Manufacturers around the world are facing increased pressure on trade spend and responding in different ways.
In this article, capability expert David Colwill outlines approaches to successful trade spend management.
Everywhere I travel across the globe I take the opportunity to meet with key executives within the Fast Moving Consumer Goods industry to discuss the matters that are “keeping them awake at night”; in other words, what are their burning platforms? Without exception, the response is usually focused on the matter of Trade Spend and how can they upgrade the capability of their executive team to improve the overall Trade Spend position for the organisation.
Interestingly, the strategies developed to address the major concerns of constantly increasing trade spend levels with the retailers seems to be generally polarised – buy some training to teach the people to negotiate more effectively! Whilst training may be an appropriate response, the reality is that it is only part (and a small part I might add!) of the total solution.
Let’s take a look at some of the factors that drive increasing Trade Spend rates:-
Retailer Concentration & Channel Expansion
There is no disputing the fact that across the Globe, particularly in the more developed economies, the retailer community is becoming more concentrated. The evidence of this is overwhelming when you look at markets like the UK, France, Spain, Australia and Canada. Our reality is that; in most cases, suppliers of manufactured goods to the retail community have a smaller number of retailers to sell to – hence the balance of power is considered to be in the hands of the retailer.
Moreover, in markets which are experiencing static organic growth, retailers are looking for a means to drive growth solutions for their own business. Geographical expansion is complex and soaks up a lot of the capital reserves available, so seeking alternative channels in their home markets is a very real option for them. Consider the development of the smaller neighbourhood solutions of retailers like Tesco in the UK, WalMart in the US and the two players in Australia (Woolworths and Coles).
The challenge we have is to find ways of doing business with the alternative channels, which clearly have different shopper profiles - however these major retailers will typically bundle all their buying power together to create a “one stop shop” for the suppliers. The losers in these scenarios are clearly the suppliers as they are not able to determine the success or otherwise of the activities on which they have invested trade spend as the retailers will not typically divulge where the trade spend funds were most effective – i.e. detailing where the actual movement occurred by channel for the activity that was purchased.
Having either less customers to sell to, or having large customers expand into alternative channels puts more power into the hands of the customer which will ultimately lead to increased demands from them of their suppliers. This will typically end up in increased trade spend activity.
Brands versus Private Label
More and more, retailers are placing greater emphasis on their own label products. Typically in the past these have been relatively poor quality imitations of market leading branded products which have used the value equation to drive a successful platform. In more recent times, we have seen retailers become more active in developing their own high quality products and giving them meaningful brands which they are actively taking to market. Shoppers are now presented with real choice and the value proposition is very meaningful to them.
This has placed greater pressure on suppliers of branded goods as the competition that they traditionally faced in past years has now expanded to include the fact that their customer base is now becoming a serious threat to the branded goods. This threat is even more pronounced on the second and third tier brands and; as a consequence, the manufacturer community is investing more heavily on their brands in-store to protect their position on shelf.
The reality that we must face is that the Private Label proposition will not disappear and as a consequence, suppliers need to find new ways to compete with this proposition.
The media landscape is changing
Traditional media is now becoming increasingly difficult to leverage manufactured brands – consumers are facing so many options now to become informed of the brand proposition and the opportunity to choose is far wider than ever before.
Increasingly, the retailer is becoming the source of media. In the past, suppliers undertook massive media campaigns through traditional channels to create consumer demand, the retailers would have the merchandise available and the shoppers would buy from them. Lately, the tables are turning – the retailers are becoming more active in advertising the brands which is driving consumer demand (regular letter box drop catalogues, in-store TV etc), the retailer then has a “captive” audience of shoppers who will buy from their stores.
Retailers are typically among the highest investors in media in most markets, and as a consequence of this, they hold a newly perceived power. The outcome is that they are successfully encouraging suppliers to use their media as a key driver for the manufacturer’s brands. This naturally comes at a cost and it is often at a higher rate than the supplier’s traditional media buying. The outcome……higher trade spend!
The long tail
Manufacturers typically create SKU’s that are not completely relevant to the consumer, yet they seek a high level of weighted distribution for these items. This allows the retailer to use these slower moving items as a “weapon” to push for more trade investment from the manufacturer community.
Due to the fact that the retailer understands that the manufacturer is measured on the weighted distribution of the total range they supply, the retailer can indicate that they are prepared to delist items in the event that the rotation is lower than desired. The supplier response is usually to find ways to retain distribution – this more than likely leads to increasing the values of trade spend. Is it worth the investment?
Of course, there are many other drivers of trade spend increases, however we need to appreciate the path to the solution rather than focus on the mere element of negotiating more aggressively or effectively (remember, this is part of the solution).
One matter that seems to be overlooked very frequently is who actually holds the power when it comes to making the decision to invest in retailer driven activities. Actually, the tables are turned in the relationship when retailers are demanding trade spend – this is a forgotten or misunderstood concept. When the retailer is seeking more investment, the supplier actually becomes the buyer! He is the one who holds all the cards due to the fact that he has the money.
Suppliers need to truly evaluate the investments they are making and demand a commitment to a return on that investment. After all, if you were being asked to pay for something by a retailer from your own pocket, is it not true that we would want to understand what is in it for us? Then why is it that in general, supplier personnel do not treasure the funds in this way?
In my experience, it was always much more difficult to generate additional trade spend from the smaller manufacturers (often these were family businesses) than it was to extract more funds from large organisations. The smaller supplier was more focused on generating a return on the funds that they invested and would not dare to offer anything in the event that there was no clear commitment from the retailer.
Recommendation
-
Consider trade spend as your investment
-
Always seek a return on your investment
-
Use the funds in a very strategic manner
-
Remember that you are the buyer when it comes to trade investment
-
Ensure that you measure the performance of the retailer and that they execute everything according to your agreements
-
Hold your funds until such time as you are satisfied that the retailer has complied with the agreements and that you have received the expected return
-
Sell the benefits of all your proposals to reduce the focus on negotiating the trade investment
-
Be prepared to say no to a bad deal
-
Be proactive in the relationship to ensure that you have everything in order – the way you want it
For more information contact:
david@webenpartners.com +65 (0)9838 0636
Download this article:
Trade Spend - the seemingly endless headache!
Share this article:
