Is improving Trade Promotions effectiveness the last chance to avoid category commoditisation?

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Picture this:

“The year is 2030. The most sold brands across all grocery categories are private label. What started as a temporary transition to private label in some key categories to avoid inflationary pressures during recession quickly became a fight for survival. Brands overspent on price support and promotion activity, and they were unable to identify how to best make use of their trade spend. This resulted in eroded margins and reduced differentiation, and in turn, resulted in private labels growing beyond control.

Most brands that once ruled the supermarket aisles are now museum pieces and collectibles for the nostalgic”

While this might paint a picture of a rather dystopian future, the reality is that we are at the early stages of a strong cost of living crisis, with inflation growing at levels unheard of in decades. (CNN now predicts a 98% chance of global recession).

Brands across most categories are already fighting for survival. They are finding trade spend is spinning out of control, and it’s increasingly difficult to identify “the 30% of the promotions that are indeed effective.” This is leaving the door wide open to decreased differentiation and ultimately commoditisation of the brand/category, and growth of private labels.

At this crucial time, effective Trade Promotion Management presents itself as the only vehicle to re-conduct the situation and regain control.

Now more than ever, Consumer Goods organisations need to find the right solution to both “run better promotions” and “run promotions better”, while at the same time achieve unprecedented levels of visibility, accountability, increased ROI and promotion performance:

1. Trade Promotions are the main weapon against every day low price. How can brands strategically use promotion investment to capture consumers at key points in time?
2. Let’s be honest: Trade Promotion Management is unlikely to ever be perfect – but what are the conditions that need to be in place to increase chances of success?
3. Most CPG companies have a spaghetti of connected and disconnected data sources and technologies covering all aspects of the trade relationship management that make it difficult to move at pace. How can new technologies help with this process?

Let’s explore these building blocks.

The main weapon to avoid a price war: Strategic use of promotion investment.

We have a big challenge in front of us. The global economy is slowing down and pointing towards recession in most geographies, which – with cost of living already sky rocketing – point at shoppers having to re-evaluate their baskets, and brands having to fight some tough battles on the shelf.

Of course, the temptation to cut prices to appear more supportive is rather large, but lowering prices can potentially lead to a race to the bottom that, overtime, will kill differentiation and lead to total category commoditisation.

Let’s face it, once you become a commodity category, you’ve removed any type of barrier for consumers to justify the purchase of branded products.

And let’s be clear, this is a lose-lose scenario:

• On one hand, the brands lose all their appeal to consumers. As the value generation trends downwards, consumers are led to buying more private labels.
• On the other hand, this causes retailer costs to go up. They will see both trade investment go down as a result of lower sales, and their own marketing and R&D costs go up as they become brands themselves.

The net-net of this is the dystopian future we picture above.

Let’s dive into it in more detail. In this scenario, we would have gone so far down the rabbit hole of price reduction that the tables have completely turned. The investment burden to cultivate and differentiate a brand moves to the retailers; it moves from a brand-to-brand battle to a chain-to-chain one, and the stakes/losses are instantly bigger in the following ways:

• This move drives retailer cost pressures up as they need to create differentiation in their private label versus competitor retailer. Not only that, but they would lose a big chunk of the trade funds they rely on today for category promotion. Why would brands fund growth of private labels when their share-of-wallet and margins are in decline as they lose their differentiation?
• This also means the fight moves from “driving category decisions in store” to “driving which store I shop in.” The potential losses move from margin points when the shopper selects brand A rather than a premium brand within the category in my store, to losing the full basket in favour of a retailer with better private label brands.

A key consequence is that this would drive private label prices up. And guess what? The loser would always end up being the consumer with a smaller choice, less innovation, and higher prices for lesser value.

Here’s the thing though – this “dystopian future” is not really that far away or that dystopian. According to a recent IRI study, up to 60% of shoppers already think that private label products are as good as national brands in terms of quality, innovation, sustainability, trust and delivery on claims. And 25% of shoppers rate them higher than they rate the big brands!

So given the answer is neither “stay as is” nor “keep lowering prices further,” there’s only one feasible alternative: Run better promotions.

“Thanks genius – this is literally what our teams currently try and do day in and day out” WE hear some of you say with a big load of sarcasm.

We know, we know – and we definitely don’t claim to be carrying a silver bullet, and we don’t think it’s going to be a simple or easy process. However, there is definitely one key thing that in our view brands need to be doing; be laser focused on choosing the right promotions where it matters most, enabling loyalty or discouraging competition switches.

By the way, we should be very clear; we are not suggesting retailers and brands are enemies. Rather, they need to find a mechanism to collaborate and find the win-win scenario in which private labels deliver value to the consumers and profit to the retailers, and overall category growth. This mechanism will help brands to thrive and drive innovation and category investment. The enemy of the retailer isn’t the brand – it’s the other retailers. This win-win position is achieved by sharing a better understanding of shopper behaviours and performance data.

To achieve this, it is absolutely critical to have the right data structures and collaboration mechanisms available from the outset. This means putting together the right market and consumer insights, combine them with sell-in and sell-out data, and drive accurate volume forecasts that ensure that the right product is on the right shelf at the right time with the right promotion.

Of course, these things are easily said, but “the devil is in the action plan.” This all pivots on having the right data at the right time to drive the right insight and the right action. The right action is underpinned by the right processes which allow for automation, quick processing and elimination of superfluous activity. Siloed, disconnected data sources and processes simply won’t cut it any more.

