90% of trade promotion events fail to deliver
Trade promotions remain one of the most complex, controversial dilemmas facing consumer goods manufacturers today. While the total investment by executives of consumer packaged goods (CPG) companies in trade promotions remains at between 12 and 15% of sales, manufacturers estimate only 35% of their promotions turn a profit.
That's nothing to write home about; especially in South Africa where 12 to 15% equates, conservatively, to R2 to 3 billion being injected by the major manufacturers into trade investment on an annual basis. The numbers are staggering. In Europe, this represents €100 billion in trade promotion spend by the 50 biggest CPG companies. Yet, many rely on spreadsheets and point solutions to manage these huge investments
Promotion activities such as temporary discounts, extra volume free of charge, loyalty programs and in-store promotions all aim to achieve certain strategic objectives. These include increased sales, increased customer loyalty, increased purchasing frequency and securing new customers.
Accenture's research suggests that as many as 90% of trade promotion events fail to deliver a positive return on investment. And, if spending continues at current levels, the pressure on profits can only increase. A recent Accenture trade promotion study concluded that some 60% of consumers stated that trade promotions do not affect their buying choices. Furthermore, 51% of promotions go unnoticed by the consumer. To add fuel to the fire, around 70% of manufacturers are unaware of the incremental impact on volume and profitability associated with promotions.
Notwithstanding the dire diagnosis, the concept of trade promotions makes economic sense: in theory, it is possible for manufacturers to increase short-term volume (and profit) by offering financial incentives to their trading partners to enhance the presentation of their products to consumers.
Accenture believes manufacturers can achieve a 40% improvement in return on spend in trade promotions by managing promotion driven costs and re-deploying inefficient spending through careful study of promotion investment and results.
Overcoming the problems of trade promotion is difficult—but not impossible. To be effective, companies need to establish a closed-loop promotion management process to better plan, execute, and evaluate trade promotion activities. In order for this to be sustainable, rather than a one-off pilot, these efforts will require the support of the appropriate tools and organisation structure.
Closed loop process
Develop and articulate a promotion strategy - companies need to tackle the question, "What are we trying to do?" Many companies have no specific trade promotion strategy other than general economics. Specific objectives of trade promotion must be agreed and communicated effectively enough to be prominent in the minds of promotions decision makers (both within the manufacturer and the retailer).
Develop targets and allocate funds - manufacturers need to have systems in place that will help them identify and target profitable, revenue generating promotion activities. Deals should be simplified to attack the hidden costs of promotion administration. Only 31% of manufacturers are making significant progress in simplifying trade promotion deals.
Create promotional plans and events - manufacturers should consider more targeted, imaginative, promotion plans, such as co-marketing, solution selling and group promotions to make better use of marketing spend.
Sell in and negotiate promotion plans - most leading companies provide flexibility to their marketers to determine how promotion budget is spent. It is critical that these plans and the lessons learned from them are captured, documented and shared if future decision making is to be enhanced. Corporate supporting systems can facilitate this.
Authorise payments and resolve deductions - 50% of manufacturers cite deductions as a problem they need to control better. Simplified and flexible payment processing, supported by relevant systems and processes, will contribute to savings in this area of hidden cost.
Track plans against actual performance - manufacturers need to develop KPIs to understand the effectiveness of trade promotion spending, using performance scorecards. As many as 37% of manufacturers lack standard measures against which to benchmark performance.
Evaluate promotion effectiveness - limited scrutiny of effectiveness does not do justice to the huge investment in promotions. Manufacturers need to focus on the analysis of trade promotions efficiency at the right level of detail to feed this back into the planning phase of the cycle.
Supporting tools play a vital role in executing an effective trade promotions strategy. Efficient, profitable and effective trade promotion is information-intensive. Information must be collected, aggregated and shared across business units. Many programmes founder due to a lack of infrastructure, tools and skills to organise, analyse and synthesise vast quantities of input and output data.
The cost of implementing a holistic, capability-based promotion management programme can be daunting, ranging from R10 to R30 million. But the upside of a 2.5 to 4% increase in net income outweighs the downside of continuing business-as-usual.
About the author
Richard Bailey is Accenture Senior Manager. Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. Visit www.accenture.com
for more information.