Zero-based trade for CPG leaders: Five steps for raising the impact of your trade promotions

Executive summary

The next wave of profitability for consumer packaged goods (CPG) companies will come from zero-based trade (ZBT). This adaptation of zero-based budgeting goes beyond cost management of trade promotion. It helps manufacturers rethink their patterns of spending and increase the profitability of this all-important way of reaching end consumers in retail stores. Trade promotion, which directs shopper awareness at the point of sale, is a valuable strategic capability. In the annual expenses of a CPG company, it typically ranks second; only the cost of goods sold is greater.

ZBT represents a five-step process for raising the impact of that spending. The first step is to diagnose your situation and look for previously unseen opportunities for improvement. Second, develop trade promotion strategies that are aligned with your business strategy, reflecting both the financial returns you expect from your trade promotion investment and the level of freedom you have to redeploy it. Third, employ trade optimization levers — budgeting, pricing, analytic planning, and post-event analysis — to implement these new strategies. Fourth, bring your overall trade budgets in line with your new approach. Finally, give this new ZBT practice the enabling capabilities needed to sustain it over time. Together, these steps add up to a new overall trade promotion strategy that can yield millions in savings for your CPG company and give it a customer-facing competitive edge.

Introducing zero-based trade

After it was spun off from its parent company, the leaders of a US$4 billion food manufacturer decided to pursue a two-pronged growth strategy. They would revitalize their core brands, which were mostly snacks and lunch foods popular throughout North America. They would also aggressively expand into adjacent categories, which would mean ramping up investment in innovation and advertising. But where would they get the necessary funding? The answer was optimizing their trade promotion spending.

Many people outside the industry aren’t aware of the role that trade spending plays in a consumer packaged goods (CPG) manufacturer’s bottom line. In the annual expenses of a CPG company, it typically ranks second; only the cost of goods sold is greater. Bringing this factor under control can make a growth strategy viable. Thus, when a method shows promise for cutting back the costs of trade spending — and, in the process, making it more strategically effective — it’s worth consideration.

A few CPG early adopters are implementing this type of method: a clean-sheet approach called zero-based trade (ZBT) that can help you put in place an overall trade promotion spending strategy. ZBT is an adaptation of zero-based budgeting (ZBB), a method with a long-standing track record of success in other fields. Early efforts in ZBT have shown that it can systematically boost the return on investment (ROI) of a CPG company’s trade spending by 10 to 20 percent. It does this while making it easier for that company to build stronger brands, enhance innovation, increase margins, and drive shareholder returns.

The key to ZBT is understanding the potential strategic value of trade promotion. Often managed by the sales function, this is the body of activity that brings products to the attention of consumers at the moment of purchase. It includes promotional events, such as price discounts, displays, demonstrations, and the like, conducted in conjunction with retail merchants. In the U.S. alone, CPG trade spending exceeds $200 billion annually. Company executives tend to recognize its importance. It is typically the second-largest line item on their P&Ls (behind the cost of goods sold), and it consumes about 20 percent of their gross sales.

Yet, as essential as trade spending is to the success of CPG manufacturers, it is also something of a drag on their profits. Sixty-three percent of the CPG executives who were surveyed in 2016 for Strategy&’s biannual benchmarking study of trade management practices admitted that their current levels of trade spending are unsustainable. Worse, only 19 percent of them reported being able to reduce trade spending as a percentage of sales over the past two years. All of that changes, far more rapidly than expected, when zero-based trade enters the scene.

Conclusion

Zero-based trade is a complex capability; it requires a lot of work to get right. But there are not many other opportunities in a typical CPG business to systematically reduce costs and capture benefits of such significant magnitude. Moreover, the dramatic bottom-line value that ZBT can produce is just one payoff. When the newly independent CPG company described at the beginning of this report implemented ZBT, it reduced its trade spending by $60 million two years into a three-year program (with more savings expected per year as the program continues to develop). That significant bottom-line impact is typical. There are additional rewards in the form of higher trade ROI and the improved margins and market share that go with it. But perhaps the best reward of all is the opportunity to reinvest the payoffs from ZBT in other areas, such as new and innovative products and more effective marketing.