Estimates of consumer packaged goods sales through the retail channel are something like $1.4 trillion annually. Consumer packaged goods (CPG) are mainly the packaged food products we buy, the health and beauty aids, the general merchandise and the household products that fill our shelves. They are consumed regularly, mass-produced, heavily branded and marketed with a very sophisticated understanding of consumer behavior. Think Coca-Cola, Tide or Rice Krispies.
The nature of consumer product marketing today, however, is vastly different than it was even 10 years ago. Long gone is the golden era of the '50s, '60s and '70s when CPG manufacturers lived in a sparkling world in which they made product, ran advertising and middle-America came running. CPG companies leveraged the power of their brands and their relationships with consumers to spin off new products, develop new lines and brands and capture dominant market share.
Now, CPG companies must contend with a variety of new retail channels--supercenters, warehouse clubs and category killers to name a few. On top of that, consumer markets are fragmented, and consumers know nothing of brand loyalty. It's a world turned upside down by powerful retailers who own the real estate, market their own brands and may soon conquer the world.
Not that it's been a sock hop for retailers. The early ability of WalMart to leverage its size and offer the lowest prices to consumers put tremendous pressure on other retailers to develop similar volume buying power and efficiency. In desperation, supermarkets and drug chains consolidated and continue to do so today. Safeway bought American stores. Rite Aid and CVS grew as if on steroids. In France, Carrefour merged with Promodes. Meanwhile, European retail companies like Ahold acquired chains up and down the Atlantic and beyond. Then there's the Internet.
The immediate result of the merger and acquisition activity is that there are simply fewer customers. A few years ago there were 25 or so major retail chains; today the number is closer to half that. What this means for CPG manufacturers is that smaller numbers of customers represent a larger share of their business. There are rumors, for example, that WalMart alone makes up nearly a third of Procter & Gamble's sales.
This consolidation tilts the balance of power in the industry. Retailers are now able to establish significant requirements for companies to work with them. To keep products on the shelf, CPG manufacturers have to prove, through category management or other optimization techniques, that their product will earn its keep.
"In the past, many CPG manufacturers would develop a product in a standard format, a mass format and be able to define the requirements--here are the products, the sizes, the dates, the terms, the discounts and the off-invoice," says Dennis Garman, a CPG industry specialist and segment principal for integration services at IBM. Today, it's not unusual for retailers to make demands for products, case and pack sizes or pallet configurations that fit their unique business model.
Reengineering the Supply Chain
Closer alignment of business processes is also the child of a calculated effort to reengineer the supply chain to focus more directly on consumer demand. In the early '90s, manufacturers, retailers, wholesalers and brokers launched an industry-wide initiative called efficient consumer response (ECR). The program was intended to bring greater efficiency to business functions such as logistics, promotions and new item introductions. By cooperating to develop an efficient demand chain, all parties would win. Rather than pushing product at retailers, manufacturers would replenish according to consumer demand. How well they could marry would define the competitive advantage of their demand chain.
Since then, great strides were made as all sides began sharing data to improve supply-chain management. There were big returns on ERP solutions like software from PeopleSoft and SAP, which help take gross inefficiencies out of production and distribution processes.
Now that the big rewards from reengineering the supply chain have been achieved, the focus has shifted to getting a better return on the sales side of the business. Surprisingly, billion-dollar CPG manufacturers don't have the most sophisticated sales technology. "I do think that based upon what we've seen in the last three years, the CPG industry in general does lag some other industries from an adoption of technology in the front office from an integrated perspective," says Bill Berenger of MEI, a supplier of field force management solutions. "A lot of them use spreadsheets, have e-mail and presentation software, but very few of them have yet integrated trade promotion and sales force automation application software."
This isn't to say that there hasn't been a flood of new systems into CPG companies, designed to address their new business requirements. But now companies want a much clearer picture of what's working and what's not. More specifically, they want to understand better what's happening in the field and what kind of return they are getting for their marketing efforts.
Measuring ROI in Category Management
Category management is a cooperative retailer-manufacturer process of managing each category of product as an independent business unit. It is one of the recommended ECR practices and has become a cornerstone of supermarket retailing. Categories are assigned roles within the store such as "routine" or "convenience" and the category management team tries to identify the most profitable assortment of products, types, brands and sizes that meet consumer demand in that category. Finding the mix could mean raising sales 5 percent or more.
