During the past few decades, CPG manufacturers have invested in technology to minimize access inventory while maximizing shrinking profits.
We’ve seen the evolution of ERP systems managing orders to cash.
There’s heavy investment in forecasting and demand planning systems. Not to mention – significant spend to understand consumer insights and demographic shifts for a marketers.
Over this same 20+ years, we have seen trade promotion spend increase from an average of 12% of gross revenue to 25% of gross revenue. As BCG notes, the growth of trade discounts is outpacing sales growth. As a result, CPGs are finding it difficult to increase revenue. Without appropriate intelligence and predictability into spending, that cost threatens companies’ bottom line and leadership sustainability.
The Wall Street Journal reports that 16 CPG CEOs – representing over $150B in annual revenue – have retired or been replaced over the past 2-year period.
It’s no secret that the CPG sector stands witness to eroding margins on both the retailer and manufacturer side of the business. This, due in large part to an extremely mature sector struggling to create fresh ideas that meet the needs of the changing demographic from Baby Boomers to Millennials and Generation Z. Plus retail consolidation, online shopping, and price competition.
Add these challenges to the increased pressure from the low price retailers Lidl and Aldi, the entry of Amazon into brick-and-mortar grocery retail via its Whole Foods acquisition and we have immense pressure on CPG manufacturers to attain volume and profit objectives. It’s the perfect storm. Given these challenges, it’s not surprising that in the past 2 years the “E” in CEO is closer to “Exit” than “Executive”.
The Role of Trade Spending
Trade spend, as the #2-line item on a P&L, hasn’t seen an organizational investment to improve the management and outcome of such a large expenditure. Remarkably, a multitude of CPG companies still operate a significant portion (if not all) of their trade event investments on spreadsheets. As a result, promotional plans are woefully imprecise, creating a ripple effect of inaccuracy on forecasting and demand planning systems.
Just as the ERP, forecasting and demand planning systems evolved to become more absolute, so has trade management software. There’s a huge opportunity for companies who invest in trade promotion management and optimization technology. Since the cloud can handle massive amounts of data, we can now automatically harmonize and smooth data for anomalies. Also, post-event analysis can happen near real-time and the power to optimize future trade spending for both the retailer’s and manufacturer’s objectives is standard base practice.
A best-in-class TPO application shows 3%-5% annualized return on the annual trade spend.
Ask the ushered out CEOs what a financial impact like that would have meant for their companies… and in many cases their jobs.
To navigate today’s CPG sector means investing in the information that allows you to make better decisions and the tools to turn this insight into actionable, measurable results.