Category Management: An Antidote to Trade Spend

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.

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Doing More With Less: A Scientific Approach to Holistic Trade Management

For foodservice manufacturers trade spend is typically the largest expense line item, apart from cost of goods sold, on their income statements. Despite its oversized economic importance, however, trade spend is hard to pin down as an organizational function. Traditional sales and marketing activities like pricing, advertising and sales force management tend to have clear organizational mandates, departmental structures and dedicated resources. Not so trade spend, which is less a singular discipline than it is a hodgepodge of activities scattered across different departments. The lack of a holistic approach to the many divergent strands of trade spend activity can make for suboptimal results, duplication of efforts, and inability to measure and evaluate the performance of trade spend decisions.

To be more effective, managers need to break down the organizational barriers, bring their diverse trade activities, information and processes onto a common platform, and mobilize the vast amount of data available from their purchase history records to the task of analyzing opportunities for more precisely targeted trade campaigns with a higher likelihood of success. This can provide the foundation for a holistic approach that helps foodservice enterprises achieve that objective much talked about but not often achieved – turning trade spend into trade investment.

Trade spend needs to target the right products and the right customers

This holistic approach starts at the beginning, with a broad-based trade budget which managers plan across different product platforms, trade vehicles and customer types. How is the budget initially divided up? As a practical matter there is a fundamental problem here: manufacturers often end up sending most of their trade dollars to their largest customers – who are often the ones who need these dollars least – rather than the ones who could potentially grow their business and expand their product sales more aggressively. A better way to spend trade dollars is through disciplined quantitative analysis and economic scenario testing that ultimately reaches a very granular level of detail: what combinations of products and customers are likely to be the most receptive to trade initiatives? The goal is then to build a trade program that can effectively reach these target audiences, to execute campaigns with precisely defined messages and incentives, and to measure the results so as to have a plausible quantitative measure for return on trade investment (ROTI). Read the rest of this entry »

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The Changing Landscape of the Foodservice Industry – Part 1

This is the first installment in a two-part series on major changes taking place in the US foodservice industry. In this installment we look at some of the key challenges, stemming from current industry practices, that  impede optimal performance by manufacturers, distributors and operators in the sector. The second installment will examine converging technologies that are poised to challenge the industry status quo, and present an opportunity to benefit through improved sales and marketing analytics for those who are prepared.

It's a new world for FAFH, but the industry remains stuck in unproductive practices

The foodservice industry, comprised of the food prepared away from home (FAFH) sector of the food & beverage market, accounts for about 46% of all consumer dollars spent on food and beverage products in the US. Over the past twenty years this business has changed considerably as American lifestyle habits, choices and spending propensities have evolved with regard to food and beverage consumption. Yet manufacturers, distributors and operators in the foodservice industry have in many ways been slow to adapt their sales and marketing practices to better serve the evolving preferences of the end consumer. As a result there are considerable inefficiencies up and down the value chain resulting in suboptimal performance for all parties. Trade spend management, campaign marketing and other critical activities suffer from an absence of data-driven input for decision-making, as well as the inability to effectively monitor and evaluate performance. Relations between trade partners are often characterized by mistrust and a lack of willingness to work together for win-win outcomes. Read the rest of this entry »

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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 MarketIntelligence Foodservice Trade Survey. Read the rest of this entry »

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