October 15, 2007
The Slow Path to Trade Promotion Collaboration
By Tom Ryan
According to a new survey from DemandTec and Booz Allen Hamilton, both grocers and CPG manufacturers believe collaboration around trade promotions is critical to their business success. At the same time, both sides remain frustrated by the progress getting there.
Of the retailers surveyed, 92 percent said collaboration was “very important” and 8 percent, “important.” Of the manufacturers, 56 percent rated collaboration “very important,” and 39 percent, “important.” Key benefits of collaboration cited by both sides include not only ROI and effective promotions, but also revenue growth and more efficient planning.
However, the survey also found that although trade promotions are supposed to be mutually beneficial, 87 percent of manufacturer respondents reported they are “not satisfied” with their return on trade promotion events, compared with a still relatively high 50 percent of retailer respondents.
Dan Fishback, president and CEO of DemandTec, which helps both sides collaborate via its electronic deal management technology, TradePoint, told RetailWire that many of the leading CPG companies and grocers have come a long way in improving collaboration in trade promotions. This is partly because trade promotions have become a major cost for both.
But Mr. Fishback said many trade promotion efforts are less than optimal because both sides are still not fully embracing collaborative tools and processes.
 |
| Dan Fishback, president and CEO of DemandTec (right) last Thursday presided over the NASDAQ closing bell with Mark Culhane, EVP and CFO (left) |
“Historically, these two trading partners have been like two players at the poker table,” he said. “They keep their cards close to themselves and they only collaborate when it’s in their best interest. So historically, they have fought over every dollar of trade spend versus trying to figure out how to use that dollar to drive the benefits of both parties.”
Collaboration efforts are also frustrated because both sides believe they understand the customer better than the other.
On the positive side, the survey shows both sides are more eager to improve collaboration. Mr. Fishback believes continual improvement will be driven by both “fear” and “greed.” Many fear that the biggest companies have figured out how to collaborate and “that they need to respond.” They also fear they must reach out to the other side to reach today’s fickle and less loyal consumer.
“I think people are looking at a more challenging consumer and going, ‘Holy smokes! We’ve got to work together to figure out what the consumer wants and address that need or they’ll go somewhere else,’” said Mr. Fishback.
But “greed” is driving many to initially explore collaboration. At the minimum, according to Mr. Fishback, both sides are seeking cost savings and efficiencies in record keeping by putting the whole trade promotions process over a shared network rather than communicating through e-mail, faxes, and endless paper trails. This is helping many on both sides get on the road to better collaboration.
“We’re not professing to be the Dr. Phil for the CPG and retail marketplace in that we’re going to somehow get them to work together and reconcile their issues,” said Mr. Fishback. “What we do is connect the two and we’re allowing them to do it for their own good.”
“So we’re counting on greed and we’re seeing success,” adds Mr. Fishback, whose company went public on August 9. “But once they agree to reduce their costs, they can decide how many cards they want to show each other. The manufacturers can start to get more value out of their trade spend and the retailers can start making more factual decisions.”
Discussion Questions: Why do you think the survey shows that manufacturers seem more frustrated by trade promotion collaboration efforts than retailers? What do you think are some of the main hurdles preventing greater collaboration?
BrainTrust
Recent Discussions
Discussion Questions
Poll
First, kudos to the DemandTec team for seeing both their customers and their product’s value in a very objective light–and for saying so in public!
Trade promotion negotiation is like divorce–the first person to stop being mad wins. To “stop being mad” requires that the source of irritation be eliminated. For instance, a husband and wife might argue about spending and going over budget. In the divorce decree the judge sets a fixed budget (I think they call it “alimony” but of course this is a purely hypothetical example!) Then both ex-partners are on a budget neither can violate and it is remarkably easy to “stop being mad.”
In this case “being mad” involves looking at trade promotion negotiations separate and apart from the business of selling more products to consumers. Before you say “but that’s what trade promotion is about” consider this, it is the activity manufacturers “purchase” from retailers that causes the “incremental volume” brand managers analyze endlessly in their syndicated data reports. It is not the “trade spending” per se. So trade promotion is just a purchase process like buying a GRP of media–except that the process is not nearly so transparent. And besides that, you are engaged in a “purchase process” with your customer! How comfortable is that?
