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      Introduction to TPM: Emerging Natural Brands [White Paper]

      An Intro to Trade Promotion Management For Emerging Natural Brands (July 2023) 

      Table of Contents

      1. Executive Summary
      2. Trader Promotion Management - The Basics
        1. The Sales Channel
        2. High Level Cost Structure
        3. Elements of Trade Promotion
        4. The Trade Process
        5. Benefits of a Trade Promotion Solution
        6. What Next?
      3. About Adesso Solutions

      Executive Summary

      Entering the Consumer Packaged Goods industry can be complex. Most new natural brands quickly realize it's a complicated channel with multiple levels of distribution, and a complex cost structure. It can be daunting for a new natural brand. 

      The purpose of this document is to assist new, emerging natural brands with an initial overview of the complexity of the space, and some common pitfalls in how to navigate this complex area, more specifically as it relates to trade spending and managing this spending.   

      Also, it is important to recognize that while trade spending seems like an impossible black hole, it is possible to get this area under control in short order. It is also important to turn trade spending into a marketing lever – it has been around for decades, and with proper information and analysis, it can become a major benefit to your team and grow your brand. 

      We welcome the opportunity to educate you, answer further questions, and provide more insight as you continue your journey. 

       

      Trade Promotion Management – The Basics 

      The Sales Channel

      1. Brokers / Sales Agency Partners
        • One of the first areas you will want to address is finding a broker partner to assist you in selling through this complicated channel. Brokers understand the market, the customers, and how to execute various programs within these two areas. Just like natural brands and retailers, brokers have different strengths and weaknesses, different priorities, and different areas of focus. The key to a successful broker relationship is to ensure both parties understand each other's priorities and are aligned with a common set of objectives.  
        • Every broker has their own individual agreement or contract, and rest assured every one of these is different based on the strength and priorities of the broker. It is critically important to understand all elements of this contract and agreement, and make sure that your organization is aligned with the broker’s organization. Too often there is misalignment here. Expectations are not met, and the natural brand’s business suffers as a result. We cannot stress strongly enough how important it is to have initial and ongoing alignment on roles, responsibilities, objectives, and deliverables. 
      2. Distributors
        • To sell your products to retailers, whether chain or independent stores, you will need to sell your products through distributors. They purchase products from all natural brands, consolidate them, and redistribute them to their various retail customers. While this sounds simple, it is an amazingly complex system.   
        • Your first step in developing a plan with these distributors (the 2 primary ones are UNFI & KeHE) needs to be a thorough understanding of their distributor agreements, which you will be required to sign.   
          • Link to current KeHE & UNFI agreements here 
          • There are an innumerable number of charges and fees, ranging from forward buy requirements and free goods requirements to administrative fees to logistical charges.  It is safe to say that one of the primary revenue streams for these distributors includes the various funds these distributors leverage from natural brands.   
        • Each distributor has a published promotional calendar for the year, requires significant lead times, and provides specific purchase dates for each promotion, as well as the dates they will reflect these promotions to their retailers.   
          • Link to key distributor dates here 
        • It is important to understand that while these distributors are a required partner to develop a relationship with, they are not partners in the true sense of the term. They are clearly in this for their benefit, not yours. In all areas, they will look to increase their revenue at the expense of the natural brand.    
      3. Retailers
        • Obviously, the retailers are the conduit between the natural brands and the consumer, however, they purchase the products from the distributor. The distributor remains the link between the natural brands and retailer for all billing, chargebacks, fees, and any other spending – to include trade spending, shortages, logistical charges, spoils, slotting / free goods, and any other fees.  
        • Performance related promotions are developed and negotiated with the retailers after the framework of these events are planned at the distributor level, but to be clear, the retailer needs to have the detailed plan to secure performance to drive consumer takeaway.   
        • It is also particularly important to target retailers for these events by understanding their requirements, forecasting performance (including retailer volume) and then, comparing actual results to forecasted results. It is therefore key to target specific retailers to understand what works and what is not working to avoid a costly waste of valuable trade dollars. There is a variety of information available to evaluate performance, which will be discussed later in the document. 
        • A keynote: to secure merchandising support at a retailer (chain, coop, etc.) it is mandatory to have distribution in all stores within the retail customer, or specific merchandising division within the retailer. Random distribution within a retailer (for example, 6 of 35 stores) is an almost certain recipe for failure. It is clearly a better growth approach to have full distribution at one 10-store chain account than to have 50 stores across various retailers, with no full distribution at any of them. 

      High Level Cost Structure 

      There are 3 main cost centers for an emerging natural brand. While they represent most expenses, 2 of the 3 areas are easy to quantify, track and measure against. The third has proven to be the ‘black hole’ in the segment. 

