Crunch the Numbers that Really Matter (hint:they’re the ones that relate to downstream demand)

A New Approach to Trade Spend for Foodservice Manufacturers

There is no shortage of quantitative analysis in the trade spend practices of foodservice manufacturers.  Unfortunately, very little of this analysis helps give decision-makers insights about the effectiveness of their trade spend programs.  The numbers being crunched do not relate to signals about actual downstream demand, but rather to the formidable mountain of claims from their distributors.  These claims come in all manner of data formats and accounting entries and it typically takes armies of brokers, salespeople and financial staff to figure them out.  After all the cumbersome and error-prone line-by-line calculations to validate claims are said and done, you are no more informed about the profitability or the potential risks associated with any given program.  No wonder there is widespread dissatisfaction with the effectiveness of these programs.  Over 75% of manufacturers in this sector consider their trade spend initiatives to be inefficient, according to the 2010 Market Intelligence Foodservice Trade Survey. Read the rest of this entry »

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A Beer on the Beach, and Other Mysteries of Fair Pricing

Businesses want us to view them as fair – there is arguably nothing more important than a reputation for fairness in the daily marketplace of commercial transactions. As business managers what can we do to ensure that decisions we make – about pricing or other actions that are clearly visible at the point of the customer-product interaction – will be seen as fair? Is fairness something absolute, immutable and precisely quantifiable?  Or is it situational, capricious and ever-changing?  The bad news, perhaps, is that ‘fairness’ is a very elusive notion to pin down with certainty – it’s hard to put fairness in a bottle and label it as such.  The good news is that fairness more than anything else is about perception and the relative judgments of your customers and potential customers in varying demand situations.  That’s good news because the better you understand the granular contours of your demand environment and the precise needs and propensities of your customers, the more likely you are to understand how to make decisions in that environment that are both fair to the customer and profit-optimizing to your business.

thirst-quenching - but is it fairly priced?

Here’s a test of fairness.  Imagine you are lying on the beach on a hot summer day and find yourself craving a cold, satisfying beer.  What price would you be willing to pay to quench your thirst?  Now imagine two alternative scenarios.  In one, the only place within walking distance to buy a beer is the poolside bar of a swanky five-star beachfront hotel.  In the other, there is a rather run-down beachfront grocery store that sells beer.  Imagine further that both the hotel and the grocery store sell the exact same brand and type of beer.  Does your maximum price point change depending on whether you think you are getting the beer from the hotel or the store?  Do you think it is fair for two different establishments to sell the same commodity for a different price? Read the rest of this entry »

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The Price You Pay for Not Changing Price

The WSJ ran a story on 3/10/09 on the financial success of McDonald’s Corp. throughout the present recession. Since the company is one of only two DJIA members (the other being Wal-Mart Stores, Inc.) to have ended 2008 by posting a gain for the year, it is perhaps only fitting that the Journal devote a few inches to McDonald’s. The only student to pass a difficult exam rightly deserves a gold star. But amidst the discussion of McDonald’s zeal for succession planning, controlled expansion and keeping a lid on costs in the face of the last year’s commodity price swings, one item deserves more attention than it received: McDonald’s is encouraging individual locations to experiment with prices.

Restaurants sit at the crossroads of both cost and demand volatility. Much to their detriment, companies such as McDonald’s often buffer both their customers and their upstream suppliers from feeling the financial impact of this volatility. Now McDonald’s is at least hinting that it wants out of this arrangement, and our experiences working with multi-billion dollar partners in the food distribution industry points to this being a wise move. We have long observed significant daily fluctuations in food prices across all categories. Couple this with the effect that a strong dollar can have on McDonald’s overseas business, and it quickly becomes clear that understanding how much a customer is truly willing to pay for a menu item is of huge value for a company so proud of its billions and zillions served.

The real question is why don’t more restaurants (or any number of businesses for that matter) treat their price as the valuable asset that it is? It is not overly difficult for a restaurant to approximate a schedule of demand and create several different menus with prices tailored to different Cost of Goods Sold (COGS) environments. For a restaurant grossing $500,000 in revenues annually, every 1% increase in sales corresponds to a $5,000 improvement to the top line (subtracting the printing costs later). In our experiences in food distribution, a 1-2% increase in the organization’s top line can translate into a bottom line improvement of over 8% – an observation that we have seen replicated in numerous industries. Projecting forward a few years, I would be willing to bet that the majority of companies with the highest valuations among their industry peer groups will also be the ones that are trying to actively shape demand through their pricing strategies.

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