Customer planning and trade management: Benchmarking study

To succeed in an extremely competitive retail environment, companies in the CPG space have to make large investments in their customer planning and trade management capabilities to drive sales, capture share, convert consumers in the most profitable way possible, and form more collaborative partnerships with retailers. In Strategy&’s biannual customer planning and trade management benchmarking study, we found that a large majority of these companies believe they spend far too much on trade and trade management, to the detriment of their businesses, and are unhappy with the quality of the tools and systems available to manage this investment.

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Customer planning and trade management Benchmarking study

Contacts
Atlanta
Penny Boswell Principal +1-312-578-4883 [email protected]

Cleveland
Leslie Moeller Senior Partner +1-216-696-1767 [email protected] Steffen Lauster Partner +1-216-902-4222 [email protected] Steven Treppo Partner +1-216-696-1570 [email protected] Akshat Dubey Principal +1-216-925-4038 [email protected]

Dallas
Trey Alexander Partner +1-214-746-6506 [email protected] David Ganiear Partner +1-214-746-6512 [email protected] Hans Van Delden Partner +1-214-746-6523 [email protected]

Chicago
Paul Leinwand Senior Partner +1-312-578-4573 [email protected] KB Shriram Partner +1-312-578-4882 [email protected]

New York
Edward Landry Partner +1-212-551-6485 [email protected] Bart Sayer Partner +1-212-551-6447 [email protected]

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About the authors
Paul Leinwand is a senior partner with Strategy&’s consumer and retail practice, based in Chicago. He has more than 15 years of experience advising clients in the consumer packaged goods sector on strategy, growth, and capability building, and is an expert in developing go-to-market strategies for leading CPG companies. K.B. Shriram is a partner with Strategy&’s consumer and retail practice, based in Chicago. He has more than 13 years of experience in building growth strategies, and enabling operating models and market-facing capabilities for clients in consumer-focused industries. He is also an expert in building pricing, channel management, and customer management capabilities. Steven Treppo is a partner with Strategy&’s consumer and retail practice, based in Cleveland. He has extensive experience in the global consumer packaged goods industry, and is an expert in developing growth strategies and leading CPG companies through strategic transformations. Penny Boswell is a principal with Strategy&’s consumer and retail practice, based in Florida. She has significant experience in the consumer packaged goods industry, and is an expert in developing go-to-market strategies for leading CPG companies.

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Executive summary
To succeed in an extremely competitive retail environment, companies in the consumer packaged goods (CPG) space have to make large investments in their customer planning and trade management capabilities to drive sales, capture share, convert consumers in the most profitable way possible, and form more collaborative partnerships with retailers. Inefficient or ineffective trade management can cause companies to spend too much, without achieving the profitability they need. In Strategy&’s biannual customer planning and trade management benchmarking study, we surveyed a set of wide-ranging companies in the CPG space, from small companies to large corporations, across a variety of sectors. We asked them about their spending on trade, customer planning strategies, and how their trade agendas affect their sales forces in the field. Our study found that a large majority of these companies believe they spend far too much on trade and trade management, to the detriment of their businesses, and are unhappy with the quality of the tools and systems available to manage this investment. Leaders had best practices in common — outlined here — that have helped them outperform their competition. The insights we offer in this study can serve as a basis for any CPG company to create new funding structures, planning processes, analytics, and systems or tools in order to maximize its return on investment in trade.