True collaboration will only come when both parties’ business model becomes directly dependent on the sell-through of more products to consumers. Eliminate slotting, trade promotion (at least off-invoice/billback) and menu costs. Base everything on sell through. Let the value of in-store activity for BOTH parties be dependent on the incremental volume it generates for both.
It’s not that hard. And we could measure it today with or without data synchronization or RFID. We just need someone to “stop being mad.”
Several obvious reasons the manufacturers are more frustrated: they’re the ones paying into the retailers’ pot, they don’t have the POS data to analyze what is or isn’t working and they’re continually threatened by private label. Having the bulk of your marketing dollars in the hands of someone who wants to steal your share as often as he wants to identify points of collaboration makes it tough to feel good about the money being spent. I have another question for the group: Why hasn’t SOX compliance penetrated the labyrinth of trade promotions? I’m not an accountant but it seems to me SOX would necessarily shine a light on some of the fund buckets and where they are being spent. I would love it if someone with a closer understanding of the law would share what they know on that one.
The reason manufacturers are less satisfied is simply that it is their money being spent. The retailer has the opportunity to refuse a deal or promotion that does not meet their criteria for meeting “hurdle rates” or expected ROI. If one manufacturer will not pay, there is a chance that another will spend what is being asked. Any deal that the retailer accepts can be assumed to be satisfactory to them.
The manufacturer often feels backed into a corner and so will spend more than budgeted or planned in an effort to “get in the ad” or “secure the display.” Of course, then they can refuse to spend what is being asked for–but the “downside” to them is perceived to be greater competitively than it is for the retailer to refuse a deal.
I think the gang above has it right. The impetus is just not there for retailers to collaborate to the level that manufacturers would want. They hold all of the cards, and can put the squeeze on manufacturers in several ways that fit their liking.
I like the way Nikki B. answered the question, above. Retailers haven’t proven their willingness to work with their manufacturing brethren, and until manufacturers can turn the tables on them, this is always going to be a one-sided relationship. Retailers ought to know that working together helps out everyone. At first, sharing this sort of info will likely help the manufacturers more than anybody else, but long term, this can easily turn into a win-win.
Manufacturers must make a compelling case to their trading partners, or else the momentum will never be achieved.
Consider the game’s components: it’s manufacturers money vs. the rental value of retailer “apartments.” The spender always wants more sovereignty over their money’s application; the user wants supreme power with happenings inside stores–and has many “renters” waiting for their coveted space. This maintains all the modern inconveniences of promotional monies and makes for a bit more frustration for CPG companies than for retailers.
What to do? When manufacturers can innovate additional ways to create more demand for their wares and wiles with consumers then the money for trade promotions would tighten up and retailers, yearning for that cash, would have to become more cooperative–and do it with greater fidelity.
The only way manufacturers will ever be satisfied with trade spending is when it is eliminated completely. There’s no reason for manufacturers to be satisfied with trade spending when too much of it winds up going straight to the retailer’s bottom-line. Retailers can talk all they want about partnering with their vendors and that’s fine as long as they still are able to take “X%” directly to their bottom-line.
It is all about CPGs protecting the consumer marketing dollars that create trial, resale and brand equity. Over time, the brand becomes a traffic generator, and everyday builder of business that is pertinent to supermarkets…vs. the desire of the trading partner to accelerate, as much as possible, volume and dollar sales by dealing/pricing tactics.
And here is where the strategic difference lies!
Yes, some CPGs’ brands aren’t being supportive of–marketing wise–advertising to the consumer. And the trade demands–and should–better movement numbers. Then, the CPG companies need to price promote with the supermarket landlords! And this is justifiable.
Two different approaches to the business! The keen, consumer savvy supermarket entities like to partner (and see the value), as long as the brand(s) is truly consumer marketed; and then, when appropriate, promoted within the store! Hmmmmmmm
The problems with trade promotion collaboration are no different than with the lack of collaboration in many other areas, though one would think this is an area where the two sides could certainly get on the same table more often than not.
Still, I think there are some basics:
1. Are the trade promotions the ones the retailer is really interested in? Or the ones the manufacturer wants, but the retailer is lukewarm about?
