Today’s CPG trade promotion environment is filled with complexities that far outweigh what we see in other industries. From the manufacturing perspective, CPG companies face some of the biggest challenges, which include managing a complex supply chain, growth in private labels and sustainable price pressures.
Retailers face their own issues such as finding ways optimize inventory, maximize margins and continue to achieve customer satisfaction. For both parties, they struggle to understand how their trade funds are getting invested and the returns. On average, retailers see only a 7.1% out of stock level. Yet the number increases to 75% when it comes to promoted items, not only because of operational execution but also due to in-accurate demand forecasts for promotions.
Consumers on the other hand are demanding high value for their money due to economic uncertainty and increased access to mobile technology and social connects for purchasing. Simply put, the retailer and the supplier need to find ways to collaborate better, focused on creating customer demand and quickly reacting to in store stock levels.
Recent studies show that trade promotions represents the second highest single line item in the corporate budget – in upwards of 10-30% of sales revenue or $2B in the United States, after the cost of goods. According to AMR Research, 54% of companies are unhappy or unsure about their promotion effectiveness and 85% are concerned with ability to track and manage spending. Today, 30% of promotions are estimated to be unprofitable.
This begs the question…Why? Few CPG companies are leveraging technology and processes to optimize their trade promotion strategies. Focus on market analysis and statistical modeling to determine their trade-spend budgets is entering the advanced phases of innovation from BPO providers and domain experts but few are pulling on this lever. Other challenges are prevalent, since many aren’t leveraging KPIs and metrics to better understand which promotions worked and which didn’t, but some are still challenged with how to accrue for promotions. Others struggle with revenue recognition and compliance regulations. For an industry that spends $150 billion for trade promotion, it is mind-boggling to think how optimization could fuel their growth. Could it be that it’s just too big of a beast to tackle?
Perhaps. Yet with a demand driven approach to do as follows – a positive effect will be achieved since mobile app users are focused on finding the best deals by turning on their phones location services.
- Ensure structural and strategic alignment
- Provide improved visibility to data
- Produce superior analytics that account for local consumer preferences.