Play Big: The Consumer Packaged Goods Imperative

Retailers Have a Firm Stranglehold on the Point of SaleThe predominant channel of distribution for CPG products is through retailers. Much is said about the adversarial CPG manufacturer and retailer relationship.Justified or not, CPG manufacturers view retailers as a "choke point." Retailers effectively control all aspects of CPG distribution: new products, breadth of line, number of facings and store placement. They control pricing and promotion. Retailers control the point of sale to the consumer -- and all the information to be gleaned from the transaction. Considering that the majority of purchase decisions are made in-store, manufacturers relinquish a significant point of consumer connection to retailers.Manufacturers must learn to leverage new channel strategies (such as food service or direct-to-consumer) or this retailer conundrum will not change in the near future.The proliferation of brands and SKUs themselves have been part of manufacturers' undoing, because retail shelves are largely fixed real estate --and each new addition makes other products and brands less important. But retailers have also become more adept at their own positioning in the marketplace by differentiating themselves versus other chains, other formats and other outlets, such as restaurants. The result has been smarter merchandising, an emphasis on improved in-store experience and shrinking space available for CPG products.Retailers Are Demanding--and Getting MoreWith increased retailer scale has come greater power, and growing demands on manufacturers. Most costly has been the increased demand by retailers for manufacturing trade marketing funds. Much of these funds are used to pay for slotting or overriders, or to fund temporary (or permanent) price reductions. Manufacturers have fallen into a cycle of capitulating to these demands. Yet little if any of these trade marketing monies actually help to build or maintain a manufacturer's brand appeal with consumers, who are encouraged to focus on price. In spite of the investment, nearly 80% of the CPG industry inadequately tracks and measures trade fund performance, and 90% believe they are not highly effective in managing trade funds in general.Trade spending now accounts for 61% of a typical CPG manufacturer's marketing budget, up from 53% in 1997. This is the second-largest P&L expense for CPG companies behind cost of goods, and now represents about 16% of gross sales.18 As a result, traditional brand-building activities such as advertising and consumer promotion get squeezed.Taken from 1999 to 2001, the growth in trade spending can be described as a transfer of $16 billion from manufacturers to retailers. Surveyed CPG manufacturers believe that only half of their trade marketing monies pass through to consumers, and that as much as a quarter of trade spending is applied directly to retailers' bottom lines. Trade spending has grown into a vicious circle for manufacturers as they spend more and more to curry retailers' favour, only to devalue their own brands in the process.Retailer Store Brands are Threatening Manufacturers' BrandsThe increased strategic importance of retail store brands and private label goods is also significant to manufacturers.Retail store brands now compete with and often outplay manufacturer brands on quality and price positioning. For most shoppers, store brands and private label products have become firmly ensconced as part of their brand set. Fewer than one quarter of consumers believe that manufacturer brands are worth the extra cost to private label. Store brands have natural advantages in the future, including instant distribution, brand name relevance across categories, and growing perceptions of quality.With limited retail shelf space, these products have the effect of squeezing out space for both leading and lower tier manufacturer brands.Retailers are not out to kill CPG companies and their brands. They need manufacturers' brands to build categories and to maintain credibility with their shoppers. Consumers like choice and variety, and retailers need to emulate new product ideas in their own store brand line-up. Store brands and private label, however, are more profitable for retailers, with margins estimated nearly 10 percentage points higher than manufacturer brands. Store brand successes have been achieved across channels in categories not normally associated with commodity status: refrigerated lunches, diapers, detergents, pet food, tobacco products, snack bars, shelf-stable juices, vitamins and fragrances.Wal-Mart for instance, has leveraged its Sam's Choice and Equate brands across multiple categories, most notably in detergents, to compete against Procter & Gamble's Tide. Reports indicate that the chain's private label programme in diapers has overtaken the combined size of P&G's Pampers and Luvs brands. Wal-Mart's White Cloud brand also has a notable presence in paper goods for the retailer, and is supported with marketing.Retailers Are Playing a Strong Brand Marketing GameIn the U.S., private label has reached over $47 billion in retail sales, an all-time high. Yet, private label is more developed in Europe, and may have reached a saturation point in some countries. In an effort to further build sales, retailers are combining quality improvements with commensurate brand marketing expertise. Sainsbury's, for example, implemented a brand management structure for its private label product line to manage its brand portfolio strategically, and to bring a focus on speed, innovation and quality to the new product development process. Sainsbury's products include the Blue Parrot Cafe line targeted at children, Be Good to Yourself line for health-conscious