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This study is a detailed examination of customer planning and trade management practices across the CPG industry
•  Our biannual customer planning and trade management benchmarking study focused on a series of objectives, including: –  Understanding the latest trends in how leading CPG companies structure and manage their customer investments –  Providing quantitative and qualitative insights from the data and several case studies –  Allowing participants to compare their performance to that of others within and across the CPG industry •  Senior executives from a wide set of companies participated by completing a quantitative survey and qualitative interviews on the following topics: –  Funding management: funding structure, transparency and disclosure, and investment management across the portfolio –  Customer planning processes: sequencing, use of supporting analytics, deployment of enabling tools, and structure of incentive programs –  Trade spending management: spending levels, processes, and tools to manage and drive efficiency •  A set of marketplace leaders were identified through benchmarking best practices and confirmed through their performance in the market: –  Leaders are equally likely to be found in the food and beverage space and in the non–food and beverage space –  Leaders are also as likely to be small companies (less than US$10 billion in revenue) as large companies (greater than $10 billion in revenue)

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A diverse set of 21 CPG manufacturers participated in the study
Participating companies Industry and size characteristics

Household care products

Food and beverage

By sector

3

2

3
Personal-care products

13 21

Conglomerates

By revenue

US$5–10 billion

US$30 billion

10
US$1–5 billion

4

4

3 21

US$10–30 billion

Note: To protect confidentiality, all participant companies, their responses, and the survey results are blinded. All quotes are from survey participants. Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis Strategy& 6

Customer planning and trade spend management remain high on the agendas of CPG manufacturers
All firms place significant emphasis on customer planning and trade spend management; food and beverage players tend to hold it as a higher priority than others Priority level of customer planning and trade spend management

70%
29% 30%

71%

Top three priority

Priority, but not top three

Food and beverage
Question: How much of a priority is customer planning and trade spend management in your organization? Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis Strategy&

Non–food and beverage

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Key areas of focus range from tactical to strategic issues, each of which puts pressure on the traditional role of the sales force
•  Most CPG companies are making or planning investments in the areas of customer planning and trade management •  Though increases in trade spending have leveled off since 2010, manufacturers remain unsatisfied with the overall level of trade spending; however, meaningful reductions in spending remain elusive •  Development of new channels such as e-commerce continues to pressure manufacturer programs and product portfolios •  Long-term strategic planning with customers (two or more years out) remains a yet unrealized goal for many •  Enabling long-term planning also requires a deeper level of account planning that puts more focus on local decision making •  Tools such as trade promotion management (TPM), post-event analysis, and trade optimization are available to support increased effectiveness of customer investments and support planning •  Many of these changes put pressure on the traditional role and skill set of sales professionals, requiring that they develop financial and analytical acumen in addition to general business and negotiation skills

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Dissatisfaction remains high across many areas of customer planning and trade management

1 2 3 4
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Spending efficiency/effectiveness 85% of survey respondents feel that current spending is inappropriately high for the long-term health of their business

Funding allocation More than 50% of surveyed companies feel their trade funding program is ineffective

Customer planning 70% of participants report they are unsatisfied with their current approach to customer planning

Systems and tools Respondents are largely dissatisfied, with 70% unsatisfied with current planning and execution tools and 55% unsatisfied with current trade tools

Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis 9

1 Spending efficiency effectiveness

Overall trade spending levels were the same in 2012 and in 2010, but remained significantly higher than in 2008
Industry trade benchmarks Trade-to-sales ratio, 2008–12
Trade-to-sales ratio 40% Maximum 35% 30% 25% 20% 18.0% 15% 10% 5% 14.0% 18.0% Third quartile Median First quartile Minimum 2008 2010 2012

Discussion
•  Only 40% of respondents indicated they reduced total trade spending over the past year; the average decrease was less than 2 percentage points •  A majority of respondents feel trade spending remains too high, although rates have stayed flat •  Those who have successfully reduced trade levels demonstrate a holistic approach to customer planning and show organizational discipline in resisting customer pressure while focusing on brand building and innovation •  Variability in trade rates reflects not only spending levels, but also pricing strategies (e.g., price-up/spend-back)

Question: What is your current trade-to-sales ratio? Note: 2012 median: food and beverage, 20.6%; non–food and beverage, 16.2%. Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis Strategy& 10

