When many of us sit down to discuss objectives with our managers, executive team, or investors, one of the metrics bound to come up is margin expansion.  As a CPG executive, you are very likely tasked with driving some combination of top line sales, market share growth, house hold penetration growth, selling in new items, and margin expansion.    For purposes of this discussion, let’s just use the simple equation of: profit/total revenue = margin.  Also known as ‘the money left over for us’.

When a CPG sales person meets with their buyer, their buyer too has a series of metrics they are being evaluated against.  Many are quite similar to those of the CPG sales professional.  The retailer’s want their buyers driving category top line sales, building market share, being first to market on key new items, building their store brand business, and expanding margins.  A good CPG sales professional not only knows the metrics their buyer is held accountable for, but also which are the most important.

The issue we have just unearthed is that the CPG sales person and the buyer are both tasked with expanding their margins.  Is it possible for both to expand their margins at the same time?  Yes, but it won’t be easy.  And if only one of you gets to expand your margin, which will most likely win?  Yes- the retailer.  When you have your annual planning session with your buyer and they say their goals are “X, Y, Z and expanding my margin 2 points”.  Uh oh.  That margin expansion is coming from somewhere.  Most likely from your buyer’s vendor base- of which you are one.  Sure, the buyer may be able to alter their shelf set, focus on higher margin items, etc.  But these higher margin items actually have to sell or they miss their top line sales commitment.

How many CPG sales executives actually talk to their buyer and say “well my goals are A, B, and C and to expand my margin here at your account by 2 points”.  The answer is not many.  Or zero.  There is a ton of pressure on the sales person and their firm from many angles: on the pricing side, many are “trapped” by the specter of Amazon in a rock bottom price game.  Any hint of taking a price increase is generally met with a very unfavorable response and then quickly followed up with real, or implied, threats of “grave consequences”.  Many CPG sales people fold right here and tell there executive team that taking price is “impossible” or “we can do this so long as we price protect my account”.  And when you start price protecting everyone, you realize no margin expansion and your trade spend line item goes up; and it goes up with no corresponding merchandising support.  You are spending money to buy price.  Your margin is certainly not improving.

Yet on the cost side of the equation, CPG firms are facing real commodity input pressures, rapidly rising transportation expenses, and of course SG & A increases as things like health insurance, regulatory compliance etc always find a way to increase.  The reason many of costs on the “expense” side of the ledger go up is that change is hard and risky.  Are you going to change payroll, healthcare, or 401K providers over a 2% price increase?  Likely not.  Yet if you try to pass on 2% price increase to a retailer, it is pretty easy for them to knock you out of a shelf set, or cut back facings. 

So what is the CPG executive to do in order to try and drive their margin?  First and foremost, be a supplier to the retail community that is easy to do business with.  Do what you say you are going to do when you said it will be done.  When there is a problem- bring it forward rapidly.  Preferably with some options.  Getting down to specific things the manufacturer can do:

• Don’t flood the market with loser skus. Always better to have fewer stronger skus than constantly splitting the business across more items.  This generally just results in wasted inventory dollars (yours and the retailer) and is a velocity killer for your brand in total.
• Absolutely, critical to price items properly at launch. The current intolerance for price increases looks like it will be with us for a while.  So ‘correcting’ a poor price post launch will be tough.
• Any input to COGs that is imperceptible to the end consumer should be aggressively worked for lower pricing ie shippers, labels, bottles, packaging components.
• Be highly disciplined on your trade spending. This is generally the number two or three line item on a brand P&L after cost of goods and SG & A.  Spend intelligently with the right accounts on the right skus in the right programs.  Do not get lured into participating in programs you know will not work based on past experience simply because you are asked to.  Spend the time to build a logical plan.  Bring facts to the table.

If you can’t change the mix of the skus you are selling to drive margin through advertising or a true innovation, the intelligent application and utilization of your trade budget will be your best bet to drive margin.

As Jeff Bezos of Amazon stated about manufacturers: “Your margin is my opportunity”.  There is no doubt he means it.  So what are you willing to do to protect your margin?

As a consumer packaged goods executive, you are very familiar with the two primary retail formats: high-low and every day low price (EDLP).  Depending upon your category, the percent of ACV in high-low format may be about 40%.  Walmart is obviously the leader of, and highly committed to, their EDLP heritage.  And sure there may be a retailer claiming to be a hybrid or a retailer that continuously alters their strategy looking for a winning position in the market with the consumer.

A slightly different matter is when a retailer asks, or puts, a brand (or manufacturer) on to an everyday low cost (EDLC) program.  There are several reasons this could happen- one being that the retailer feels this will result in the best sales and profit performance for your brand.  Another reason could be that the retailer does not feel your brand is a traffic driver and therefore- not worth their time to invest in developing a comprehensive plan.  A lot of effort on the retailer’s part for not much upside to their plan.  Brands, especially smaller ones, often feel compelled to agree to this approach with the retailer in order to be “easy to do business with”, build good will, or- they feel they have no choice as they have no data to prove otherwise.

