Posted by Bud Hilton
In a recent foodservice conference someone made a case that manufacturers’ expenditures toward the trade should be considered “investment” not “spend.” An executive with a very large food manufacturer made the statement . . . “Don’t try to kid yourselves, most of it is spend, not investment.” When prompted to elaborate, his position was that their company seemed to have an almost open-checkbook policy, as opposed to a planned marketing spend approach. He went on to say that “if the customer asked for money we always seem to give it to them with little concern for profitability or case growth in return, they have become that powerful.”
In separate one-on-one conversation with him I began to understand and even agree with what he meant. So, let me take a stab at it.
There are basically two types of Trade Spend in which everything else can be grouped:
- Promotional spend – Usually client manufacturer directed. Generally, allowances related to and in exchange for volume growth, SKU additions, additional unit compliance, etc.
- Demand spend – When a customer (distributor or operator) asks for additional rebate dollars to be treated as a price reduction (pay-to-play) with no promise of additional cases of business.
First let’s look at Demand Spend. Many years ago non-chain contracted business (street business) was upwards of 70% of the manufacturers’ volume, very profitable and generally had some longevity. Over the years the huge growth in chain/contracted business has almost caused a “flip” in that equation with most manufacturers stating that pure multi-unit business is in excess of 60% of their business, with substantial price reductions tied to it and in most cases no promise of increased volume activity.
This pendulum has swung so far towards this group and it has become so large and powerful that they can place some very demanding mandates on control of the manufacturer and their distributor. Industry reports show that while this group represents over 60% of the volume, they account for only about 15-18% of the available profit . . . and they keep demanding more pay-to-play money!
So, how can manufacturers grow with these chain groups?
Compliance - In most cases studied, large chains generally DO NOT have 100% participation of their units on a manufacturer’s programs and/or total SKUs offered. Until recently, manufacturers had very primitive means to identify non-complying units because operators were hesitant to divulge such information, reporting was very slow forthcoming, or manufacturers did not have the “teeth” in their programs to mandate reporting.
Verification – It has become an almost “accepted practice” for manufacturers to pay what the customer asks with either loose spot checking or NO verification at all of the customers’ claims. Again, manufacturers had very poor systems to collect and verify these activities. When this business was smaller it, of course, mattered less. When much of the rebate portion of this business was off-invoice or a direct rebate with proof of purchase, it was somewhat easier to deal with. With chain growth and the onset of “deviated pricing," creating complicated bill-backs to the distributor (a third party), this practice of claim “pick & pay” has become error prone and more costly to all parties.
Here are some facts noted from industry surveys and from companies actively involved in trade spend claim processing:
1 in every 4 claim received is in error of the original agreement
Errors caught through proper verification will improve your ROI savings >15%
Manufacturers’ “soft-cost” (administrative) is generally >3% of your trade spend AND CAN BE REDUCED OR ELIMINATED!
Think of what you could do if you could identify, save and re-deploy these funds . . .
You could spend them on number one, above . . . Promotional Activity, with the remaining operators that may offer some high profitability opportunities. The local leverage operators (LLO’s) are the next tier of high volume and powerful operators, made up of small chains and large independents which account for an additional 15-20% of the business. Finally, the remaining street operators are large in numbers, smaller in cases per unit, and offer purchase loyalty.
Today, there are companies that offer alternative applications and systems to accomplish things we have been discussing. Maybe it is time that you look into the opportunities available through improved data visibility and accurate trade spend administration.