Taking back the power

In the past five years there has been a dramatic rise in trade promotions activity – and an equally significant fall in the share of profits from this activity for packaged-goods companies.

A massive £8bn is spent each year in the UK on trade promotions (price promotions) by packaged-goods suppliers. What’s more, it is estimated that trade spend typically accounts for 20% of the total profit-and-loss in UK packaged-goods businesses. Yet the whole area of trade promotions remains largely under-scrutinised, and this is costing suppliers millions of pounds.

Research has uncovered a great imbalance in retailer-supplier negotiations. Using a database compiled from a group of more than 400 suppliers, over 15,000 trade promotions were analysed across 30 different categories over the past five years.

Incredibly, it has found that over the past year, the leading grocery retailers held on to 86% of the total incremental profits generated from “joint” retailer-supplier promotional activity. Many suppliers may not even know the exact figure for their business. And worse still for them, this lion’s share of profit being kept by retailers has grown by 10% in the past five years.

What’s more, the percentage of sales made on promotions are increasing each year for heavy promoters. The data shows that 46% of suppliers now sell 40% of volume on promotions – up from 16% of organisations three years ago.

A Cabinet Office report earlier this year showed that £10bn-worth of food is thrown away each year, and that we should cut back our spending. The Government has claimed that buy-one-get-one-free-style promotions, key consumer goods sales tools, are a major contributory factor to this level of waste. But price promotions play an important part in driving volume through consumer goods companies’ factories.

Not surprisingly, therefore, the smart money is going into finding ways of redistributing the wealth – by increasing the manufacturer’s share of the promotional profit pie. This is because trade spend is probably the biggest area of expenditure where there is genuine scope for immediate and significant improvement. It is the biggest “win”.

As they say in the US, just do the maths. A company making a bottom line 10% margin, spending 20% on trade promotions, only has to increase trade spend efficiency by 1% to generate a 2% improvement in bottom-line profitability.

In spite of this, there are still consumer-goods manufacturers stuck in the past, bemoaning the rising cost of manufacturing on the one hand and the increasingly aggressive retailer on the other.

The traditional, default solution is to cut “discretionary spending”, and at the top of this list is usually advertising investment. The argument is that “brand preference” is less important than “promotional discount” at a time of economic downturn, and that short-term volume returns (and sometimes profit) are almost always higher for promotional activity.

With the packaged-goods sector investing nearly £2bn each year in advertising, cutting back media spend in order to fuel trade promotions seems like an easy answer. But the evidence suggests that this approach may be more flawed than even the most ardent advocate of (or apologist for) media spend might imagine – not least because it makes no allowance for a long-term advertising effect.

More enlightened thinking now favours looking at advertising and promotional strategy as interdependent pillars. One should not be compromised to the advantage or otherwise of the other.

The advertising needs of the brand, which are usually long-term, have an enormously important role to play, provided their role is properly co-ordinated with promotions.

Swapping one for the other is less effective than introducing a programme of promotional best practice which can benchmark your performance against that of your peers.

There is a final irony. The need for media “accountability” means that there is now more emphasis placed on advertising accountability than promotional accountability, yet, at £8bn, annual trade promotion spend is about four times higher than total advertising spend.

The good news is that there is a solution, but one that requires a sea-change in the way many manufacturers approach the whole subject of trade promotions management. Research indicates that ultimate success hinges on the negotiation phase with retailers, and there are a number of common mistakes made, which can be worked on and eradicated.

Recognising that trade promotion budgets can be more effectively put to work – and are not the inevitable result of growing retail power – may just be the most important step a packaged goods business takes over the coming months.