Improving Foodservice Trade Spending
The foodservice industry is emerging from one of the leanest periods in its history. With tepid revenue growth, a trend that may outlast the recession, foodservice manufacturers are tightening their belts and putting trade spending squarely in the crosshairs.
In the U.S. foodservice industry, the number and types of players are proliferating and foodservice manufacturers are struggling to manage a newly complex network of distributors, partners and promotional programs (see figure 1). Between the manufacturer and the operator (of restaurants, institutions, catering services and others) is a large and growing group of middlemen. Local distributors are potentially moving to the regional level. Mid-tier distributors are joining buying groups. And operators are forming group purchasing organizations (GPOs) to increase their leverage over manufacturers. Each one wants a discount via trade marketing funds, because each claims to "own" the operator. Amid this increasingly complex route to market, the current or future roles of the various players are not at all clear (see sidebar: Who's Who in the U.S. Foodservice Route to Market).
At the same time, the foodservice industry is just beginning to come out of one of the worst periods in its history (see figure 2). In such a challenging market, somebody's profits are going to suffer. To make sure you are not that "somebody" requires an understanding of the ongoing changes in the market, a principle-based trade strategy and some smart bets. It is time to improve trade spending to improve business performance.
Trade Spending is Misaligned
Despite reduced sales, manufacturers' trade spending has continued to increase. For those unfamiliar with the industry, foodservice resembles retail in that 15 to 20 percent of a manufacturer's gross sales revenues go directly to the distributor or operator in the form of trade funds. Trade spending refers to money taken off the invoice or paid back to the distributor or operator as a rate per case; fixed payments made to distributors and operators in the form of signing bonuses and growth programs, among others; and deviated pricing offered to obtain operator business. This trade spending was originally designed as an incentive for signing up or preferential treatment, but has since become entrenched as a negotiating pawn in the industry's complex power relationships. In a survey last year by The Hale Group, 80 percent of manufacturers reported that trade spending as a percentage of sales stayed the same or increased between 2009 and 2010, despite the decline in sales.1
Part of the problem is that the complex foodservice ecosystem is changing, with new players seeking to exert their influence. Not only is it challenging to keep track of the negotiations and the physical flow of product across all of these participants, but also nearly all of them expect trade funds from the manufacturer—often on the same case of product. Furthermore, in some cases, these partners may be double dipping, or receiving multiple trade programs on the same delivered case.
Given the large and growing number of players and distribution channels, manufacturers are challenged to (1) make smart trade investment decisions and (2) link investments made in a channel back to improved sales. Indeed, one of the biggest problems is demonstrating the link between trade spending and business performance. Very few manufacturers can link trade spending to a specific distributor or operator program, and even fewer can link trade spending to an actual increase in a product's sales.
Why does any of this matter? It matters because manufacturers need to be able to make informed investment decisions. For example, let's say a manufacturer makes a strategic decision to increase growth in the healthcare segment by increasing its sales to hospitals and nursing homes. The manufacturer decides to continue its strong partnership with a national distributor and rely on the distributor's sales force to push its brands with healthcare providers. However, at the same time, hospitals and healthcare providers decide to enter into a group purchasing organization and rely on the facility manager or GPO for product assortment decisions. So our hypothetical manufacturer may be losing out on sales to a competitor that has generated better pull via an aggressive GPO trade marketing program. Here, despite making the strategic choice that "healthcare is important," the manufacturer has failed to support it with an appropriate trade program.
Reconfiguring the Trade Spending Strategy
From our perspective, the current foodservice trade environment is unsustainable, and the onus is on manufacturers to take bold steps to gain control of trade funds. Manufacturers must start treating their trade dollars as an investment, not merely as a cost of doing business. Trade spending needs to return to its original purpose as a way to invest in future growth—investing in promising markets, partners and customers.
Know who's making decisions at what levels. Trade funds must be directed at the point of decision. This philosophy is more difficult to execute than it sounds, however. It requires manufacturers to know who the decision makers are at each level of a consolidated distributor: Are decisions made at the level of the local operating company, the regional market or the national corporation? (Note that it does no good to base your investing decision on where the authority should be.
Additionally, manufacturers must have data to answer the necessary questions and calculate the return on investment (ROI), which requires visibility: How will a trade dollar spent at this level stimulate demand? Why is this level the proper one at which to cut through the complexity of the network and the various private-label pressures to influence individual customers? What form will that influence take? At a more advanced level (which should be a long-term goal) the questions and answers should involve not only visibility but also hard data—for example, "a previous initiative targeted X with $Y and yielded increased sales of Z."
Although such changes will come about eventually, it will not be easy for all players to instantaneously set up the accountability and visibility required to provide meaningful ROI figures. While the industry is moving toward that goal, manufacturers should, at a minimum, inform decision makers about total investments made with that customer across the local, regional and corporate levels (for distributors) and at the corporate, business unit and operator levels (for facility managers and GPOs).