In our recent TPM round table we heard Gil Phipps, former CMO at Sprouts Farmer Market, say “you can buy the newspaper every day, but unless you read it, you won’t get anything out of it. Enterprise data is the same. Collecting it is great, but you need to make sure it’s accessible and it provides actionable insights.”

Evolving Trade Promotion Management – nobody said it was simple.

We have uncovered the need for brands to understand how to run the right promotion on the right shelf for the right consumer and at the right time. But this is by no means a simple endeavour.

When we look at the end-to-end business process to define, agree on, execute and monitor promotion success, this is neither a linear nor a simple set of processes. Let’s try and break them down into three process clusters, between “front”, “middle”, and “back” office.

In the front office, we have a team of Account and Key Account Managers working daily to drive growth for their product and category within their chains. They have disconnected and siloed data sources across sell-in, sell-out, retail execution and consumer insights. They work hard to make sense of this data so they can negotiate the next stage of growth with their buyer. They are, of course, doing all this while coordinating the resolution of the everyday situations at the same time.

In the middle office, we have the set of processes that look at planning the impact of promotions. The intent is to both inform those front office negotiations and capture the output of such negotiation. This enables continuous volume forecasts while also interpreting the results “after the fact” to provide continuous feedback. The most advanced manufacturers have parts of these processes relatively refined – increasingly ran in a Shared Service Centre and even outsourced. However, the Key Account Managers often carry a lot of the weight and still rely on disjointed inputs pulled together into spreadsheets.

Finally in the back office, the teams scramble to make sense of the payments they receive from customers and the constant set of disputed invoices that have the wrong promotional discount applied. This results in significant amounts of working capital stuck, which is of course detrimental to both the brand and the retailer; it causes unnecessary overhead that limits the brand ability to further invest.

In our view, there are three key success factors we can extract from these high-level problems:

• End-to-end alignment from the front to the back office is critical to ensure trade promotions can be ideated, negotiated, tracked, and executed in a consistent manner that provides more predictable results.
• Removing data siloes is the starting point that enables this alignment. Processes will continue to break along the way as long as brands need to rely on disconnected or incomplete data sources.
• Gaining efficiencies in the processes can free up capital that can be re-invested in the trade promotion cycle. When combined with strategic alignment and the better use of data, this would enable higher growth rates for the manufacturer and the category across the board.

Brands need to be aware that this is a journey, and that as much as there is a need to act now, it is rather likely that the current landscape requires a fair amount of work in aligning data sources and gaps. For most, this will be an 18-to-24-month journey that requires a couple of planning cycles to fine tune and start to deliver the right insights and improve the planning.

We are at a moment in time in which technologies like cloud and AI can help accelerate this alignment, identify process efficiencies, and democratise access to end-to-end data. Let’s have a look at how.

Conclusion: Transform or struggle. Modern TPM can only be achieved with modern technologies at its core.

We have explored several major themes. The current economic pressures are a contributing factor to the growth of private labels across most categories. This will unavoidably impact the strategies brands take in the coming months to grow – or at a minimum maintain – their positions. We have also highlighted how price wars wouldn’t be beneficial for anyone. We can therefore conclude that the answer has to be two-fold. First, “running better promotions” will deliver brand and category “sticky” growth. Second, “running promotions better” ensures the end-to-end processes from the front through the middle and into the back office are running efficiently and in the same direction. These two areas have to be the focus of all commercial and revenue growth teams.

To achieve these two goals, we have identified three key success factors: “Rich, Connected and Accessible Data”, “Strategic Alignment”, and “Efficient Processes.”

But let’s be clear. The year is 2022, and none of these things is truly possible without the aid of modern platforms and technology architectures that are lightweight, cloud based, AI-first, and API focussed. Let’s dive into these a bit more:

• AI driven. It is critical that to-be TPM architectures leverage the advancements of AI and analytic capabilities to find concealed patterns and predict likely outcomes by digesting vast amounts of data. Target scenario models have historically taken hundreds of resource hours to turn into actionable insights can now be delivered in minutes.
• Transformations need to focus on delivering flexibility through modular platforms that can scale with the business and are easily deployable. Platforms that are no-code or low-code will further simplify capability deployment. Take advantage of new functionality as it’s released, and reduce your company’s technical debt.
• API-first. Set the focus on composability and reusability with loosely coupled integrations. This enables flexibility, and it will democratise access to rich and complete data at point-of-use. API-first approaches have proven to broaden data access to entire organizations, ensuring teams sees the same data at the same time, and break data siloes to unlock innovation.
• Cloud based. In today’s world, running applications on the cloud is not just an option but a must. Not only do cloud infrastructures accelerate time to value, but they also offer a lower total cost of ownership. A hybrid cloud strategy enables organisations to choose the right cloud infrastructure for each application.

Now, this is only the beginning. We don’t need to look too far ahead to see an even more exhilarating future; as quantum computing continues its journey into mainstream, we’ll be able to accelerate these resource intensive processes and analytics even further.  This can result in near-real-time processing of billions of consumer interactions that will drive real-time, hyper-localised promotions. These are outcomes we can only start to imagine!

We’ve said this already: It won’t be an easy task. But it’s indeed a critical one that brands need to undertake if they want to thrive in the short to mid-term. 2023 is promising to give the market a shake up and there is an imminent need to act.

If you want to hear more about how IBM can help consumer goods organisation reimagine Trade Spend and Trade Promotion Management, reach out to Andres.

Let’s create something that changes everything.