      1. To start, cost of goods sold (COGS) typically represents about 30% to 40% of gross revenue and with QuickBooks as a financial system, it is quite simple to quantify by line-item expense. Virtually all emerging natural brands have a solid handle on this area. 
      2. Although variable based plans for broker commissions can create some analysis, HR expenses (including commissions) are rather straightforward as well. There are innumerable payroll services available to automate and simplify this process.   
      3. This third area, trade spending has become the major issue for all natural brands, with countless deductions, never-ending surprises, and unanticipated charges. Many natural brands simply write these off to one GL (General Ledger) code or look to clear the deductions at an extremely high level. Neither creates the environment to have a solid cost foundation for analysis, particularly that in the first few years, these expenses can range from 30% to close to 50% of gross revenue, and many warrant repayment. Regardless of the exact level of trade spending (which you can understand), having this level of expense, without granular knowledge of the exact GL code, customer, promoted group or indirect retailer will be a long-term challenge.  Many companies have gone out of business due to insufficient controls in this area.  

      It is critical to onboard a wholistic, comprehensive solution as a core competency for growth. 

      This is affordable, complete, simple to use, reduces administrative time and resources and will be a key level for success in the short and long term.

      Elements of Trade Promotion 

      Trade promotion takes various forms, is complex and it is paid to both distributors and retailers. It encompasses all funds paid to both levels, and includes funds paid for merchandising (in-store promotions to drive incremental sales), slotting (funds to drive new and incremental distribution at the distributor level) as well as fees and other charges to support these funds.   

      1. Merchandising 
        • There are innumerable types of merchandising promotions, most related to the performance required. Many of the more common ones would include: 
          • Off Invoice Allowances (OI’s) 
            1. These are paid to distributors for a published period, and then reflected by the distributor to all retailers, typically for a slightly different period. 
            2. There is no required performance for this promotion on the part of the retailer, it is up to the natural brand / broker to secure performance, 
            3. At the end of the OI period, the distributor will purchase additional products, in many cases until the next OI starts (known as ‘bridging’ or ‘bridge buying’).  
            4. For example, if your OI is 15% off case cost, you may reflect this discount on all cases sold to the distributor with no performance required, and no incremental sales. 
          • Performance Based Promotions (% Off or Case Rate) 
            1. These will require specific performance negotiated between the natural brand / broker and the individual retailer. As mentioned earlier, if it is a multi-store retailer (chain or cooperative), it is required to have full distribution (all stores) to execute. 
            2. Typically, these are leveraged to create price reductions for specific time periods, and these should be scheduled to coincide with the reflected dates of the OI allowance. 
            3. They are paid on a deduction basis, through the distributor based on the agreed upon performance. 
          • Performance Based Promotions (Lump Sum or Fixed Fees) 
            1. Lum sum fees are typically used to secure advertising, display or any other type of non-price related activity.  
            2. These are also paid on a deduction basis through the distributor as above. 
      2. Slotting
        • Securing new distribution at both distributors and retailers requires a fee, which can be significant.   
        • For distributors, it is typically a series of fees for new item placement in the warehouse, listing the items for sale and other various charges. These can be numerous and either a lump sum or case rate. 
        • For retailers, it will typically come in the form of a free case (or half case) per store. As you easily see, it can get quite expensive quickly, so it is important to have a comprehensive plan to create consumer demand for your product in advance of securing random retail distribution. 
        • If you do have merchandising / promotional funds scheduled at the retailer, recognize these are in addition to the free good, so in fact you are paying in addition to cases that were free.   
          • As an example, if you secure new distribution at a 20-store chain, there is no initial revenue on those 20 cases. The merchandising funds will be paid in addition to this amount on any of the cases sold, based on the performance requirements. Imagine the situation with a 400-store chain such as Sprouts!  It is not uncommon to send an invoice, and with the deductions, receive a ‘negative’ payment.  
        • Again, the key here is to target new distribution, and have a clear plan to move these cases to the consumer so they are repurchasing product, and you have a loyal consumer base. 
      3. Fees & Other 
        • Trade spending can also include additional fees such as a distributor surcharge to deduct for the performance-related promotions. There is a deduction for virtually everything.  

      As you can easily see, trade spending, representing up to 40% or more of your revenue, is complex and needs to be addressed upfront in your journey. Again, working with a knowledgeable partner (expert) and having an affordable solution to manage the process with you can be an extremely cost effective path to success. 

      The Trade Process 

      Following a clearly defined trade process is key to growing your business. If not, this becomes a fragmented hodge-podge of unknown spending, clear uncertainty about what is happening with your retail partners in advance, resulting in an inability to forecast 40% of your costs. Consider not having any visibility into your COGS – it could never happen, yet it does with trade all the time. This also leads the constant surprises with distributor deductions and a major impact on your profitability. 

      Many emerging natural brands have little or no idea what is being spent nor where, whether by distributor, retailer or at a brand level, creating havoc with budgeting and profitability, which immediately impacts the shock of the deductions. It is also impossible to understand what promotions are working and which ones are not performing. Additionally, it is difficult to understand upfront what your team is spending. While this may seem repetitive, it will have a major impact on success or failure. 

      To start, this will provide an overview of the 4 steps in the process. 