Secure a growing advantage. Meanwhile, the beauty of an investment-minded manufacturer is that there is less knee-jerk reactive thinking to trade spending and more preemptive, long-term thinking. Rather than weighing only the one-time effect of a decision, the focus is on gaining a longer-term advantage. In large part, this involves looking outward to understand and measure performance across distributors, buying groups and GPOs, among others. But it also involves looking inward to ask, "What defines performance for us?"
Six Steps to Transform Trade Spending
To gain control of trade spending, we recommend the following six steps see sidebar: The Challenge of Transformations):
- Define trade. Delineate exactly what represents trade funds as opposed to other funds such as terms-of-sale discounts, cost-driven net pricing, selling expenses and brand marketing programs.
- Understand where funds are going. As discussed earlier, track trade funds by route to market (distributor, operator, GPO) and by type (fixed fees or lump sums, variable rates per case, growth programs or net price).
- Develop a trade strategy. The foodservice division will have to engage in defining strategic goals: Does performance mean increased market share, profitable growth or some other measure? Is it best accomplished through preferred or sole-sourced status, new product slots, culinary participation, more-visible branding or other techniques? Armed with such performance requirements, foodservice leadership can then tie investments in trade funds to these measures.
- Put guardrails in place. A trade-spending investment strategy is only as good as its execution. Yet the sales force treasures its flexibility. A manufacturer needs principles to balance these two pressures—thinking of it in terms of "guardrails" helps clearly define the requirements for investment outside of these principles.
- Implement processes and tools. To execute the plan requires clearly defined processes supported by analytic tools. Because trade spending involves an overlap among sales, marketing and finance functions, the roles of each must be delineated up front.
- Build capabilities. If properly implemented, performance-based trade-spending initiatives should improve over time, as data accumulates on what has worked in the past. But this will be true only if the manufacturer invests in the internal skill sets, tools and resources to track ongoing performance and manage trade funds accordingly.
Clearly the transformation to performance-based trade spending requires hard work. It cannot be accomplished through mere lip service. But it can be done, as demonstrated by manufacturers' experiences in retail. Foodservice executives get weary of comparisons to retail, and justifiably so: There are important differences between the sectors. But the fact remains that retail has developed effective ROI analyses of trade funds and implemented performance-based strategies for more than 10 years. It is long past time for foodservice to learn from these experiences, accommodate the unique aspects of its complex ecosystem and apply similar principles to its own operations. Such efforts can stave off losses during these hard times and drive profitable growth.
The Results: Growth and Profits
A comprehensive assessment of a company's trade program followed by a determination of performance requirements typically yields between 15 to 25 percent in trade efficiency (same cases for less trade) and effectiveness (more cases for the same trade). (See sidebar: One Food Manufacturer's Approach.) In this way, evaluating trade programs is like any other smart business decision: The focus is on programs with high ROI that promise future profitable growth, or on channels that can provide the best access to target segments
While manufacturers begin to examine their trade programs, leaders can differentiate their companies from the crowd by placing strategic bets. After identifying the most strategic route-to-market you then align both financial (trade) and non-financial (sales organization) resources with the partners in these channels that you believe offer the best path to profitable growth. For example, if your company has decided to focus on healthcare, you might want to partner with facility managers as a channel, focusing on chefs and facility purchasing professionals as the main decision makers, and align your trade investments accordingly (see figure 3). Trade program investment tactics may include signing bonuses, fixed fees, allowances or differentiated pricing. A bet is never a sure thing. But a well-informed bet has a good chance of generating competitive advantage.
Trade efficiencies not only improve the bottom line, but also free up money to invest in other areas. As food service manufacturers scaled back investments in areas such as marketing and R&D to pay for trade, they lost much of their differentiation in the market. Through increased differentiation—in route-to-market, product innovation and branding—companies can drive future growth.
A Bigger Pie for Everyone
Reforming trade spending is an imperative for foodservice manufacturers seeking profitable growth. The industry's tepid sales, rising input costs and convoluted system of distribution channels and partners requires a reassessment of the trade-spending model. But moving toward performance-based trade spending does not mean going to war with distributors and other players, because this is not a zero-sum game.
When a manufacturer adjusts its trade spending to invest in high-growth areas, it helps all operators increase their profits, creating a bigger pie for everyone in the industry. Granted, the manufacturer's actions force the distributors, GPOs and other players to make a choice: They can jump aboard, provide transparency and align their own incentives with high-growth activities they follow through on to help maximize the value of those investments—or they can stay where they are. Those that choose to join the team can help savvy manufacturers create new, efficient, mutually beneficial ways of doing business.
1 The Hale Group 2010 Trade Survey