In March when Loblaw announced it had completed the acquisition of Shoppers Drug Mart, I read many articles where industry watchers prognosticated how great the merged company would be for Canadian consumers. My point of view was quite different.
Leading up to this moment we have seen a long trend of Canadian retailer consolidation from over 20 with scale, to 7 controlling up to 90% of sales for Canadian consumer packaged goods (CPG) companies. Over that period we have experienced cycles of retail price deflation while input costs increased, and the line of the CPG P&L that captures all manner of expenditures with customers has doubled; for many exceeding 30% of sales. Many categories within the retail environment are commoditizing as the percentage of sales that occur with promotional pricing is breaching 70%, and it takes nearly 2 years to break even on new product innovation (assuming your new product lasts that long). It’s not that Canada is becoming too costly a market to innovate within, but many Global CPG companies are assigning Canada a “profit provider” role for other regions, and Canadian owned CPG’s are looking with greater frequency to invest internationally for improved returns. Surely this is not better for Canadian consumers. The bottom line for CPG managers is that they are trading in a hyper competitive retailer environment, marked by uncertain inflationary upside and customers forced to deliver shareholder value by ‘buying’ versus ‘selling’ their products.
The outlook sees continued pressure for CPG as economic growth remains soft (1-3%) and consolidated, powerful retailers force suppliers to bear the burden of cost inflation, while demands for more trade spending increase. This pressure is expected to force progress as CPG companies strive to get the most from their trade spend, add tools to help them be more productive and master their data; ultimately allowing for investment in emerging opportunities, like the ability to directly influence shopper purchase decisions through smartphone APPs. So there is promise in the outlook as well.
However, in order to realize the promise there is a need for CPG leaders to free investment capital from trade budgets. The common refrain that ‘there are no extra funds for customer’s growing trade spend demands’ leads me to believe the industry is reaching an inflection point where business-as-usual (BAU) will no longer work. I propose CPG embrace more of a merchant banker’s mindset, shifting the approach from ‘trade spend’ (customer’s money) to ‘trade investment’ (CPG investment capital for ROI).
To concretize the mindset think about implementing these Top 10 Practices for Trade Investment Optimization:
- Focus sales teams on growing net dollars before volume.
- Commercialize a comprehensive customer segmentation that prioritizes and paces investments and corrective stances.
- Embed a post event analysis capability and discipline into the organization.
- Assume your source data is flawed and systematize contingency management.
- Instill a consistent trade investment assessment and decision methodology.
- Avoid promotion saturation (duration, depth and overlap)
- Always negotiate for customer reciprocity and mutuality.
- Set clear trade investment ‘areas of freedom’; let people make decisions within their freedom and link accountability to decision rights.
- Link trade investment to elasticity and merchandising execution.
- Align sales compensation to customer profit and ROI.
These are not easy actions to take and for both the large and small CPG organization may require a significant change initiative, but if you leap to a “tool” without first reorienting mindset, methodology and measure you can expect a slow creep back to BAU. It is time to stop talking in the language of ‘trade spend’ and begin acting with the merchant banker’s mindset of trade investment.
If you find this point of view compelling and wish to talk further, reach out to me at Lighthouse NINE Group.