      1. Planning
        • Detailed customer planning is critical to properly accounting for the spending your team plans to execute, along with creating a budget at both the distributor and retailer level. 
        • There is typically collaboration between your sales team and broker partners. These plans need to be recorded by the event and by the customer.  
        • Most natural brands also have an approval process based on the levels of funding. Final approval may be from the founder, senior finance person, or senior sales lead. 
        • Once the plans are developed and approved, they are set to be taken to your customers. 
      2. Commitment
        • As plans are being executed in the market, some will be accepted ‘as is’, others require changes (typically more funds needed), others are rejected, but it is a fluid process that continues for months. At the end of a period, many ‘in-market’ plans will be significantly different than what was originally planned. This needs to be captured.  
        • Also, as plans are finalized with customers, there is always a custom driven contract for the promotional spending. This is typically completed by the broker, submitted to the customer, and becomes the agreed upon record between the natural brand and the customer. It is also the basis for promotional deductions. 
        • Having a timely and complete understanding of all funds you are spending by product, customer (both direct and indirect), along with documentation, is the basis for proper accounting.
      3. Settlement / Deduction Management 
        • As you know, deductions can seem outrageous. In most cases, these deductions are primarily promotion related and legitimate. More specifically, we have found the following to be a good barometer of deduction breakout: 
          • Promotion related with customer contracts:  80% to 85% of deduction amount 
          • Non-promotion related (logistics, shortages, admin fees, unsalables, other):  15% to 20% of the deduction amount 
          • Of these, typically 5% or so (of the total) can be disputed for repayment; proper documentation is key to securing repayment 
        • Proper planning and commitment are the cornerstones to rapid deduction clearing and securing repayment as warranted. 
      4. Reporting & Analysis 
        • Having consistent and regular reports and analyses is obviously critical to leveraging all this spending and deduction information. To start, it is important to have core metrics to track progress, identify opportunities and make better business decisions. 
        • Some initial reports for the planning and spending side to provide a business-side view should include: 
          • Trade dollars planned vs. spent by customer (both direct and indirect retailers) 
          • Trade vs. shipments and the resultant rate per case spending 
          • Actual shipments vs. planned shipments 
          • Promotions to be approved 
          • Promotions to be committed 
        • For the deduction / settlement side, some basic metrics would include: 
          • Deductions to clear by customer 
          • Deduction aging (the duration for open deductions) 
          • Deductions to clear 
          • Unauthorized deductions (to be addressed for repay) 
        • Ideally, these are addressed by direct customer, and in most cases, at the indirect customer level as well. 
        • This will represent an excellent starting point to gain understanding of your business; reports and other analyses can be added as there is an organizational understanding of these basic metrics around spending, and you gain better control of a sizable portion of your cost structure.  

      Other Information Available 

      As you grow, there are a variety of other information sources available to further analyze the results of your spending; these would include:  
        • Shipments
          • Combining shipments with spending is a basic measurement and barometer to how trade spending is performing at a high level. While not detailed at an indirect retailer level, it can provide an understanding of spending and volume / revenue at a product group level, SKU level, and allow for a basic understanding of trends and year-over-year comparisons. 
          • Also, you can understand the relationship of non-trade deductions, as well as the spending on a period level. 
        • Warehouse Withdrawals 
          • Both main distributors provide access to most of their retailer's indirect volume, either through reports or their portal. 
          • As you have spending at the indirect level, you can then analyze the volume / spending relationship, evaluate individual promotions, and make decisions based on effectiveness. This is a major step in the process for improving both your volume and your trade effectiveness.  
        • Syndicated Data 
          • Syndicated data sources such as SPINS can create a different level of understanding and analysis. The ability to simply understand how each promotion is driving consumer behavior is the next major step to growth. 
          • While this may not be an initial area to address, as you have the detailed planning and actual deal performance, you can easily look back and understand the historical trends. 

      Benefits of A Trade Promotion Solution

      A holistic & proven trade solution generates innumerable benefits for the emerging natural brand, in fact many of our clients initiated a project before they had appreciable retail revenue.  It set them up for proper accounting of their trade spending and we have, however, isolated this to 4 key benefits that make a total difference – they are accounting for this spending at as granular of a level as your COGS, with the added benefit of targeted analysis to make clearer decisions about your spending and leverage trade as a true profitable volume drive to build your brand.   

      What Next? 

      After reading this you may be thinking, ‘We are a 5-person team, I handle sales, our finance team is overwhelmed with UNFI and KeHE deductions, and we have no time for this. 

      Rest assured there is a partner that totally understands the business and can guide you through the process. There is also a solution that is built specifically to address the issues reviewed here.  

      The solution is extremely simple to use, will dramatically reduce your administrative time, and is affordable – in fact, the payback comes within a few months.  

      You can also be onboarded within a week – the solution is totally complete. We simply need some information from you, and a connection to your QuickBooks system. Then there is some simple training and you're ready to go.  

      No one is too small. 

      As you are looking to learn more, or need more information, feel free to let us know.  

      [Contact Us to Learn More] 

       

      About Adesso Solutions 

      Adesso Solutions is a leader in Trade Promotion Effectiveness for small to midsized and natural products CPG manufacturers. Adesso leverages a long history and deep expertise in the industry, and offers the all-encompassing Flamingo Trade system, unique System Effectiveness Services, Trade Analysis & Reporting, and an active community for client collaboration. https://www.adessosolutions.com