Spurred on by anecdotal consumer comments in the press that “prices are going up at grocery stores because of COVID-19” and industry intelligence indicating that many retailers are pulling back on shelf price reductions and other promotions, I became curious as to what was really going on. Most importantly, how this dynamic might impact trade promotions post COVID-19, especially over the next 8 months.
The emerging trade promotions bulge
First, it’s important to understand the basic mechanics of CPG trade funding with a retailer. It is traditionally negotiated as a percentage of an assumed level of sales, mutually agreed upon between manufacturer and retailer. Retailers can qualify for these funds, but in order to earn them, must perform specific merchandising actions.
During the COVID-19 phenomenon, retail sales have skyrocketed. However, at the same time, many retailers have pulled back on both the number of promotions and the level of promotion markdown dollars being applied. As a result, it’s highly likely that a large surplus of trade dollars “qualified” for but not “earned” exists in the marketplace. The chart below shows the gap between historical markdown dollars spent during COVID-19 versus the same time last year*. We see that in just six weeks this retailer likely qualified for $36M in surplus trade funds that they did not fully earn because of lack of performance. Note that this surplus will only grow larger if this trend continues. So, the question is, what will happen to all those trade dollars?
Ready, willing and able… but not quite sure how?
Several large retailers have already raised this subject with suppliers, communicating in writing their expectations that “Trade rates need to remain whole for the year” and “it is imperative total trade rates are delivered.” Therefore, it seems likely that some (if not most) retailers are planning to perform in order to earn all those planned and newly qualified-for trade dollars. Normally this would be seen as a win/win for retailers and manufacturers, as every trade dollar qualified for would be spent to drive additional incremental sales. However, consideration must also be given to the impact that compressing a larger number of brand-specific trade promotions into a shorter period of time will have on the net effectiveness of those trade promotions as well as the price/value perception of major branded products.
The “how” is actually available right now
In order to determine how to effectively use these unearned trade promotion dollars in a shorter period of time, planners will need to include a wider range of insights than normal into how they plan these “compressed” trade promotions. These additional insights include cross-purchase behavior, purchase cycle, price sensitivity and promotion cannibalization. Importantly, since most promotions are ultimately executed at a sub-brand and/or size level, planners will need to gather these types of insights at a much lower level of granularity than is possible using just POS or household panel data exclusively. The good news is that doing so is really straight forward with retailer loyalty data. Additional good news is that there are already a wide range of loyalty-data-powered insights and promotion tools in the marketplace. Many suppliers already have access to one or more of those tools. And for those that don’t, there are many options to gain access via a wide range of retailers and insight providers.
In all cases, when it comes to spending the bulge of surplus trade funds, it is highly recommended that both suppliers and retailers incorporate promotional insights derived from loyalty data into their planning of promotions, especially those compressed into a shorter period of time as a result of the COVID-19 trade promotions bulge.
*Proportionally masked results. Excluding Fuel, Pharmacy, Gift Cards, Greeting Cards, Tobacco, Floral, Books/Magazines
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