Trade terms are a vital part of the Consumer Products (CPG) - retailer relationship, but they are often poorly managed and lead to inefficiency and conflict. PwC Strategy& reveals the key challenges and opportunities in optimising trade terms, and offers a three part-approach to achieve better outcomes for both parties. Read this article to learn how to unlock 2% to 5% growth in operating income and foster stronger collaboration and trust with your retail partners.
Trade terms are the backbone of the CPG-retailer relationship. They set the rules and rewards for working together to grow the category and satisfy the consumers. However, they are also a source of tension and conflict between CPGs and retailers.
Consumers are less loyal to brands and more influenced by availability and affordability with 46% consumers switching retailers for better value and 32% shifting to private labels[1]. This makes the market more competitive and price sensitive than ever, and both parties are under pressure to protect their margins and market share.
Breakdowns in trade terms negotiations can result in supply disruptions, product de-listings, or even legal disputes. CPG manufacturers and retailers need to find the right balance of trade terms that benefits both sides and aligns their interests.
In our experience, we see a significant variance at CPG manufacturers with trade spend per customer ranging from 20% to 60% of gross sales revenue (Exhibit 1). This spread in trade spend is seen across categories, channels and markets indicating a widespread issue and a missed opportunity to leverage trade spend strategically to drive top line growth.
Exhibit 1: Example variation at CPG manufacturer with up to 60% of gross revenue as trade support to retailers
Source: PwC Strategy& analysis
Trade terms can make or break the profitability and growth of both parties, as they account for a large share of their investment and income. CPG manufacturers can boost their operating income by 2% to 5% by improving their trade terms efficiency and effectiveness.
What is driving the need to rethink your trade term strategy now?
Trade incentives need to be dynamic and evolving for CPG companies to adapt to:
Margin pressures
Consumers are increasingly trading down in the face of the cost of living crisis. In addition, CPGs are facing escalating competition from private label products as well as rising input costs - leading to margins being squeezed. CPGs need to assess and adjust their trade spend levels to reflect the value and competitiveness of each product and channel. For example, trade terms that focus on innovation and category growth can incentivise CPGs and retailers to collaborate on launching new products and expanding the market.
Channel diversity and complexity
Each channel has a different customer profile, purchase behaviour, and price sensitivity which requires that trade spend be customised and tailored to them. At the same time, trade terms need to be coherent and consistent across the portfolio to avoid channel conflicts and arbitrage opportunities. CPGs need to find a balance between channel specific and channel neutral terms to optimise their return on investment.
Strained partner relationships
CPG - retailer relationship has come under tremendous strain recently. It is imperative that trade terms are aligned with the strategic vision and priorities of both the parties, and support the development and differentiation of the category. Clear, consistent and coherent trade terms can reduce the administrative workload and the invoice disputes, and improve the relationship and the cooperation between CPGs and retailer.
What are the key challenges leading to inefficient trade terms?
Trade terms are often not managed with the same rigour and discipline as promotional investments, which are subject to regular analysis and evaluation to ensure return on investment. Trade terms are frequently driven by legacy contracts, inflexible systems, and poor document management, resulting in lack of transparency, alignment, and accountability.
In our work with CPG companies, we have come identified the following three key reasons for inefficient trade terms:
- Legacy Terms: Many key account managers (KAMs) are afraid of the consequences of changing their established terms and ways of working. This drives inertia in contract negotiations and acceptance of inefficient and ineffective processes. Historical contracts based legacy terms are the most common result, which do not reflect the current objectives and outcomes of trade support. For example, building on past contracts to form new agreements often leads to less conditionality for the new contract; multiple iterations lead to low traceability. CPG companies end up with less frequent review of benefit threshold and limited tracking of returns on investment.
- Rigidity and Complexity: Trade terms structures are frequently rigid and reduce adaptability to the evolving channels and retail landscape. Systems used to manage terms do not capture nuances and variations of the terms. This leads to lack of transparency and significant administrative overhead in validating customer claims.
- Limitations in document management: Trade terms are not properly documented and updated, as many agreements are made via emails and not incorporated into contracts. This makes it difficult to link financials and ensure compliance.
CPG manufacturers have between 12% to 45% mismatch between trade terms in customer contracts and specifics captured in trade systems across countries.
