The Consumer Packaged Goods (CPG) industry is one of the most dynamic industries known. Each manufacturer faces different business challenges, some internal, and some external.
Some of the internal challenges that can be presented to the manufacturer are generating new products (innovation), efficient production, brand development, new and more efficient packaging, broker administration, and effective distribution.
On the other hand, you have external challenges, such as Competitors. Depending on the category in which you participate, it is the aggressiveness that can exist within the shelf, fighting for spaces and for the attention of the consumer in order to get the sale. Consumers demand more products and more varieties. Thirty Years ago, supermarket stores stored about 7,000 Stock Keeping Units (SKUs) inside their shelves. Today, it is estimated that they can be about 50,000 SKUs, and it is estimated that about 30,000 products are released and launched each year. In addition to this, an increase in Private Equity firms investing in Food & Beverage companies has been identified. There is a large amount of money available to fund start-ups or early-stage manufacturers. In 2017, a groundbreaking 49% of the top-ranked brands belonged to small producers.
One of the most important and relevant challenges is the retailer and the strategy it carries with the products and categories of the manufacturer. Will the retailer use your products to generate more margin or profit? Will they use your products as a means to increase foot traffic within the aisles? Or for negotiating better conditions with another supplier? Do not leave aside private labels.
WINSIGHT GROCERY BUSINESS reports that private label brands have a growing advantage against national brands, 41% versus. 7.4%. In 2018, private label brands grew by 10.6% versus a drop in national brand units.
To compete and take advantage, CPGs must grow in new channels and markets, but they must continue serving well. They cannot risk losing the market share they have captured at the expense of new customers. They should not avoid investing in technology and analytics. Identifying the right SKUs to invest gives them the necessary information to compete and to keep growing market share.
Now, let’s talk about those challenges related to Trade Promotions. In my opinion, the ones we will mention are the most relevant that we have seen and that generate the greatest impact within a Trade Promotions strategy.
- The first is the ability to predict the price elasticity of demand by SKU, by retailer and by region. By doing this, the CPG manufacturer has the potential to increase its margins by 9 to 12%. This type of predictive elasticity behaves very differently from the concept we know of as the traditional Price Elasticity of demand.
- The second is to take cannibalizations and crossed elasticities into consideration. With this, up to 8% of your promotional budget can be saved. When promoting a product in a banner, it is essential to consider the effect it can generate on the sales or margin of another product. Failing to do so will be detrimental to the total result of your portfolio. You must take into account the correlation that exists not only between products or SKUs within the same line or category, but also the one that exists throughout your portfolio.
- The third challenge related to Trade Promotions is the Optimization of In & Outs volumes. This is very interesting, considering two factors: Sales Volume, which is difficult to predict in a short time that lasts the promotion of IN & Out, and the erosion of your margin when the product stays longer on the floor of the retailer. The more time your product spends on the floor, the stronger the price reduction will have to be.
Having certainty in your volume predictions for the selected promotional period between 85% and 95% will reduce your UNDERSTOCKS or the OVERSTOCKS of in & out promotions.
The fourth challenge is to be able to build or use a trade promotion optimizer tool that will allow you to make an optimization of your entire portfolio. With all your customers, you must take into account the impact that a price change of your competition can generate in your volume. At the same time, you can simulate and experiment with multiple volumes and margins generated from different price points.