Reducing Trade Expenditure – Think ‘Consumer First’ Not ‘Store First’

In 1995 POPAI told the world that 70% of purchase decisions were made in-store and in May this year they announced their latest research showing that this number had climbed to 76%. Manufacturers around the world have seized on these figures to justify progressively higher levels of expenditure in retail.

Today, “trade spend’ is one of the highest single costs borne by consumer goods businesses after the cost of goods. A recent report by AMG Strategic Advisors, shows that American Consumer Goods companies now spend 13.7% of gross sales on ‘trade funds’. The same report suggested that 77% of these companies plan to increase trade promotions funding in the coming years.

For many manufacturers, trade spend has become a cost of doing business. As major retailers continue to grow (the top ten have more than doubled in size since 2000), teams can expect these costs to escalate further. The problem with this is that much of this money delivers a negative ROI. We’ve found that returns are on average 30 cents on the dollar, which means we conservatively estimate that the top 250 consumer goods manufacturers lose nearly US$200bn per annum through ineffective trade spend.

Most manufacturers would like to see reduced trade costs and better returns on their investment but many struggle to figure out how they might do this. In my experience the first major step to take is to change the attitude your company has to retail investment.

Many manufacturers have been influenced by Proctor and Gamble’s “store back” approach. P&G created this approach to ensure they understood everything there was to know about “the first moment of truth” – the point when a shopper buys the product. P&G seek to understand what triggers purchase in-store and work back to consumer stimuli to ensure each trigger “fires” at the right time. The problem however is that many disciples misinterpret ‘store back’ as ‘store first’.

‘Store first’ thinking puts the power into the hands of big retailers by focusing investment on the biggest customers in order to drive sales. Retailers use this power to encourage greater volumes of investment from their vendors, thereby driving the escalation of trade spend.

I believe this is a damaging and costly approach so my teams and I suggest a different way of thinking – ‘consumer first’. A ‘consumer first’ approach focusses on the key consumption priorities and then seeks to identify target shoppers whose purchase behavior can deliver that consumption. This allows you to prioritize channels based on their ability to deliver the right shopping patterns (not just based on size) and to define the right activity plans in-store before writing a cheque to a retailer. You might think of this approach as almost being ‘store last’.

For some this might seem like a lot of extra work, but think about it, if you are spending 13.7% of sales in-store and 70% of this is wasted, a ‘consumer first’ approach could increase profitability by nearly 10 margin points. The average consumer goods business makes only 8.5% profit so this approach could double the profitability of some businesses.

We know this approach works, we’ve seen teams who insisted it was ‘impossible’ to reduce trade spend saving millions of dollars by taking the ‘consumer first’ approach – isn’t it time you do too?

 

Feature image from Flickr

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6 thoughts on “Reducing Trade Expenditure – Think ‘Consumer First’ Not ‘Store First’

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