What are the principles that need to underpin your new strategy?
Trade terms should not be a zero-sum game, but a win-win opportunity. CPGs and retailers need to foster a deeper, more collaborative relationship that focuses on joint category growth, fully embracing the tenets of joint business planning.
This needs to be reflected in your renewed trade terms strategy that delivers:
Fair and mutually beneficial trade terms that reflect the value and contribution of each party. An example would be co-innovation l terms where a retailer is incentivised not just for volumes sold, but also for shopper insights shared that fuel co-innovation. It is in both parties interest to move away from a single point focus on profit pools which lends itself to a zero-sum mentality. Instead, CPGs and retailers should actively pursue expansive growth through innovation, category management and sustainability.
Transparent terms structure and clear, consistent terms to foster trust and loyalty between CPGs and retailers. For example, a terms structure should have agreed conditionality, clear performance thresholds on increasing levels of trade investments with retailer agreed KPI and review cadence. Such an arrangement will remove any ambiguity on terms payments and enable CPGs and retailers to collaborate and operate in a data informed manner.
Broad-based and collaborative joint business planning to focus on overall category growth, incorporating elements such as co-innovation and shopper insights to ultimately enhance their long-term partnership.
How can CPG companies optimise trade terms?
Many CPG companies struggle to start their journey towards optimised trade terms and maximum return on trade investment. PwC Strategy& has developed a three-part approach to help CPG companies achieve trade terms excellence:
Design a fit-for-purpose trade terms framework
Create a trade terms framework that aligns with your go-to-market strategy and your competitive landscape. Analyse the effectiveness and efficiency of your current trade terms and identify opportunities to standardise and simplify them. This will enable you to allocate your resources optimally, improve your profitability, and adapt your trade terms as the market evolves. To ensure flawless execution, provide clear commercial guidelines that include negotiation tips, selling stories, and flexibility thresholds for your key account teams. These guidelines should reflect the strategic importance and role of each retailer in your portfolio.
Adopt a zero-based trade and ROI mindset
Adopt a zero-based trade and ROI mindset: CPG companies often focus on promotion profitability, but this is not enough. You need to apply the same rigour and discipline to all aspects of trade support. Use a zero-based trade[2] approach, where you renegotiate all your trade terms based on their value and impact. Make sure that your trade terms have clear conditions and counterparts, and that you measure and track their ROI. This will help you optimise and reallocate your trade spend as needed, achieve your desired outcomes, and build stronger relationships with your customers. In customer negotiation context, this means assigning a clear role to each retailer and offering them the support they value. This should be reflected both in your trade terms and in your account teams. For example, a retailer that values innovation should have specific trade terms that focus on co-innovation and be supported by a team that has strong shopper and consumer insights.
Leverage GenAI for superior execution
Technology can help you manage your customer contracts and monitor your trade spend performance more effectively and efficiently. Use the latest technologies, such as GenAI for contract management and smart contracts, to reduce your administrative burden and errors. This will free up your sales teams to focus more on building strong relationships with customers, and improve your account management capabilities for a more agile and competitive business. Empower your sales teams with robust scenario planning to anticipate negotiation moves and counter-moves, and train them frequently through role playing to deliver a collaborative and profitable negotiation.
Our approach in action at a global CPG company
Our client, a global consumer packaged goods (CPG) manufacturer, was looking to optimise their trade terms as part of renegotiation of their customer contracts. However, they faced several challenges with their trade terms. We worked with their central commercial team and delivered results in 8 weeks.
Trade terms optimisation is a critical and urgent priority for CPG manufacturers and retailers, as it can deliver significant benefits for both sides, such as increased profitability, growth, and collaboration. However, this is not a one-off exercise, but a continuous and iterative process, requiring ongoing commitment and investment from both parties.
If you are a CPG manufacturer looking to optimise your trade terms, we can help you. We have the expertise, experience, and tools to help you assess, define, and implement your trade terms strategy, and to achieve your desired outcomes and objectives.
Contact us today to find out how we can help you optimise your trade terms and grow your business.
Sources
1. 2023 PwC Global Consumer Insights Pulse Survey
2. Zero-based trade for CPG leaders by PwC Strategy&
