HoukTPM

April 5, 2006

Will CPG continue to lead the way?

One of the “givens” in trade promotion in the past decade or so has been that, in most cases, CPG (or FMCG, if you prefer) has been the leader in most aspects of the practice. Most would agree that packaged goods companies have had the most sophisticated systems for budgeting, allocation and planning of trade promotion, the best deduction management systems, by far the best analytics, and the most comprehensive (and complex) program offerings.

That last item isn’t necessarily a good thing, and it may be both the cause and an effect of the need for more sophisticated systems.

The most important and noticeable aspect of all, however, is that the CPG suppliers spend the most money. And again, this is often a cause of the sophisticated systems – if 20% of your sales is going for trade promotion, it makes sense to spend more money to track it.

One of the first things I noticed, many years ago, when I began to get serious about studying trade promotion effectiveness, was that almost all the studies were based on CPG. I asked an academic why this was and, after giving me the pitying look I evidently deserved for asking such a dumb question, he replied, “Because those are the numbers we have.”

I guess it’s like the famous answer the crook Willie Sutton supposedly gave when asked why he robbed banks: “Because that’s where the money is.”

Because the supermarket channel was the first to adopt scanner systems widely, sell-through data has always been most readily available for CPG products, and that category, as a result, gained a big edge in ability to measure results of trade promotion spending. In fact, both A.C. Nielsen and Information Resources, Inc. have carved out a pretty good business almost exclusively serving CPG suppliers and trade channels with this data.

I’m wondering, though, if things are poised for a change. I’m wondering if, perhaps the durables category (or some sub-categories within durables) might be about to leapfrog ahead of CPG.

The reason for this heretical thought is that there is no reason for most durables marketers to continue to lag so far behind CPG in analytics, the area of the greatest difference. Given that such a large proportion of all sales now are made through a handful of mass merchants and category killers, all of whom use scanners, the same data could be made available to a toolmaker or apparel company as to P&G.

All of the lift tables (projections of increased sales based on a variety of factors) created by statisticians and serving as the engines of the best analytics tools have thus far been created for CPG (at least all of which I’m aware). But given that the theoretical work has been done, adapting them to other products and channels is simply a matter of somebody being willing to pay for it.

As for systems, the other area of CPG superiority, given the ever-falling cost of hardware and memory, to say nothing of the cost of offshore programming; it’s financially reasonable for even mid-sized companies to have trade promotion management and analysis systems that are not far behind those of the giants.

So far, I’ve just been giving reasons why durables companies might catch up to CPG soon. But the systems are the reason why they might do far more than just catch up.

Wondrous as many CPG systems are (and I’ve seen some that can do amazing things, amazingly easily), they tend to share some common flaws. Or perhaps I should say common characteristics, since they aren’t seen as flaws by the users.

Most CPG trade promotion management systems have only rudimentary claims-processing capabilities and very limited (almost nonexistent) ability to capture performance data.

The reason these are characteristics instead of flaws is that most CPG programs get few claims (settlement is generally off-invoice or deduction), and even less proof of performance.

In most durables categories, by contrast, claims and proof of performance (however rudimentary) are the norm. As important as the actual proof of performance, the systems for durables companies are structured to capture detailed data as to the type of performance. A CPG system, at both the planning and performance level, will generally identify an event no further than, for example, “ad”, while a durables system is set up to capture at least media and ad size.

The reason this matters is that CPG has only half the equation as far as analytics is concerned. They have the effect (sales), but limited data on the cause. Which may be why there’s so much wasted spending in CPG. I constantly hear people in that category moan that seventy or eighty percent of their spending is on ineffective promotions (promos with unprofitable results considering their costs).

If you’re in durables, on the other hand, you’ve always had significant detail on cause, but now you also are capable of tracking effect.

Durables companies that take their existing systems, add in a module from one of the analytics firms (or create their own), and build reliable lift tables, can now move well ahead of the pack in trade promotion management.

Will it cost a bunch? You bet it will – but a lot less than what you’re currently throwing away on ineffective promotions.

And then CPG will need to play catch-up.

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