Associate Partner at IBM – Salesforce at the scale of IBM
Originally published on November 4, 2022
Part 1: Is improving Trade Promotions effectiveness the last chance to avoid category commoditisation?
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 & promotion activity and 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)
Many 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:
- 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?
- 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?
- 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?
Part 2: The main weapon against every day low price – Strategic use of promotion investment.
We have a big challenge in front of us. Economy is slowing down and pointing towards recession in most geographies, which, with cost of living already sky rocketing, point at soppers having to re-evaluate their baskets, and brands having to fight some tough shelf battles.
Of course, the temptation to cutting 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 end with total category commoditisation.
And 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 tends down, which points consumers to buying more private labels; on the other hand this causes retailer costs to go up, as they both see trade investment reduce and increase their own marketing & R&D efforts.
The net-net of this is the dystopian reality I pictured in my previous post. 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, and the investment burden to cultivate & differentiate their brand moves to the retailers – it becomes a category by category “Sainsburys vs Tesco” battle and the stakes/losses become bigger for them:
- This move drives retailer cost pressures up, as they need to create differentiation in their private label vs competitor retailer AND they would lose a big chunk of the trade funds they rely on today for category promotion (because why would brands fund growth of private labels when their share of wallet & margins are in decline as they lose their differentiation)
- But also, the fight moves from “driving category decisions in store” to “driving which store I shop in,” so the potential losses move from margin points when shopper selects brand A vs premium brand within the category in my store, to losing the full basket in favour of retailer with better private label brands.
A potential consequence is that this could only drive private label prices up. And guess what, the loser would always ends up being the consumer, with a smaller choice, less innovation and higher prices for lesser value.
This “dystopian future” is not really that far away. According to a recent IRI study, up to 60% of shoppers1 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% rate them higher than they rate the big brands! (research from IRI here https://lnkd.in/e7GNxm3Q).
So given the answer is neither “stay as is” nor “keep lowering prices further,” there’s only one feasible alternative: It’s running better promotions.
“Thanks genius – this is literally what our teams currently try and do day in and day out” I hear some of you say with a big load of sarcasm.
I hear you – and I definitely don’t claim to be carrying a silver bullet, and I don’t think it’s going to be a simple or easy process. However, there is definitely one key thing that in my view brands need to be doing: Be laser focused on choosing the right promotions where it matters most, enabling loyalty or discouraging competition switches.
It is critical to ensure the right data is available from the outset – this means putting together the right market and consumer insights, combined with sell in and sell out data, driving 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 very easily said, but “the devil is in the action plan” – It all pivots on having the right data, at the right time to drive the right insight & the right action, underpinned by the right processes that streamlined action and allow for automation, quick processing and eliminate superfluous activity – siloed, disconnected data sources and processes simply won’t cut it any more.
But that’s the subject of my next article – where I plan to explore the key success factors to future proof your approach to trade promotion management that focuses on “running promotions better.”
Part 3: Evolving Trade Promotion Management – nobody said it was simple.
Over the last few weeks, we’ve looked at some of the challenges brands face in the current inflationary times and how private label growth could be detrimental for all parties in the long run, as it would reduce the ability for brands to invest in trade and move the category promotion funding burden completely to the retailers; as well as reduce choice for the shopper. Although, it is worth remembering that private labels are typically more profitable for the retailer and can drive customer loyalty to the retailer.
In the last post we talked about 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, execute and monitor promotion success, this is not 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 trying 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 which, they work hard to make sense of so they can negotiate the next stage of growth with their buyer (while of course, 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, to both inform those front office negotiations, and capture the output of such negotiation to enable continuous volume forecasts, while also interpreting the results “after the facts” 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), but very often the Key Account Managers carry a lot of the weight and still relay on disjointed inputs pulled together into excel 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, resulting on 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 my 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 – as long as brands need to rely on disconnected or incomplete data sources processes will continue to break along the way
- Gaining efficiencies in the processes can free out capital that can be re-invested in the trade promotion cycle, which combined with strategic alignment and better use of data, would enable higher growth rates for the manufacturer and the category across the board.
In my last article in this series, I will explore the role of modern technologies in supporting these three key imperatives – we are at a moment in time in which technologies like cloud and AI can help accelerate alignment, identify process efficiencies, and democratise access to end-to-end data.
Conclusion: Transform or struggle: Modern TPM can only be achieved with modern technologies at its core.
Over the last few weeks, we have been exploring how the current economic pressures are a contributing factor to the growth of private labels across most categories, and how this will unavoidably impact the strategies brands take in the coming month to grow (or at a minimum maintain) their positions.
We also talked about how price wars wouldn’t be beneficial for anyone – perhaps they would lead to short term share gains but would ultimately impact the manufacturer’s ability to invest on innovation and category development, and as such, be detrimental to all parties (shoppers, manufacturers, and retailers).
We concluded that the answer had to go through both “running better promotions” that deliver both brand and category “sticky” growth, and “running promotions better”, ensuring the end-to-end processes from the front through middle and into the back office are running efficiently and in the same direction – This should be the focus of all commercial and revenue growth teams.
To achieve these two goals, we 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 focused.
- Lightweight: Flexible and componentised platforms that can scale with the business and are easily deployable, and that are based on no-code or low-code technologies that further simplify their deployment.
- Cloud based: Not only do cloud infrastructures accelerate time to value, but they offer lower cost of ownership too. This allows you to execute fast, learn even faster.
- AI first: Leverage technologies that have AI engines that allow you to find patterns where there aren’t obvious ones, and predict outcomes by digesting vast amounts of data. Target model scenarios that humans would take weeks if not years to identify.
- API focused: Target an architecture that is composable and reusable, with loosely coupled integrations that enable flexibility and democratises access to rich and complete data at point of use. Make sure your whole organisation sees the same data at the same time.
We’ve said this in previous posts: This 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.
The combination of the right business strategy, the right technology decisions, the right implementation partner, the right change management and talent transformation strategies, is the only way to de-risk this undertaking – and IBM, in partnership with Salesforce and our other strategic alliances, is best placed to help you.