consumers, and Taste the Difference.Additionally, premium private label lines have garnered share and higher prices across continents. Tesco leverages its more premium priced Finest line. Kroger's Private Selection line is considered one of its most successful launches ever, taking a key position in its 5,500 SKU private label line-up.25 Safeway has also been innovative with its Select line.26 Both Kroger and Safeway have built up a huge infrastructure to support their private label programmes, each with more than 40 manufacturing facilities.CPG manufacturers now are not alone in playing the packaged goods branding game. The growing marketing sophistication of retailers means that price and quality are no longer the clear differentiators between store brands and manufacturer brands. CPG companies must raise the bar for their own brands, or begin playing by a new set of rules.A Growing List of Retail DemandsDeductions (Non-payments of disputed line-item charges on a bill for merchandise) -- Manufacturers' sales and customer service departments spend considerable energy and expense resolving deductions, and non-payments have a considerable impact on manufacturer cash flow.Slotting Fees -- Manufacturers often pay fees for new distribution with the risk that new items could soon be dropped, or delisted by the retailer.Penalties and charges -- Retailers charge manufacturers penalties that range from late shipments, under-shipments, capitulate due to threat of loss of distribution or because many penalties, though numerous, are not large enough to challenge individually.Service requirements -- Many retailers rate and tier the service levels of their suppliers. Those scoring high on order-to-delivery cycle time, for example, may be given preferred status. Some retailers are beginning to demand perfect, "on-time and in-full," orders from their higher tiered suppliers.Global pricing contracts--Retailers often ask for a reward for carrying a manufacturer brand globally or regionally. In Europe, for example, this takes the form of an additional overrider payment.Global or regional promotions -- Retailers negotiate special deals on promotions that span geographies, even across multiple company-owned chains. These promotions have proven to be especially hard to execute and monitor.Custom products -- Individual retailers may demand special products, packs, or display-ready merchandise in order to differentiate themselves from other retailers.Manufacturing and distributing these custom products adds significant costs for the manufacturers.P&L contribution requirements -- A retailer may make unilateral brand merchandising decisions based on targets that have not been negotiated with the manufacturer. For instance, a shortfall in manufacturer retail sales or service levels would be considered a cost against the retailer's pre-determined targets. The retailer would then unilaterally adjust pricing and/or trade support levels within a product line or an entire product grouping in order to increase the profit contribution.Manage Each Retail Account for ProfitabilityA proper customer selling, service and solution strategy involves segmenting retailers by their revenue and profit potential, and then managing each one to capture the most value. To this extent, retail account managers must become true business managers, closely monitoring individual retailer (and class of trade) P&Ls. Salespeople may need to be retrained for this role. The first step is to base their incentives on a combination of volume and profit measures. The second step is to give them new tools to help them be more effective.These tools should help them to sell interactively, to retrieve information remotely through mobile hardware, and to automate activities such as updating promotion calendars, tracking orders and managing deductions. Also, many customer service functions can be delivered through "self-service" automated online portals and other developed applications, further freeing up time for salespeople to focus on the business of selling.Trade spending must no longer be viewed by manufacturers as the cost of doing business. Such an attitude feeds an escalating pattern of waste, complexity and inefficiency, and leads to manufacturer brand devaluation. Instead, manufacturers must assess trade spending as the primary input for analysing each retailer on a cost-to-serve basis, and then decide what further trade investments are warranted. Analysing costs-to-serve involves tallying the total costs per unit moved through a given retail customer, factoring in the costs of special pricing, supply chain resources, carried inventories, special manufacturing runs, penalties, dedicated account teams and working and non-working trade funds.Manage Trade Spending Through Discipline, Insight and ControlBeyond this, companies must effectively learn which trade promotions work and which do not for both the manufacturer and the retailer.Using strong conceptual models, trade fund ROI can be improved through disciplined, ongoing event analyses and adjustments. A scientific method should be employed where manufacturers theorise, test and refine their promotions, creating relatively advanced models that can be leveraged into the future and across the organisation.These promotional learnings can reduce costs for both the manufacturer and retailer, and improve delivery against retailer executional commitments. These learnings must be cross-fertilised among different brand, account, and channel teams--and across business units.

Play Big: The Consumer Packaged Goods Imperative

P2PI MEMBERS

JOIN P2PI

Related Images

Company

Market Segment

P2PI MEMBERS

JOIN P2PI

Related Images

Related Articles

Company

Market Segment