Trade spend outlays continue to dominate the sales & marketing budgets of foodservice manufacturers. This is despite a persistently high level of dissatisfaction with the cumbersome administrative burdens of trade spend programs and the lack of measurable results. Manufacturers want a clearer understanding of how targeted trade promotions influence downstream demand, but instead they become enmeshed in unproductive administrative paperwork such as resolving and processing duplicate claims.
The current trade spend paradigm also does not work in the best interests of distributors. While they do benefit in the short term from the financial impact of the trade dollars they receive from their suppliers, distributors do not obtain insights from current trade spend practices that could help them more effectively grow demand across products and categories. Of more benefit would be product and assortment education from their suppliers, enabling them to identify tangible ways to tap into new sources of sales growth.
Category management, a standard practice in many retail sectors that is now gaining currency in foodservice, can be a way to attain this knowledge, use it to effectively drive growth for both manufacturers and distributors, and ultimately to phase out the unproductive aspects of the current trade spend paradigm.
Category management in foodservice can offer the following value proposition:
• A collaborative platform between manufacturers and distributors based on shared investment of time and resources, as opposed to the general mistrust that permeates trade spend relations
• Combining knowledge about products, customers and assortment from the manufacturers with transaction-specific insights about timing, location and volume from the distributors to create a holistic view of demand at the micromarket level of every product and every customer
• Advanced technology to facilitate in-depth analysis and predictive recommendations around all key demand levers e.g. pricing, promotions, assortment, and purchase timing
From “Pay to Play” to “Category Captain”
The common view today in foodservice is that trade dollars are for all intents and purposes a “pay to play” ante required for manufacturers to get their products through distribution channels into the establishments of restaurants and other foodservice operators. These trade dollars are the biggest line item expense after COGS on manufacturers’ income statements, and thus comprise a commensurately large revenue item for their distribution partners. While the conventional wisdom may be that the current system is too entrenched to change, the fact is that a well-executed collaborative category management program can be far more effective than traditional trade spend in identifying the best uses of promotional budgets and delivering on them. Here the manufacturer is not simply cutting a check for some loosely-defined trade campaign and hoping for the best, but instead is taking a more active role in educating, guiding and supporting the distribution partner to increase sales. The vehicle through which the manufacturer can take on this active role is that of category manager, also known as category captain.
In taking on the role of category captain the manufacturer is essentially investing its own time and resources into helping the distributor achieve stated performance objectives. Distributors face a significant challenge in improving category performance. They lack the in-house knowledge about products, customers, and assortment that can help match the right products and offers with the right customers. Manufacturers can supply this knowledge along with supporting tools, including engaging and informative product collateral, suggested product uses, recipes and so forth to help meet objectives such as: increasing demand among existing customers; identifying new customers; and improving sales turn with higher velocity products.
Scalable Category Management
When scaled widely across multiple product categories over time, this approach can ultimately prove to be a more sustainable form of revenue than traditional trade spend dollars. One important difference is that the results delivered by an integrated, data-driven category management program can be measured against quantitative performance targets. Unlike trade spend, where unsystematic and non-automated processes make any kind of ROI analysis problematic or outright impossible, category management puts hard numbers into the hands of decision makers and executives so that they can evaluate how effective the initiatives have been.
The advantages of category management do not just accrue to the distributors. Here again this approach offers up compelling advantages as compared to traditional trade spend. Manufacturers will gain more from their investment of resources into category management than they do from their funding of trade activities. They will have access to a downstream view of demand, supported by actual daily transaction data that has traditionally proven elusive. They will have a much better sense of the timing, quantity and logistical details of customer transactions – and they too will be able to quantify this value with performance measurement tools.
In the prevailing economic climate foodservice is likely to experience strong headwinds to achieving sustainable growth and profitability. Trade spend dollars – which account for about 18% of every sales dollar manufacturers generate – are a dead weight on an industry sector that cannot afford such waste. Replacing the current paradigm with a more efficient, data-driven collaboration model such as category management offers a potential path for industry players to improve their own profitability and that of their industry partners.