By Tim Powell, Managing Director
Trade spending, for most manufacturers, is the second-largest go-to-market expense after cost of goods sold, typically higher than the cost of sales and marketing forces combined. Yet many companies struggle to develop a strategy for measuring and assessing their trade spending effectiveness. While there is a high participation rate, manufacturers report low satisfaction.
There are two types of trade spending – performance and participation:
- Performance Spend: is intended to produce a return of investment and a form of measurable performance. These include case allowances, new product incentives, growth programs, price promotions, spiffs and cash discounts.
- Participation Spending: is “pay to play” and does not necessarily work in favor of the manufacturer but is a cost of reaching customers. These include food show booth fees, marketing clubs, flyer fees, sales access fees, publication support and contests.
According to manufacturers…
- The most effective trade promotions: new product incentives, case allowances, growth programs, DSR contests, DSR spiffs and price promotion. (IFDA)
- The least effective trade promotions: food show participation, sheltered income, food show allowances, lump sum and cash discounts. (IFDA)
Because trade spending is complicated, there are a number of issues surrounding it that need to be addressed by any “push-through” food company.
- Trade Spending an Enigma: In a round table FSIP hosted in June, most food executives mentioned promotion, slotting fees, high expenditures and pay-to-play to describe trade spending. One participant added it was a “purposely puzzling.”
- Information Asymmetry: Distributors often have the upper hand in terms of trade because few manufacturers know how the monies are being spent and how effective the programs are.
- Organizational Ownership of Trade: While many manufacturers do have an individual responsible for trade – which may fall under marketing – the tasks involved are detailed and complex. It is difficult to find an individual/department to take on the task of handling trade spending as it requires exorbitant time and resources. The use of analytics varies widely.
- Effectiveness of Trade Spending is a Concern: Applications exist to track trade, such as Blacksmith trade promotion management and optimization software (an SaaS solutions build). However, these are very expensive and salespeople need to be continuously trained.
- Business Reviews are Becoming More Frequent: Total spend continues to primarily flow to/through the distributor, despite efforts to influence and reach the operator. Sysco and US Foods are increasing business reviews to weed out suppliers of its own choosing (or so it seems).
Information is power, whether that means understanding where a manufacturer lies on the leverage scale or conducting post-promotion analysis.
Fact-based negotiations have the highest likelihood of producing the best and fairest results.
Keep in mind that while training can help staff understand negotiation better, it is still not guaranteed to make them better practitioners. Manufacturers who are analyzing their performance and finding they are not getting sound results are in a stronger position to rationally renegotiate when they receive requests for additional trade dollars.
NEED HELP NAVIGATING TRADE SPENDING’S CLOUDY WATERS? Foodservice IP can assist you with a strategic and effective plan. Contact Tim Powell to learn more.