Inflation is reaching a 40-year record, with no real solutions in sight. The retail industry, especially grocery, meat and produce stores are facing serious consequences that impact their top and bottom lines. How does this impact the state of trade promotions and all other channel incentives?
No matter what side of the political fence you are on, we are all suffering the effects of the highest inflation in more than four decades, with an imploding stock market and what appears to be a full-blown recession racing toward us here in the United States.
That forecast is bad enough for all consumers, but what is the impact to the efforts of consumer products companies and their channel partners to effectively promote their products and services? The financial executives for both the manufacturer/supplier and the channel are digging into the numbers and holding mission critical meetings with the sales, marketing and revenue growth management teams to sort out the best strategy going forward in this awful environment.
If you combine the effects of the pandemic, the disruption within the supply chain and the rocketing cost of fuel to move products, we face a perfect storm and a clear “triple whammy” on revenues and profit. There is no doubt that key account managers and sales reps are being directed to look at existing promotional plans and begin considering significant reductions in the budget. This means, of course, that the phone calls to the retailers explaining why future promotional plans have to change are becoming a common occurrence.
Consumer Goods Technology just this month released a story by senior editor Lisa Johnston with some serious analytics from NPD about how the consumers are reacting to the inflationary pressures. The numbers tell a sad, but understandable tale.
(See “As Consumers Shift Spend, CPGs Focus On Promotion Effectiveness;” https://consumergoods.com/consumers-shift-spend-cpgs-focus-promotion-effectiveness)
The survey showed that food (87%) and fuel (77%) are the two areas where price increases are most noticeable. Prices will no doubt continue to be raised to combat the climbing inflation, and that will have severe impact on consumer buying in the short term for sure, and in the long term if the inflation is not brought under control.
The CGT/NPD survey also showed that of all of the consumers polled, only 17% said that they will not change purchase habits. Everyone else surveyed will be taking some sort of action to stave off the economic pressures.
23% of the consumers said that they will be cutting back product spending with 20% saying they will buy fewer items. This means that nearly half of the shoppers will be spending less money and a smaller basket at checkout.
28% of the consumers polled said that they will look for more promotions—actually the highest percentage of respondents to the survey. This is not surprising, but what it does now is add to the pressure facing both the manufacturer/supplier and the channel buyers.
“We can raise prices only so far,” says the CFO of a canned goods company I recently worked with. “There has to be some reduction in the total trade spending, but I have very few metrics around this inflation thing that helps to guide us toward a real answer.”
For his company, there is a 2% across the board reduction in trade spend budgets, which means that the KAMs and sales reps must figure out the balance between where to cut and where to move money. The end result is generally that some account is going to lose and some other account will either stay the same or even increase to enable more promotions.
If the consumer expectation of more promotional deals mirrors the CGT/NPD survey data, knowing where and how the consumer shops is even more critical in this inflationary economy. Tactically, that will most likely means higher temporary price reductions (TPR) and less feature ads, demonstrations or display signage.
For the retail and ecommerce defense against inflation, “it’s the price, stupid” (with apologies to James Carville).
The last time inflation was nearly this high was during the 1970’s. Trade promotion back then was still very much based on the practice of claiming promotional ad performance with documented proof of compliance and being paid by check. Among the many changes that took place within the consumer goods industry then, one of the most prominent was moving away from this promotional settlement practice to what we have today in FMCG—deductions taken by the retailer.
Already in deep margin pressure, retailers could not wait the 90-120 days it often took the manufacturer to pay the claims; and as a result, retailers soon began deducting to protect their financial state. This, as we all now know, is the genesis of the current practice of deductions without routine documentation of performance and costs. I detail this in the third chapter of my book, “The Invisible Economy of Consumer Engagement.” This was also a time period when the US federal government was very active enforcing the Sections D and E of the Robinson Patman Act. Today, the level of federal interest, much less legal action is virtually negligible.
Today, however, as Lisa Johnston mentioned in her article above, there is far more advanced analytics and data to help both the manufacturers/suppliers and the retailers to better plan and execute effective trade promotions; and the amount of intelligence around the responses and ROI generated in trade promotions is light years ahead of the ‘70’s. 
But the ability to tie into those analytics the real consumer intentions to a high degree of accuracy in the predictability of promotional results has a long way yet to go.
The effort toward understanding how best to engage with the consumer has to now take center stage. Sales organizations own the trade promotion budget in most consumer products companies; but the real knowledge of the consumer is found within the corporate marketing organizations. As we see in the CGT/NPD study, consumers are augmenting their routine purchasing processes with more focus on what their dollar now buys; and the difference between knowing how to work with that intelligence and simply continuing the status quo of trade promotion planning without it is a dangerous gamble—one that costs far more now than ever before. It is incumbent upon consumer products manufacturers and their channel partners to work together to improve the ability to engage the consumer and sell the products.
There is nothing good about inflation. It sucks the wind out of the sails of the economy; but what we may see develop here is the driving force that finally enables real, effective and continual alignment between sales and marketing to enhance the ROI of trade promotion spending and leave the last several decades of failed promotions in the rear-view mirrors.
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Hand Promotion Management LLC is an independent consulting company focused on the improvement of the ROI and value of trade promotion, co-op advertising and channel marketing fund-based incentive plans of consumer products companies globally. Be sure to check out Rob Hand’s new book on trade promotion, “The Invisible Economy of Consumer Engagement,” available online everywhere, and now available as a digital ePublication.
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