Stop Wasting Promotional Money

When consumer goods manufacturers set out to improve their efficiency, they usually start with marketing and production. Trade spending--the payments they make to retailers in hopes of encouraging promotion--is almost always overlooked. Yet for improving the profitability of a consumer goods manufacturer, this is among the most important levers, up there with pricing, media spending, production costs, and distribution. Indeed, McKinsey has found that proper management of can increase a company's return on sales by two percentage points. In consumer goods, trade spending means all of a manufacturer's cash payments to grocery retailers beyond terms and conditions, such as bonuses, discounts, and advertising allowances. One example of is the central-warehouse discount; another is the second-placement fee. In all, these payments account for up to 30 percent of the costs of a typical consumer goods manufacturer (Exhibit 1). Such is the power of retailers that an absolute reduction in is hardly realistic. Competition for limited shelf space is intensifying, particularly in center-city grocery outlets with 600 to 800 square meters of selling space. More intense pressure from private labels is also weakening the position of manufacturers. In addition, more and more of them are turning away from media for product launches and toward trade-related activities (such as free sampling) that often raise spending. These higher levels of have shifted profits from manufacturers to retailers: in 1992, consumer goods producers in the United Kingdom collected about 48 percent of the total industry profit pool; by 1997, their share had fallen to 44 percent. During that period, the retailers' share grew to 49 percent, from 42 percent. The same trend can be observed in the rest of Europe. In many cases, only about half of the total payment a manufacturer makes to grocery retailers earns something definite, such as shelf space, in return. The rest of these payments are hidden price concessions. Although most manufacturers know this, the retailers' power compels them to pay up. But the high degree of variation among individual accounts in the structure of shows that manufacturers can at least increase the part of it that adds value for them (Exhibit 2, on the next page). To do so, however, a manufacturer must ascertain the profitability of each account by instituting a system of account-specific profit-and-loss statements. …