In some instances, this may in fact be the winning approach and all parties are happy.  However, if sales velocities begin to slow, the retailer will call to inform you that you must take action in order to improve sales or you will potentially run the risk of getting delisted.  You remind your retail partner that you have agreed to an EDLC program so there really are not incremental funds to invest.  In some cases, the retailer will work with you to try some things to get sales turned around.  However, they will not spend a lot of effort here because if your brand was a leader- it would not be struggling to meet velocity hurdles.  Your buyer is now targeting you for one of two things: incremental funding or deciding whom they will swap into your shelf space at their next reset.  Since CPG leaders are competitive- and we likely paid good money to get on to the shelf in the first place- we eliminate failure as an option and go to management for incremental funding.  The ultimate losing hand as you are boxed into an EDLC program and you are now incrementally funding programs in an effort to “save” the brand.

Data shows that in many cases, a brand will do better NOT entering into an EDLC program, allowing their everyday price to be higher, and putting together a promotional plan with the retailer to drive sales through to the ultimate consumer.  This can accomplish a couple of things for the brand- first and foremost, with the proper data, both the retailer and the brand will make more money.  Second- the fact that your brand is being promoted will draw the attention of consumers; this is particularly important for brands that experience a lot of brand switching within their category.  Do not underestimate the power of getting the ad, end cap, or tag up in the store.  Lastly, putting together a promo plan with your retailers for your brand will cause them to both invest some time to consider how to grow the brand (all want their categories to grow- why can’t your brand be a driver of growth?) and will drive performance by the retailer in order to get your brand’s trade dollars.

Years ago one of the finest Sales professionals I have worked with told me ‘we all need to be alert for Sally at this time of year’.  It was getting toward the point on the CPG calendar when line reviews, promo planning, and new item presentations show up on your schedule.  In this instance, the subject at hand was promo planning.  I had no idea who Sally was- so I asked ‘where does this person work?’  The answer was ‘everywhere’.  Sally wasn’t a person- it was an affliction: Same As Last Year (SALY).  As we spoke further, the mist was starting to clear and I understood the lesson coming my way .

Turns out, we are all subject to the tyranny of SALY if we are not careful.  People, being human, will often take the easiest and quickest path possible to completing any task that calls for thinking and effort.  If we are not careful, we enter a promo planning meeting and our buyer says that they have to grandfather last year’s performance “plus a few percent”.  If you aren’t careful, the promo planning meeting has already been framed- the default is last year’s plan.  If you were fortunate enough to have a killer plan last year- perhaps this baseline is beneficial to you.  If you are a pro, and if your senior management is paying attention, you are going to have to beat last year’s plan whether your account challenges you or not.

But what if the plan wasn’t optimal?  What if you don’t get that end cap this year?  Or you don’t have a hot new item?  What are you going to do to offset the pipeline volume you had last year that isn’t in the plan this year?  How to defend against the competitive new item you saw at an industry conference? What if your buyer is kind of lazy and doesn’t want to slug through a new plan?  What if you are lazy and don’t want to develop and present a new plan? You have to enter your meeting with SALY prepared to build the best plan possible- not to accept starting with last year’s plan and then “tweaking”.  If you accept SALY, the “plus a few percent” mentioned above will come right out of your margin either via a demand for list price reductions or enhanced “commitment” to merchandising support.  Both options are losers for your firm.  SALY doesn’t care: their mission is accomplished.

So how do you approach this meeting?  By being as prepared as possible with facts.  If you enter the meeting ill prepared, or simply expecting to execute last year’s plan- you will lose.  Any number of reasons can rear their head: buyer leaves the desk and a new buyer has no affinity toward you or your firm, competitor has a hot new product, competitor gets an injection of capital to invest in a brand, or most likely- someone is willing to out work you.  You need to show that you have come to the table to work.  You know what the optimal price points are, you know the distribution you really need and why, you are prepared to ask for support for a promotional plan that makes sense for your company, the account, and the consumer.  Lifts aren’t “sort of about here”- the lifts are projected to be here and here’s the rationale why.  As a final point, you demonstrate you understand what is important to the account and what they are tasked with delivering to their management.

If you enter these meetings prepared with very specific facts and a clear, logical proposed plan- it is no guarantee that you will get what you want.  But your odds of success will increase as the message will be clear that your buyer can count on you to be prepared with facts and to hold a logical discussion about the business.  You will separate yourself from those firms that walk in ill prepared- or those that are bringing the same plan everywhere, but changing the logo on the deck. 

SALY doesn’t work here any longer.