Budgeting Boomerang: How today’s CPG leaders are using analytics to return more from their trade promotion investment

Topics: Finance, Budget, Leadership

At the start of 2017, we referenced Vice President of Marketing at Kaufman Hall, Abe Cohen, as saying in a CFO.com article that, “Organizations spend way too much time every year going through the annual budgeting process.” (see the original blog post) We are once again facing the budgeting season and with it CPG companies are navigating new challenges to better manage costs while spurring revenue growth.

In the same article, “Analytics CFOs’ Top Goal for 2017: Better Analysis and Reporting”, 90% of CFO’s surveyed identify using data for better decision making as a top goal. The implication: a move to analytics as a making tool will improve budgeting.

How is this going?

We are not in Kansas anymore

budget pic.pngAll it takes is one glance through the business section of any news site or newspaper to see that the Consumer Goods and Retail sectors are in transition. According to the recent Wall Street Journal article, “Kraft-Heinz Shuffles Leadership Ranks”, “Packaged food companies are dealing with weak demand.”

Couple this with the increased pressure from traditional retail trading partners to slice prices in the name of staying competitive -with discount retailers like Aldi and Lidl with their limited SKU distribution, and CPG manufacturers find themselves losing footing in a once stable marketplace.

This new reality means that CPG manufacturers cannot rely on the same strategies that once allowed them to stay afloat to sustain the revenue growth objectives of their organizations. This also puts incredible pressure on companies as they scrutinize and build their new budgets to do so with the data-driven understanding for what has worked in the past, the predictive intelligence of what the future will hold and the agility to shift when the unexpected disrupts our plan.

If we are honest with ourselves

The truth is that the CPG industry has been vulnerable to revenue-impacting shifts for some time as the practice of large investment with little oversight as a strategic approach to reach goals was commonly accepted. This is particularly true in trade promotions area where decision making has been left to “gut feeling” and “quick wins” instead of a sustainable investment strategy.

From a budgetary perspective, logic says cut trade spending and you eliminate much of the uninformed and possibly unprofitable expense. Reality says that decisions such as this fail to consider the reaction of retail partners that rely on pricing promotions to drive traffic through the aisles.  With this paradox, companies are paralyzed in their current practices for fear of upsetting the balance. In other words, what we don’t know can’t hurt us. But it does.

However, it is this same tactical approach to planning and executing trade promotions that has left a data trail that can be used to map a different future.

Informed vs Intelligent Trade Promotion Budgeting

Promotional performance data is something that CPG companies have had for a significant amount of time. In fact, as it relates to budgeting, this data has been pointed at to justify additional investment or to make generalizations about pricing. It has been used to substantiate the fear that if we don’t spend more in trade then we risk losing the volume sold during these promotions. Likewise, this same data has been used to rationalize deep discounts in the name of “making a number” stretching budgets without a quantified understanding of the return on this spending.

As companies take a more analytical approach to their business and their budgeting decisions they also transition from being informed about their spending to making intelligent investment decisions. An analytical approach to trade investment as part of a comprehensive Trade Promotion Optimization solution, includes using harmonized data (POS, Shipment and Spending) to predictively model the outcome of an event or customer plan.  These predictive plans include quantified KPIs that not only show the predicted outcome, but can be compared to budget for a real-time understanding of investment and impact prior to execution. Furthermore, the optimization capabilities of a TPO should provide the ability to apply constraint-based modeling to optimize for revenue, profit, or volume within defined manufacturer and retailer budgetary constraints.

As stated earlier, today’s CPG leaders must not only have an informed plan, but also must be able to remain agile in the face of disruption. Building this flexibility into your trade investment budget requires real-time post-event analysis as part of your Trade Promotion Optimization solution that visualizes trends to assess risk and quantifies promotional ROI for quick fact-based decisions. Having this intelligence at your fingertips means that Actual vs. Planned spending and results can be top of mind when decisions need to me made.

With this the time-consuming budgeting mentioned to at the opening of this post becomes simplified and more accurate.

Why now?

It seems illogical during a time where many CPG companies are looking for ways to trim their budget to invest in a new initiative with analytics, let alone a new technology like a Trade Promotion Optimization solution. However, the failure to make the transition to a revenue growth management approach driven by analytics means that you are preparing a future budget for a significant miss. From a competitive standpoint, a retail partnership standpoint, and a corporate growth standpoint companies have to accept that what we have always done is no longer is working. The choice is to hope the problem fixes itself or to invest in the ability to make better decisions while delivering an annuitized return of at least 3%-5% on your annual trade investment to your bottom line.

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