Trade Promotions 101
In my last post, I discussed slotting and distribution costs. While the Specialty Food Distributor does not charge you to slot your product in their warehouse, often retailers pulling out of the SFD will charge some fee for placing your item on their shelf. While it is less than what the retailer charges manufacturers to slot an item into their warehouse, it often can still be a substantial investment for entrepreneurial food companies as well as more established manufacturers. You need to be prepared for this expense and your annual planning needs to anticipate targeted growth to assure your survival.
Today we are going to discuss another expense that needs to be a central part of your profitable planning: Trade Promotion expense. I like to think of today’s post as a Trade Promotion 101 brief. I want to spend a good deal of time developing this topic, so over the next two or three posts, I will delve deeper into Trade Promotion expense for companies that have matured to the point where their trade expense has begun to overwhelm the organization in terms of planning, tracking, fulfilling, and analyzing their trade spend. Next to your ingredients and production costs, trade expense is a big, expensive topic.
Trade promotions are the result of the fiercely competitive nature of the grocery business, which as a consumer you know often comes down to price. Even on products that you have a loyalty to, seeing a display and a good price may cause you to a least temporarily switch brands. Coffee is a good example in my household. My wife and I like Starbucks Verona Blend. We buy that more often than not. However, coffee is expensive and it’s a big ticket item in your basket, so if there is a display of a competing brand, at a good price we will check that out. If our Starbucks is on the shelf at a regular price of $8.99 and we see Geek’s Coffee (a fictitious local brand we will use for this example) which is regularly at $10.49 on a display, for $8.49 for a full pound bag, we will probably switch for that week.
Geek’s Coffee sale is a trade promotion. In other words, the local grocery ran Geek’s on sale for the week, but they didn’t put Geek’s on sale, Geek’s did. And Geek’s did it through a trade promotion.
Here is how it works. Let’s assume that Geek’s decides to run a promotion on their one pound bags of coffee for the month of October. They offer a discount on each case that they sell to the wholesaler or distributor that sells the grocery. In return for the discount, Geek’s request a certain level of performance to earn the discount. The performance for the discount may be in the form of a reduced price, a display, an advertisement in a newspaper, or in today’s rapidly changing promotional world, some form of social media. Trade laws prohibit Geek’s from requesting a certain price point as a condition of taking the discount. It can be a combination of many types of performance.
Once a grocer accepts the conditions for running the promotion, he orders extra product in anticipation of increased sales during the discount. He then places the item on sale in his system, creates the advertisement or display and executes the promotion. Once the promotion has ended, the grocer sends Geek’s a bill, generally in the form of a deduction from an invoice for the agreed upon discount or discounts, dependent upon the level of performance he executed.
One word of caution, don’t get trade promotions confused with Marketing. Marketing consists of talking to your consumer, through print, TV, radio, and now the internet. Trade promotion is directed at the trade (your retailers) for reducing your price for short periods, along with paying for displays, or running an advertisement in weekly ads, or flyers.
Setting your trade rate and assuring you have planned for trade promotions is critical for your success. You will have to promote your product or retailers will replace your products with products that do have promotions planned. As I think I have said in the past, nearly everything in the grocery goes on sales at one time or another. Even premium products go on sale from time to time. Plan on the need to promote your product and include that expense in your profit projections. The current going rate for trade promotion expense is anywhere from 10-25% of your products’ wholesale cost. For example, if your wholesale per case cost is $12, you should plan on a rate of $1.20 to $3.00 per case. If you don’t have that amount built into your current pricing structure it will end up coming out of your bottom line! And if you don’t run trade promotions you won’t be on the shelf for very long.
In my next post I will dig deeper into trade promotions, for now, keep working….to the grocery shelf!