Shifting From Unconditional Spending To Conditional Investment

Has your trade spend become the cost of doing business? Are you getting sufficient return from your investment? Do your terms drive sales, consumption, or market share for your brand? For too many consumer goods companies, the growing list of fees paid to a retailer are showing up on the P&L as a gap between gross and net sales that delivers no appreciable value.

In truth, your terms should deliver mutual benefits to you and your customer. You can only achieve this outcome by negotiating better terms. The “pay to play” approach is toxic to your bottom line. So let’s purge that mindset.

What are unconditional terms?

A term that has a condition attached-if you do that, you get this-provides some control for the supplier. Unconditional terms are those fees that are paid to a retailer regardless of the outcome. These “pay to play” expenses: listing and assortment fees,trading discounts, gondola fees, mailers, to name just a few. If you want to access the shoppers in a particular store, you pay the price. And the larger the customer, the bigger the fees-based on the assumption that they (a) have more shoppers and (b) operate more efficiently.

Take the listing fee, which you pay to a retailer to produce space for your product in-store. What costs are incurred by the retailer for listing? It’s marginal. The systems are all in place. It certainly does not cost the retailer the amount that they charge, but companies regularly pay. In return, the retailer gets a boost to the bottom line, while your “investment” has not created any change in your business performance. Without positive change, you get no ROI”.

Even some terms that are masquerading as “conditional” are actually unconditional because they are so loosely constructed. A manufacturer might agree to buy 100 gondola ends. While that sounds like it has a measure of accountability on the retailer’s part, the retailer is only committing to the gondola itself, not guaranteeing the location. Your shampoo, for example, could be co-located with pasta sauces, just to fulfill the agreement. This position adds no value to your brand.

Agreeing to a specified number of slots in mailers for the year also seems conditional. Once again though, the manufacturer has no controls other than committing to the quantity of slots. The retailer dictates the pricing, the date of the mailing, and the distribution. And these mailers will happen with or without the manufacturer’s participation, so the actual cost of including a product is negligible.

An industry outsider would look at this practice as a waste of money-and they’d be right-but they can’t see the underlying cause. The fees exist because the system is flawed. As retail has consolidated, larger retailers have used escalating demand for in-store visibility as a lever to extract higher levels of other income. Willing manufacturers have fueled the fire initially unwittingly and more recently to maintain close relationships with large retail customers. As a result the gap between gross and net sales will continue to escalate unless manufacturers find new ways to negotiate terms that are more effective.

Shift to true conditionality

We are currently seeing as much as 50 to 80 percent of trade spend paid toward unconditional terms. Best practice guides you to strive for 10 percent. Transferring from unconditional to conditional terms requires the manufacturer to demand that terms are tied to execution of activities that enhance the mutual performance of the business: Invest in things that grow your top line by changing shopper behavior-influencing shoppers to buy more product and more often. Invest in availability, communicating your brand message, and presenting attractive offers.

Then you should work on the bottom line. Find ways to do business more efficiently and be more committed to those terms that are conditional. We see businesses that have an overrider on returns but still accept returns, or they pay early payment discounts even when the payments aren’t made early.

Take your trade spending money and make two things happen:

1. Apply them to activities that are mutually profitable for you and your customer; and

2. Attach more conditions. If your retailer wants you to pay a listing fee, put in writing what you want (e.g., guaranteed amount of space per store, a specified number of facings, a gondola end for the launch, placement of in-store promoters, free access to the CRM database, and targeted messaging for key shoppers). When those conditions are met, the listing fee will be paid. If you don’t get the schedule of those items, you prorate the listing fee.

When you shift to conditional terms with a clear set of expectations in writing, you focus your money on those actions that will bring results.

Selling change to your retailer

Naturally, a retailer who is accustomed to collecting fees on an unconditional basis might balk at a sudden shift in the system. You begin by understanding the needs of the retailer. They have no interest in building your business. Their sole focus is to increase their revenue. But if you can show them how your plans drive more shoppers to their store, where they will spend more money and expand the category, you will have their attention. Focus on the strategic and commercial benefits to your customer. By investing time in preparing a strong shopper-based sales proposition that is tailored for the customer, you not only increase the profitability with that customer, but you build a stronger relationship as well.

And once you negotiate conditional terms, hold fast to them. Rigorously adhere to the terms. If you agree to 100 gondola ends with a retailer who then gives you only 50, prorate their account. By monitoring compliance, you demonstrate that you are committed to the agreement and the relationship.

The process of change will take time. Guide your retailers into this system one step at a time. Prepare a plan for your negotiation, one that clearly outlines the key benefits to your customer. If you view the two businesses as a joint venture, looking out for mutual interests, both sides will win.

For more information on constructing effective trade investment frameworks or negotiating better trade terms, contact me.

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