2 Funding allocation

The design of a company’s funding structure is key
Allocation method
Full accrual 47% Mixed, with less than 20% fixed 29% Mixed, with 20% or more fixed 18% Full fixed 6%

Customer transparency
Fully transparent 12% Mostly transparent1 41% Somewhat transparent1 6% Not transparent 41%

Basis of variation
Historical spending 6% Needed to meet revenue targets 24% Performance criteria 71%

•  “Performance is defined for each customer and outlined in the joint business plan for activities that will drive attractive ROI” •  “A consistent and formulaic segmentation model is used to establish tiers and determine rates” •  Increasing the weight of future performance—compared to historical performance—was a stated goal of many participants; a few companies have begun to build this into their structures

Performance measure
Outcome metrics 8% Activity metrics 69% Other 23%

Questions: Are trade funding dollars allocated to customers via fixed dollar amounts or accrual rates? If funding varies, what is the primary basis of variation? If some portion varies based on performance, how do you define and measure performance? To what extent is your funding program disclosed to customers such that they understand how both they and others earn the funding they earn? 1. Mostly transparent = customers know how they and others earn 75% of their total funding. Somewhat transparent = customers know how they and others earn 50% of their total funding. Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis Strategy& 11

3 Customer planning

Though some companies pay more attention to the base business, most focus their planning efforts on promotion and merchandising
Only 35% of respondents develop plans with a systematic assessment of base growth levers for a majority of accounts Respondents’ primary planning approaches

6%

Total plan only

High-level base and high-level promo plan

6%

•  Most companies say they’re frustrated with their inability to shift money and focus to consumer advertising and other base-driving activities •  However, many companies focus planning time on promotion and merchandising for a majority of accounts •  Increasing rigor around base business planning can unlock significant untapped growth potential

Discussion Discussion

35%

Detailed base and Detailed promo plan

53%

High-level base and detailed promo plan

Question: What percentage of your total sales is made up of customers who are planned for using this approaches below (not planned at customer level, total plan only, high-level base + high-level promotion, high-level base + detailed promotion, detailed base + detailed promotion)? Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis Strategy& 12

4 Systems and tools

The different systems and tools that make up the customer planning and trade management ecosystem should be integrated
Customer planning and trade management ecosystem

Discussion
•  More than two-thirds of respondents indicated lack of usability and integration across tools as key focus areas for the future –  “(Our systems) are not all the way there because you have your ‘swivel tool’ to implement plan into TPM system” –  “In the future, we expect more seamless integration between previously disparate tools (e.g., post-event and TPM)”

Predictive/trade promotion optimization (TPO) Post-event analysis (PEA)

Scenario planning Planning Promotion management and execution Trade promotion management

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4 Systems and tools

Many companies have implemented execution systems and are now looking to enhance their planning capabilities
Trade promotion management (TPM) systems Level of robustness

Scenario planning Planning

No 35% High-level or total plan only 12% Pay event bills 100%

Yes (largely Excel-based/offline) 65% High-level base, Detailed promotion 35% Visibility into funding checkbook 94% Detailed base and promotion 53% Actualize base performance 76% Capture & report consumption 47%

•  Most companies have implemented foundational TPM capabilities •  More robust TPM capabilities focus on ongoing plan management and actualization •  More advanced systems that enable high-end analytics are underdeveloped; money is being left on the table

Promotion management and execution

Capture & report in-year adjustments 88%

No 53% No 12% No 24%

No 6% Increasing Robustness

Questions: Which of the capabilities listed below do your customer plan execution systems perform? What percentage of your total sales is made up of customers who are planned for using the approaches below? Is there a primary planning tool used by the field sales organization to build the plan? What percentage of your total sales is made up of customers for which you have tools that enable scenario planning and predictive analytics? Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis Strategy& 14

