The Notorious B.I.G. once wrote a song titled, “Mo Money. Mo Problems.” Was he referring to the often out of control spend associated with distributor trade funds?
It’s like the more money we give to distributors, the more problems we see. Or maybe we’re just left to wonder what we’re really getting for those dollars? Mo (high-margin) cases? Or mo problems?
Distributor trade dollars should be used to the manufacturer’s advantage. (A lot of) money is spent in the hope that collaboration will lead to street business growth. And as you probably know, the dollars can be allocated in a few ways. Two of the most common are shelter dollars and local marketing dollars.
- Shelter refers to the corporate side of distribution trade deals.
- Local marketing (or local trade) refers to funds negotiated for payment to individual distribution houses in specific geographies and might be allocated to food shows, flyers, promotions or other specific “marketing” activities.
Skepticism abounds when it comes to the fruitful applications of all types of distributor trade funds. And one of the specific concerns we hear all the time is:
“I suspect my dollars allocated to local marketing are wasteful. Are they?”
This article will help to answer that question, and, in the process, we’ll talk a little bit about the crazy world of distributor trade spend.
How do local marketing funds get allocated?
Often manufacturers negotiate local marketing at the individual house level. Some manufacturers have 70 or more different local marketing programs spanning accrual rates, lump sums, event sponsorships, coupons and other types. The responsibility for local deals often resides with a territory-centric sales team member.
Other manufacturers manage local marketing at the corporate level (via their corporate accounts team) and have only one contract for each distributor.
A company’s overall trade strategy will dictate which approach makes more sense.
So, why do you spend with distributors at all?
When the first manufacturer sent its first product through distribution, the foodservice deities demanded compensation to act as the go-between and the distribution trade game got its start.
That leads us to the first reason (and probably the worst) why manufacturers pay at all:
“This is the way it’s always been.”
Many manufacturers are simply caught up in the demands for distribution compensation. They feel the “pay to play” industry standard is unbreakable and therefore trade agreements often run on auto-pilot. The fear of products being removed from shelves is too powerful.
A better reason for spending with distributors would be revenue growth. Local marketing, when spent well and executed efficiently, can lead to an increase in street business. Street volume is like the Golden Snitch in a game of Quidditch (for all you Harry Potter fans out there). Elusive, but when caught, determines the victor.
Street business (aka: business that is free from rebates or special deals) is sought after because of the (probably obvious) profit factor. These accounts pay list price, which means manufacturers are willing to invest some time and money (the trade marketing funds) to secure them.
Manufacturers probably aren’t going to stop paying local marketing, so how do they make sure the ROI is there?
It’s advantageous for manufacturers to approach street accounts with their distributor partners because they own the street operator relationships. The distributor supplies the entire portfolio of products the operator requires and therefore has some degree of influence over the choices these accounts make.
Now, even when you “pay to play” it can be tough to get the distributor to spend the time on these initiatives because of rampant competing priorities.
Distributor sales reps are often incentivized to sell their private label brands first. At the same time, Category Captains are knocking on the door demanding volume associated with their best and lowest price.
Your local marketing dollars end up looking like the Salisbury steak on a menu of filet.
However, if you have a real partnership with your distributor and you can show that the trajectory of your business is not in line with the growth incentives you’ve discussed and agreed to, they may be inclined to spend some time to help you dress up that steak.
The more you know.
Don’t rely on anecdotal feedback from the sales team to evaluate local marketing performance. Use the analytic tools at your disposal to look at the numbers. Applications with proper analytics should easily be able to pinpoint specific geographic business composition to help you understand where the funds are having the desired impact.
Let’s say the prior year business split at City-Distributor-A looked like this:
55% contract / 45% street
And the current run-rate with City-Distributor-A puts you at:
70% contract / 30% street
What does this say about the impact of your local marketing dollars?
You probably want to pick that bone with your customer. Even if your total sales are growing, the wrong mix can be a detriment to overall business.
Contract cases have a much lower margin than street business. The gains need to net out on both the volume and profit lines to deem your local marketing spend “not wasteful.”
After reading this, you’re probably rethinking the value of local marketing dollars (if you weren’t already). Change is hard, but here are a few things to do if you find that local marketing is wasteful in some or all instances for your organization:
- Recapture. Don’t pay if you service the operator under a contract (like via Aramark or Foodbuy). Pay on the street business that is growing your operator portfolio.
- Stay Put. Compare contract types and analyze growth. Make sure the dollars are boosting street business. If you keep increasing funds without realizing gains, put a stop to it. 3% turns into 4% and over years those “small increases” can add up to big dollars.
- Support. Some distributors may be better partners than others. Allocate spend to align with those that support you, as you support them.
Since trade spend isn’t going anywhere anytime soon, be a change agent in your organization and advocate for measurement and reallocation of funds to improve local marketing ROI. Pretty soon you’ll be making beautiful music with your customers.