2. Manufacturers sometimes forget the retailer is working with their competitors too–and that the retailer needs to look at the big picture in terms of what will maximize profit dollars in a category or area. It may not include your promotion.
3. Merchants have their own plans and strategies. As always, you will find retailers give the most attention and collaboration when your trade promotion ideas are in sync with the way a buyer wants to run the business. A good idea that is not attuned to what is currently at the top of the buyer’s mind simply will not get much attention despite the objective merits.
4. I am increasingly agreeing with the consumer goods companies (and now, finally, it appears Wal-Mart) who say the medium opportunity for RFID is to focus on the execution of trade promotions in store. Manufacturers may do well to look their to get more bang for the buck.
Suppliers who have the ability to use the retailer scanned sales data to calculate their own internal profit, as well as the profit for the retailer, can get incredible insights into the profitability of promotions for both them and for the retailer. This can highlight which promotions were win-win for both the supplier and retailer, and which ones only benefited one party. These insights, although they are historical only, give suppliers knowledge as they make future decisions on where to spend promotion $ with the retailer. It is also valuable to assess a promotion after it is done, and share that information with the retailer, to confirm the success or failure of the promotion.
It’s still a kind of payback from years past. Retailers are now like the nerd, who was pushed around by the bully for so long that now that they have the power, they can “take their ball and go home” whenever they want–so to speak. This has been a source of discontent and decades of hard feelings, which won’t go away for quite a while. Both sides agree they need more collaboration, but once the grudge match is over, that’s when they will eventually get down to business.
What would trade promotion be like if publicly-held retailers and suppliers bought each other’s stock? Not a full merger, but minority positions. Unilever could own part of Safeway, Wal-Mart, A&P, etc. The retailers could own shares of Unilever, Procter & Gamble, General Mills, Heinz, etc. Companies in Japan with close trading relationships often own each other’s stock. Perhaps collaboration would be more open if everyone was trading “within the family” instead of “against the enemy.”
You know, I hate to blame the retailer in this relationship, because there is bad behavior and a lack of trust on both sides, but most of the things I see have to do with retailers’ bad behavior more than anything else.
First, trade deals are held separate from marketing–this is an internal issue to a retailer. Manufacturers got over that a long time ago–they have brand managers who look at this stuff holistically. But try to wrap a campaign around a trade deal, and you get the stiff-arm from the retailer. This limits the impact of any promotion.
I have heard tales about retailers encouraging CPG companies to collaborate earlier in the new product launch process, only to then rip off the CPG’s innovative product idea and turn it into a private label product before the manufacturer could get their version on the shelf.
Once the promotion is in play, the manufacturer can hardly be assured that the display or the price or the POP made it into the stores–and when product is out of stock, the first party to be blamed is the manufacturer for not shipping, when it’s more likely that store operations didn’t execute to plan.
I have heard tales of manufacturers auditing store inventory (this is more of a problem for high theft items) to find that as many as “50” are on hand, when there is nothing on the shelf or in the back room. Why? To zero out the 50 so that the manufacturer can ship again, the store manager would have to take a big hit to their LP performance.
While the promotion is in flight, the manufacturer receives little to no update as to whether the promotion is performing as intended–they get the demand data after the fact, or only after paying someone like IRI. So there is no way to adjust tactics on the fly. Though I guess even if they had the information, there is no guarantee that the retailer would actually be able to roll such a change out to all their stores in enough time to make the difference.
If retailers want more from manufacturers, they need to step up to the plate in their own commitments. Trust is the foundation for a collaborative relationship. Trust can’t be forced, and demanding it is a recipe for disaster. Trust has to be EARNED. Retailers: what have you done to EARN the trust of your suppliers lately?
I think this goes deeper than the vicissitudes of market power politics and the double marginalization of vendors.
I’m also very skeptical about the notion that trade spending is going away or heading for reform. Instead, I think it will continue to get more sophisticated. Case in point:
Some retailers have become really clever about price and promotion optimization. 20th century strategies such as cost plus, competitive matching and bullying vendors are giving way to Bayesian statistical inference and other advanced modeling techniques. This computationally intensive science (no kidding! science!) leverages POS data to forecast outcomes more accurately and thereby refine merchandising to better satisfy consumers and also meet retailer objectives. The early adopting retailers that have jumped on these techniques are getting impressive results.