One common desire, however, is to get more return on the resources devoted to category management. The work is time-consuming and laborious. "One of the biggest weaknesses of the tools and all the category management work is that the implementation of category management still significantly lags behind the planning piece," says Paul Weitzel, a director at Willard Bishop Consulting. "We're spending 80 percent of our time on planning and 20 percent on execution. We've got to reverse that. That's really the goal--to make category management more tactical and less strategic. We need to get to the shelf and get more changes happening at the shelf."
Willard Bishop Consulting's clients include many of the top CPG manufacturers in the country, including Coca-Cola, Frito-Lay and Kraft. One of the things dozens of those companies are interested in today is superimposing the concept of activity-based costing on category management. Activity-based costing (ABC) is the brainchild of the accounting industry and is a method of assigning costs to individual business objects and processes. In this case, it's applied to the costs of implementing new category management plans. By measuring the effectiveness of various possible category plans and their implementation costs, manufacturers and retailers can better understand the return on the improvement, or their true profit.
starting with a third-party shelf-space management program, such as the industry-leading Apollo or InterCept applications, the company adds its ABC modeling tool--Category Profit Cost Model--and an assortment tool called MixMaster. That combination allows the system to recommend exactly how many products of a brand or flavor the category needs based on the role of the category, sales, space and true profits as identified by ABC.
To complete this understanding of profitability, Willard Bishop Consulting applies a third tool called Reset Analyzer to the category plan. "We went out and studied a reset like we do an ABC model," explains Weitzel. "We studied how long it took to build the planogram, and how long it took to drive to the store, reset the store, do all the auditing work and all of the administrative work." This analysis helps category managers determine the total cost of making the changes, the incremental sales and gross profits from the improvement, incremental costs and finally the ROI and payback from resetting that category.
Measuring Trade Promotions
Maybe because of the staggering sums of money spent on it, trade promotion is becoming another one of the most closely watched areas today. "Billions of dollars, about $75 billion as of about two years ago, are being spent on trade fund performance with really inconsistent systems on how to manage it, track it and value that performance," notes IBM's Garman. Understanding where the returns come from could help make these billions more productive. The issue of retailer consolidation looms ominously as well. "Instead of charging $75,000 to $100,000 for a specific marketplace, [retail chains] are going to say, ‘Give us a million dollars, and we will put you in our national coupon book,'" predicts Brian Burchfield, director of sales at RW3 Technologies, a maker of field reporting systems for CPG vendors. The global retailers are also making their influence felt, he adds. "Ahold [a Dutch retail holding company] will not settle for a 1.5 percent or 2 percent margin like the traditional U.S. retailer typically satisfies themselves with. If you look at Europe, I believe their margins are closer to 4 percent. You look at Australia, and their margins are closer to 3.0 or 3.5 percent. Companies like Ahold are going to come over here and expect the same. That pressure is going to be put on manufacturers to come up with more money in terms of promotions, new items and distribution. I even hear that some retailers are deeming some items to be a failure after only a six-week evaluation. In order to keep it, they are asking the manufacturers to pay a monthly fee."
With costs for launching a program going through the roof, companies need to quantify how well a promotion will do and how much of a lift it will deliver. Some CPG manufacturers, including ConAgra, Lipton and General Mills use Promomax software from Applied Information for Marketing (AIM) for this planning and trade strategy development.
"Promomax is a tool that enables people to build fact-based presentations and get more information in a user-friendly form to the folks in the field," says AIM Senior Vice President John Manuli. By selecting certain items, accounts, tactics, price points, discount levels and profitability goals, the system enables marketers to develop promotional scenarios and identify the tactics that will produce the most lift. General Mills, for example, uses it to determine ROI across its many markets and accounts and to determine the return for different promotion conditions and prices.
An important part of AIM's system is cleaning the data as well as complementing it with integrated reports from the enterprise and the field. "A basic part of what we do is create a knowledge base," explains Manuli. "We go beyond just scanner data because we believe that is insufficient for the fact-based selling that people need to be engaged in. So we also include in this knowledge base the client's own shipment data and a lot of the product, financial and other data."