Despite these challenges, a clear set of leaders have emerged and are reaping the financial benefits of their trade management
•  A set of market leaders were identified based on survey responses and an assessment of financial performance •  The specific practices of leaders were selected based on our more than 20 years of experience in working with and leading customer planning and trade management transformations •  Of the 21 companies that participated, about 40% were identified as leaders •  However, no one company was found to fully employ all best practices, suggesting opportunities for improvement for all •  In addition, some capability areas remain largely untapped across the marketplace (e.g., predictive analytics, scenario planning, ROI of EDLP) Leaders in customer planning and trade management show stronger financial performance Annualized total shareholder return, 2009–121

+21% TSR 13.9% 11.5%

Leaders

All others

1. Excludes non–publicly traded firms and firms without sufficient trading history (<20% of respondents). Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Capital IQ, Strategy& analysis Strategy& 15

These leaders excel at a common set of practices

Spending efficiency/ effectiveness

•  Leaders systematically measure and track ROI on a majority of their promotion trade spending •  As a result, these companies have realized demonstrable improvement in the profitability of their trade spending •  A majority of leaders’ funding programs are based on objective performance criteria, as opposed to negotiated spending levels needed to achieve specific revenue targets •  Leaders are largely transparent about their funding program criteria, citing an ability to better align objectives and build trust with retailer partners •  Leaders overwhelmingly focus on total volume planning, enabled by methodical processes that explicitly consider a wide range of base volume levers •  Individual or team net revenue and profit performance is the focus of field sales incentive plans often cited as a critical enabler of better, more aggressive planning •  Leaders have invested in a comprehensive suite of systems and tools to enable end-to-end customer planning and trade management •  These investments center on simplifying the process for sales through better integration

Funding allocation

Customer planning

Systems and tools

Source: Strategy& Customer Planning and Trade Management Benchmarking Study, Strategy& analysis Strategy& 16

Participants expect the future of customer planning and trade management to be more complex, with better tools and capabilities
Strategic focus and reliance on trade “We’ll get better at knowing what and who provides strong ROI and divert our resources there. This will help us shift our reliance from trade to consumer advertising, innovation, etc.” “[Joint business planning] needs to be about the longer term. We will need to learn how to be comfortable [with plans that are] tight near in but have greater variability and more unknowns further out.”

Channel multiplication “E-commerce could really change the game. I could see a day where trade as we know it goes away and really becomes much more controlled by the manufacturer.” “Focusing on the top customers won’t deliver the growth we need. We have to go deeper and broader in our [joint business planning].”

Simplification and integration “Trade will get simpler. Retailers will push us toward net cost versus different funding buckets.” “There will be more options for tools, not just SAP or CAS. [They] will be fully integrated, real time, more flexible, and tailored to our needs.”

Role of the sales professional “Sales reps need to manage more of the P&L. This will require they have more specific insights around what happened and why, essentially closing the loop on planning.” “Knowing the customer will become more important. We’ll want the best ‘milkman’ who really knows their market and can bring this expertise back to our brand teams.”

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Key takeaways
This study offers insights on best practices in the various areas related to customer planning and trade management; CPG companies can use these insights to help themselves develop an agenda to improve their overall customer planning and trade management capabilities, and to drive improved value across their enterprise.

Best practices
•  Spending efficiency/effectiveness: Companies are increasingly shifting their focus toward measuring and tracking ROI, and then employing concerted efforts to improve the effectiveness of their spend •  Funding allocation: Companies are moving toward objective, performance-based criteria, and are increasingly becoming transparent about their intentions with customers to increase collaboration •  Customer planning: Companies are allocating the focus required to build robust base-volume plans in addition to incremental, leading up to full-volume plans; they’ve also adjusted field sales incentives to include net sales and margin metrics to focus on delivery •  Systems and tools: Companies have invested in a comprehensive suite of systems and tools to enable end-to-end customer planning and trade management It is important to note that no one company exhibits all best practices, nor are companies of any particular size more likely than others to have best practices in any of these areas. This means that practically all CPG manufacturers have at least some opportunity to enhance their capabilities.

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