On the vendor side, for all their frustration they still run last year’s deals about half the time.
Going out on a limb, I’ll predict that vendors will catch on to these new techniques to start spending smarter and then the retailers will be all too happy to let vendors do this work for them.
With retail margins what they are today in any category, the manufacturer has no choice but to participate in funding the programs.
We find a high percentage of manufacturers do not understand the value of this participation. Worse, they do not budget the cost. And, the manufacturer has to be flexible with new ideas based on each retailers success stories.
Bottom line is: you have to have a consistent message in front of the consumer all the time or they will forget about in a heart beat. Retailers are getting much better about store execution…If they don’t, then the consumer will shop elsewhere where it is easier to find the best value.
Collaboration is a major change in the way companies have done business. Training and trust are critical for success. Neither are in great abundance across companies. Trust builds over time. The original “black book” study indicated that it would take about 18 months to BEGIN to develop trust and then it would build slowly over time. In one pilot study I conducted, neither party did a good job of collaboration without training. With training, the parties did all right until they hit a roadblock. Getting through the roadblock was easier and more effective when there was a facilitator or someone with experience going through the process available who could help.
New behaviors are not learned by osmosis; training is necessary. New behaviors do not become effective new processes without practice. Trust develops over time. As a result, collaboration will evolve in fits and starts over time as people develop skills and trust.
I would love to know who “might” be using Bayesian statistical inference?
More Discussions
Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?OpenAI Names the Infrastructure Standard for Agentic Commerce
Will OpenAI or Google (or another entity) set the gold standard for agentic commerce?Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?
First, kudos to the DemandTec team for seeing both their customers and their product’s value in a very objective light–and for saying so in public!
Trade promotion negotiation is like divorce–the first person to stop being mad wins. To “stop being mad” requires that the source of irritation be eliminated. For instance, a husband and wife might argue about spending and going over budget. In the divorce decree the judge sets a fixed budget (I think they call it “alimony” but of course this is a purely hypothetical example!) Then both ex-partners are on a budget neither can violate and it is remarkably easy to “stop being mad.”
In this case “being mad” involves looking at trade promotion negotiations separate and apart from the business of selling more products to consumers. Before you say “but that’s what trade promotion is about” consider this, it is the activity manufacturers “purchase” from retailers that causes the “incremental volume” brand managers analyze endlessly in their syndicated data reports. It is not the “trade spending” per se. So trade promotion is just a purchase process like buying a GRP of media–except that the process is not nearly so transparent. And besides that, you are engaged in a “purchase process” with your customer! How comfortable is that?
True collaboration will only come when both parties’ business model becomes directly dependent on the sell-through of more products to consumers. Eliminate slotting, trade promotion (at least off-invoice/billback) and menu costs. Base everything on sell through. Let the value of in-store activity for BOTH parties be dependent on the incremental volume it generates for both.
It’s not that hard. And we could measure it today with or without data synchronization or RFID. We just need someone to “stop being mad.”
Several obvious reasons the manufacturers are more frustrated: they’re the ones paying into the retailers’ pot, they don’t have the POS data to analyze what is or isn’t working and they’re continually threatened by private label. Having the bulk of your marketing dollars in the hands of someone who wants to steal your share as often as he wants to identify points of collaboration makes it tough to feel good about the money being spent. I have another question for the group: Why hasn’t SOX compliance penetrated the labyrinth of trade promotions? I’m not an accountant but it seems to me SOX would necessarily shine a light on some of the fund buckets and where they are being spent. I would love it if someone with a closer understanding of the law would share what they know on that one.
The reason manufacturers are less satisfied is simply that it is their money being spent. The retailer has the opportunity to refuse a deal or promotion that does not meet their criteria for meeting “hurdle rates” or expected ROI. If one manufacturer will not pay, there is a chance that another will spend what is being asked. Any deal that the retailer accepts can be assumed to be satisfactory to them.
The manufacturer often feels backed into a corner and so will spend more than budgeted or planned in an effort to “get in the ad” or “secure the display.” Of course, then they can refuse to spend what is being asked for–but the “downside” to them is perceived to be greater competitively than it is for the retailer to refuse a deal.