Assembling many sources of data in an easy-to-use way relieves people of having to go from source to source as they try to put together a plan. Also, when more data sources are integrated, users are more likely to discover insights they might otherwise have misinterpreted. A large sale during a promotion, for example, may mean that the products are moving. But combine that with scanner data, and it may reveal the retailer or wholesaler was taking advantage of the discount for a future time or another market.
"With our software, the user can pull up information where there is a direct comparison between the retail sale as reported in scanner data and the shipment data," Manuli explains. "So it's very easy to see where there has been a forward buy or diversion, which is really an important issue for the sales force."
Measuring Retail Compliance
Too often there's a gap between the best-planned business objectives and their implementation. "Planograms in the store don't look like category plans," laments Weitzel. "Category plans don't get implemented. Things get behind. Things don't get done. People agree to change but they don't." For $75 billion, you'd expect more. "The problem is we're not getting as much bang for our buck as we had hoped," he adds. "We're going out and doing a lot of the work. We're doing analysis. We're buying fancy tools, but we still can't get the shelf changed."
"Retail execution is becoming more and more important in the marketplace, especially as retailers are taking more promotional funds from manufacturers," says Burchfield. "And the manufacturers, because the retailers are getting larger and larger, really need to line up instead of geographically, more into customer teams and manage the business not only from an account perspective, but also from a retail store-level execution sense." There has to be a closed loop within which customer-specific plans are developed, executed and evaluated. Knowing just what the in-store conditions are helps an enterprise respond more efficiently to actual demand.
In-store reporting tools for the field force serve that function. "Retailers may say they are going to get you on the shelf," Burchfield notes, "but the majority of the time, they don't even know what's on display." Establishing two-way communication between headquarters and the retail field staff is the way to address this problem, feed this information back to the enterprise and respond to it. Coordinating field activities is important too. Molson Breweries of Toronto, for example, has turned to MEI for its Trade Promotion Management and Merchandising Activity Management software. The solution enables field sales, marketing and management at the company to exchange information in order to schedule trade promotions and coordinate retail priorities for their field representatives.
"Speed to shelf is a critical thing," according to Burchfield, "especially because you are paying a huge amount of money for slotting fees to get on that shelf, and you are spending huge amounts of money for marketing--TV, ads and FSI coupons--to make that item successful." If products are not on the shelf, consumers throw away their coupon, says Burchfield. "Now that retailers are starting to explore that charge for maintaining an item on a shelf due to its struggle in sales, to ensure the item is there initially is very, very important. RW3 systems allow headquarters account managers to have immediate access to field-level conditions either via the World Wide Web or integrated into their internal systems."
Field reporting systems are important strategically for the timeliness with which they deliver information as well as the quality of the information. Some traditionally popular syndicators of scan data fall short of the accelerated needs of CPG clients. Burchfield recalls the lack of control over promotion funds before more timely field solutions were available. "What you saw were manufacturers measuring execution with an IRI and or a Nielsen sample-based audit," says Burchfield. "All of their promotion information was sample-based. The problem with that is, number one, it is sample-based and no one has any idea what stores they are sampling in that market or for that customer. When you get the information, it's four to six weeks old. By that point in time, the retailer has already deducted those promotional funds from the invoice. And typically, a retailer will not go back and clear up the books."
AIM hears the clock ticking too. "People are integrating more data and consumer information. The other thing is that the cycle that people are working on has sped up. Since we do data processing," says Manuli "it's forced us to compress our timetable for delivery."
The need for speed is across the board, as IBM's Garman explains. "What we're finding is that more and more sales force automation applications are able to support looking at how stores are complying with promotions. The key factor around that is speed. We've worked with some clients for which call reporting systems took four to five weeks to recap. They need it in 24 hours or less. Because if you have a one-week promotion and you don't have a feel for what's happening out in the stores if it's not selling as you planned. It could make or break a particular event. It could represent wasted dollars."
The pace of change that brought this industry to where it is today isn't likely to abate anytime soon. Instead, globalization, new technologies and e-retailing will increase the rate of change and continue to raise the heart rates of many in the industry. The key to being successful for CPG manufacturers, however, lies in developing systems that will not only support the expectations of their global retail partners but ensure their profits across the board.