A Zero-Based Approach to Trade Optimization

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With forces like 3G pushing CPGs to examine costs, revenue growth management is a hot topic today in the consumer goods industry. One of the key areas CPGs are putting under the scope is trade spend. As part of the cost-cutting initiative, 3G cut the Heinz trade budget by 25% and is now ready to do the same at Kraft, causing other CPGs to follow suit.

Why the focus on trade? In the annual expenses of a CPG company, trade typically ranks second, meaning that controlling trade cost can be a CPG’s most viable growth strategy. The problem is that while trade has dramatically increased in strategic importance over the past two years, overspending is becoming a real problem and many CPGs feel that there are too high levels of trade investment delivering low or no ROI. In fact, a survey by the Nielsen company reported that 67% of trade promotions do not break even and 22% actually diminish revenue.

A blind hacking of trade spend may damage relationships with retailers though. What is needed to address trade ROI is an evolved funding approach that allows CPGs to take a clean sheet approach to budgeting. This approach should wipe away past complexities inherently built into the trade budget, building from the bottom-up by analyzing the performance of each promotion at the customer and category level, and removing or shifting funding accordingly. This kind of performance-based funding structure is known as zero-based trade (ZBT).

ZBT is an adaptation of zero-based budgeting (ZBB) that has shown to boost the ROI of CPG trade spending by 10-20% while freeing funding innovation. According to a report titled “Zero-based Trade for CPG Leaders” by Strategy& and pWC, zero-based trade begins with the development of fit-for-purpose spend strategies by logically grouping key categories and brands. Strategies are then created to optimize trade spend across these groups based on the following three factors:

1. Context:
Consider the context of the promotion for the customer, the category and the product. What is the role that the promotion plays in enabling brand portfolio and retailer strategies? For example, are you using trade to drive product trial, to be price competitive or to support everyday low price strategies? What are the expectations of the retailer? How does this fit in to the brand identity picture? Think about the context of the promotion from all angles.

2. ROI of Existing Spend:

Evaluate what kind of return you are getting today. Understand where trade investments are driving positive returns and should be continued or increased, and where they are losing money and should be re-evaluated.

3. Trade Power:
Measure the power you have in investing trade relative to other manufacturers (market share, market concentration) and to the retail partner (their size/sales). What is your position of strength at the negotiation table – what levers can you pull? How much power do you have to set the terms?

Understanding these factors allows manufacturers to determine the best strategy for optimizing trade spending in each category, but these factors can only be properly assessed with sufficient data. Currently, CPGs have little to no automation of promotional analytics, with over 80% relying primarily on spreadsheet augmentation for trade management. With an inability to conduct post-event analysis, ROI cannot accurately be measured and predictive models cannot be built. CPGs need to invest in event-level analytics in order to acquire the insights they need to evaluate promotional performance, as incremental sales lift does not always provide the total picture.

In addition to improving analytics, CPGs must also improve promotional planning processes in order to drive ZBT. This requires a shift in sales mentality from transactional to analytical. Sales must stop taking a copy and paste approach to planning, and instead, adopt a bottom-up approach that incorporates post-event analysis, ROI analysis and predictive modeling. But getting sales to adopt a more elevated planning process isn’t easy. In order to get sales on-board, you must not only equip them with analytical tools and TPM/TPO systems, but a vision that is led from the top. The executive leadership team must present the zero-based strategy as a total business transformation approach, one that will entirely alter the way decisions are made and work gets done. CPGs that have had success in adopting ZBT have tied sales incentives to promotional performance goals, while others have dedicated client teams in the field and pricing teams at headquarters to driving the ZBT movement.

A zero-based funding structure ensures manufacturers are investing with winning retailers by reducing or reconfiguring spend where significant trade power is held but ROI levels are consistently low. This performance-based model is not intended to penalize accounts though, but rather to drive collaboration and incentivize the retailers who comply. CPGs who have implemented ZBT are leveraging their new funding model to discuss how to jointly achieve defined ROI goals with customers, in turn increasing retailer support.

Zero-based trade is a complex capability that requires time to get right, but there are not many other opportunities in a CPG business to systematically reduce costs and capture benefits of such significant magnitude. The dramatic bottom-line value that ZBT can produce may be seen as the main payoff, but there are additional rewards in the form of higher trade ROI and the improved margins and market share that go with it. Perhaps the best reward of all though is the opportunity to reinvest the payoffs from ZBT in other areas, such as new and innovative products and more effective marketing.

To explore how Cierant’s zBudget™ solution, the CG industry’s first zero-based budgeting management platform, can be configured for your unique trade and/or shopper marketing cost optimization objectives, please call 203-731-3555 or email inquiries@cierant.com.