I think the gang above has it right. The impetus is just not there for retailers to collaborate to the level that manufacturers would want. They hold all of the cards, and can put the squeeze on manufacturers in several ways that fit their liking.
I like the way Nikki B. answered the question, above. Retailers haven’t proven their willingness to work with their manufacturing brethren, and until manufacturers can turn the tables on them, this is always going to be a one-sided relationship. Retailers ought to know that working together helps out everyone. At first, sharing this sort of info will likely help the manufacturers more than anybody else, but long term, this can easily turn into a win-win.
Manufacturers must make a compelling case to their trading partners, or else the momentum will never be achieved.
Consider the game’s components: it’s manufacturers money vs. the rental value of retailer “apartments.” The spender always wants more sovereignty over their money’s application; the user wants supreme power with happenings inside stores–and has many “renters” waiting for their coveted space. This maintains all the modern inconveniences of promotional monies and makes for a bit more frustration for CPG companies than for retailers.
What to do? When manufacturers can innovate additional ways to create more demand for their wares and wiles with consumers then the money for trade promotions would tighten up and retailers, yearning for that cash, would have to become more cooperative–and do it with greater fidelity.
The only way manufacturers will ever be satisfied with trade spending is when it is eliminated completely. There’s no reason for manufacturers to be satisfied with trade spending when too much of it winds up going straight to the retailer’s bottom-line. Retailers can talk all they want about partnering with their vendors and that’s fine as long as they still are able to take “X%” directly to their bottom-line.
It is all about CPGs protecting the consumer marketing dollars that create trial, resale and brand equity. Over time, the brand becomes a traffic generator, and everyday builder of business that is pertinent to supermarkets…vs. the desire of the trading partner to accelerate, as much as possible, volume and dollar sales by dealing/pricing tactics.
And here is where the strategic difference lies!
Yes, some CPGs’ brands aren’t being supportive of–marketing wise–advertising to the consumer. And the trade demands–and should–better movement numbers. Then, the CPG companies need to price promote with the supermarket landlords! And this is justifiable.
Two different approaches to the business! The keen, consumer savvy supermarket entities like to partner (and see the value), as long as the brand(s) is truly consumer marketed; and then, when appropriate, promoted within the store! Hmmmmmmm
The problems with trade promotion collaboration are no different than with the lack of collaboration in many other areas, though one would think this is an area where the two sides could certainly get on the same table more often than not.
Still, I think there are some basics:
1. Are the trade promotions the ones the retailer is really interested in? Or the ones the manufacturer wants, but the retailer is lukewarm about?
2. Manufacturers sometimes forget the retailer is working with their competitors too–and that the retailer needs to look at the big picture in terms of what will maximize profit dollars in a category or area. It may not include your promotion.
3. Merchants have their own plans and strategies. As always, you will find retailers give the most attention and collaboration when your trade promotion ideas are in sync with the way a buyer wants to run the business. A good idea that is not attuned to what is currently at the top of the buyer’s mind simply will not get much attention despite the objective merits.
4. I am increasingly agreeing with the consumer goods companies (and now, finally, it appears Wal-Mart) who say the medium opportunity for RFID is to focus on the execution of trade promotions in store. Manufacturers may do well to look their to get more bang for the buck.
Suppliers who have the ability to use the retailer scanned sales data to calculate their own internal profit, as well as the profit for the retailer, can get incredible insights into the profitability of promotions for both them and for the retailer. This can highlight which promotions were win-win for both the supplier and retailer, and which ones only benefited one party. These insights, although they are historical only, give suppliers knowledge as they make future decisions on where to spend promotion $ with the retailer. It is also valuable to assess a promotion after it is done, and share that information with the retailer, to confirm the success or failure of the promotion.
It’s still a kind of payback from years past. Retailers are now like the nerd, who was pushed around by the bully for so long that now that they have the power, they can “take their ball and go home” whenever they want–so to speak. This has been a source of discontent and decades of hard feelings, which won’t go away for quite a while. Both sides agree they need more collaboration, but once the grudge match is over, that’s when they will eventually get down to business.
