

With rising costs on one side of the supply chain, and exceedingly frugal shoppers on the other end, CPG manufacturers and retailers are being put more and more at odds with one another. While most agree that prices are going to increase across categories, the vast majority feel the retailers will pass those increases directly on to the consumer. At the same time, manufacturers are demanding more accountability from retailers to execute the planned promotions, indicating the level of compliance is being called into question.

About the Author Lorne Schwartzis Chief Executive Officer of MEI Computer Technology Group, Inc. a leading developer of trade promotion management for the Consumer Packaged Goods industry. For more information: Email CEO@tradeinsight.com or visit http://www.tradeinsight.com