What would trade promotion be like if publicly-held retailers and suppliers bought each other’s stock? Not a full merger, but minority positions. Unilever could own part of Safeway, Wal-Mart, A&P, etc. The retailers could own shares of Unilever, Procter & Gamble, General Mills, Heinz, etc. Companies in Japan with close trading relationships often own each other’s stock. Perhaps collaboration would be more open if everyone was trading “within the family” instead of “against the enemy.”
You know, I hate to blame the retailer in this relationship, because there is bad behavior and a lack of trust on both sides, but most of the things I see have to do with retailers’ bad behavior more than anything else.
First, trade deals are held separate from marketing–this is an internal issue to a retailer. Manufacturers got over that a long time ago–they have brand managers who look at this stuff holistically. But try to wrap a campaign around a trade deal, and you get the stiff-arm from the retailer. This limits the impact of any promotion.
I have heard tales about retailers encouraging CPG companies to collaborate earlier in the new product launch process, only to then rip off the CPG’s innovative product idea and turn it into a private label product before the manufacturer could get their version on the shelf.
Once the promotion is in play, the manufacturer can hardly be assured that the display or the price or the POP made it into the stores–and when product is out of stock, the first party to be blamed is the manufacturer for not shipping, when it’s more likely that store operations didn’t execute to plan.
I have heard tales of manufacturers auditing store inventory (this is more of a problem for high theft items) to find that as many as “50” are on hand, when there is nothing on the shelf or in the back room. Why? To zero out the 50 so that the manufacturer can ship again, the store manager would have to take a big hit to their LP performance.
While the promotion is in flight, the manufacturer receives little to no update as to whether the promotion is performing as intended–they get the demand data after the fact, or only after paying someone like IRI. So there is no way to adjust tactics on the fly. Though I guess even if they had the information, there is no guarantee that the retailer would actually be able to roll such a change out to all their stores in enough time to make the difference.
If retailers want more from manufacturers, they need to step up to the plate in their own commitments. Trust is the foundation for a collaborative relationship. Trust can’t be forced, and demanding it is a recipe for disaster. Trust has to be EARNED. Retailers: what have you done to EARN the trust of your suppliers lately?
I think this goes deeper than the vicissitudes of market power politics and the double marginalization of vendors.
I’m also very skeptical about the notion that trade spending is going away or heading for reform. Instead, I think it will continue to get more sophisticated. Case in point:
Some retailers have become really clever about price and promotion optimization. 20th century strategies such as cost plus, competitive matching and bullying vendors are giving way to Bayesian statistical inference and other advanced modeling techniques. This computationally intensive science (no kidding! science!) leverages POS data to forecast outcomes more accurately and thereby refine merchandising to better satisfy consumers and also meet retailer objectives. The early adopting retailers that have jumped on these techniques are getting impressive results.
On the vendor side, for all their frustration they still run last year’s deals about half the time.
Going out on a limb, I’ll predict that vendors will catch on to these new techniques to start spending smarter and then the retailers will be all too happy to let vendors do this work for them.
With retail margins what they are today in any category, the manufacturer has no choice but to participate in funding the programs.
We find a high percentage of manufacturers do not understand the value of this participation. Worse, they do not budget the cost. And, the manufacturer has to be flexible with new ideas based on each retailers success stories.
Bottom line is: you have to have a consistent message in front of the consumer all the time or they will forget about in a heart beat. Retailers are getting much better about store execution…If they don’t, then the consumer will shop elsewhere where it is easier to find the best value.
Collaboration is a major change in the way companies have done business. Training and trust are critical for success. Neither are in great abundance across companies. Trust builds over time. The original “black book” study indicated that it would take about 18 months to BEGIN to develop trust and then it would build slowly over time. In one pilot study I conducted, neither party did a good job of collaboration without training. With training, the parties did all right until they hit a roadblock. Getting through the roadblock was easier and more effective when there was a facilitator or someone with experience going through the process available who could help.
New behaviors are not learned by osmosis; training is necessary. New behaviors do not become effective new processes without practice. Trust develops over time. As a result, collaboration will evolve in fits and starts over time as people develop skills and trust.
I would love to know who “might” be using Bayesian statistical inference?