But do you understand him?
Picture the following scenario. A country unit of a consumer packaged goods (CPG) manufacturer spends months and considerable funds to prepare a high quality trade marketing program, including strong point of sales visuals and promotional support. Once all internal departments are aligned, it can't wait to share this program with one particularly important key account, which it is willing to give exclusivity to for the first 6 months. But the kick-off meeting derails into a disaster, with the unthankful retailer only demanding lower buying prices. Sounds familiar?
Remarkably few marketing and sales professionals have worked on both the CPG and retailer side of the fence, but those who have realize how little understanding exists between the two. This brief article seeks to clarify some of the basic and often overlooked misunderstandings between CPG manufacturers and multi-brand retailers, from the perspective of the supplier:
- Retailers don't understand you
- Retailers don't like you
- Retailers drown in complexity
- Retailer management 101
1. Retailers Don't Understand You
First of all, CPG companies are right: retailers indeed don't understand them. They don't understand why CPG staff speaks endlessly of the consumer and even worse - their brand - as a divine being in irritatingly vague language. Resellers also don't understand why manufacturers turn up for a meeting with an army of people - often including trade marketing, key account management, category management, brand management and even regional management - while they just bring the relevant buyers and category director. And they don't understand why CPG staff remains so vague about improving margins.
But why are CPG companies surprised? Why should retailers understand them? How many of their staff has ever worked for manufacturers? People movements between suppliers and resellers are minimal. So the main occasions in which retailer staff gets exposed to manufacturers is in negotiations (purchasing department), when goods do not arrive (supply chain department) and when bills do not get paid (finance department). These superficial and often contentious dealings are hardly conducive to deep understanding, let alone liking.
2. Retailers don't like you
Sellers often don't realize that customers not nearly like their suppliers as much as suppliers like their customers. They seem to forget that it is only they who are getting paid, and that a hard-won trading terms agreement may cause long term resentment. How many of their customers may in fact be reluctant clients, agreeing only as there is no better alternative?
The natural conflict between buyers and sellers also exists within retailers themselves, with purchasing departments under permanent pressure from complaining store operations / sales departments to reduce buying and hence selling prices. This pressure is naturally passed on to CPG manufacturers and impacts trade negotiations. Many retailers resent the in their eyes unfair distribution of the margin value chain between manufacturers and resellers. Why should a manufacturer of e.g. skin care make 30% percent margin on this category, while the retailer hardly makes 3%? Simply not discussing these fundamental matters doesn't mean that they are not felt. Larger doses of empathy would benefit many manufacturers.
3. Retailers drown in complexity
At most manufacturers, complexity comes from just that: production. Building and running plants are technically complex and a frequent cause of problems and delays. Logistics is a second source of complexity, especially with cross-border shipments. Retailers have no production and little supply chain worries if suppliers deliver the goods to their warehouses and stores. So how complex can be retailing be? You buy at a certain price, and you sell at a higher price to cover for costs and margin; that's all... Conceptually retailing is indeed simple, but the reality is very different. Many multi-brand grocery retailers carry 30,000+ SKUs, sourced from 1,000+ suppliers. Managing these numbers and diversity is far from easy. That's why oil companies are such poor convenience store operators, as selling 5 internally sourced SKUs is radically different from selling 500 SKU's sourced from dozens of suppliers.
And then there are the retailer's consumers. Many retailers run loyalty schemes, allowing them to track the transactions from 1+ million consumers across hundreds of geographically dispersed stores. But most retailers don't know what to do with all this data that is crippling their antiquated systems. The amalgamation of suppliers * SKU's * stores * customers (* employees as retailing is notoriously people intensive) results in an overwhelming complexity that few multi-brand retailers have successfully mastered. At best retailers are efficient within one function, such as purchasing or (store) operations / sales, with one function often dominating the other (e.g. in decentralized retailers such as Carrefour operations is often the strongest function, whereas purchasing reigns in centralized retailers/wholesalers such as METRO Cash & Carry). However, this efficiency within one function often goes at the expense of cross-functional effectiveness.
Going back to the trade marketing initiative of our CPG company, the above is extremely relevant, as the implementation of his program requires the support from the retailer's purchasing department, but as a minimum also the commitment of the store operations / sales department. It is not uncommon for CPG companies to do the coordination across retailers' internal departments for their initiatives, as retailers' own cross-functional communication is often limited and contentious. What doesn't help is that the function most likely to support the trade marketing initiative - the retailer's marketing department - has often little power, people and budgets, a far cry from the almighty reign of marketing in CPG companies.
4. Retailer Management 101
So how should manufacturers deal with these mundane but often overlooked retailer fundamentals? Here is some basic guidance.
Create clarity about what you (don't) want to discuss
As a default, (purchasing departments at) retailers expect to be discussing buying prices and trading terms with manufacturers. CPG companies should make it clear ahead of the meeting what they (also) want to discuss. In case of gross retailer dissatisfaction about buying prices or trading terms, then this should be addressed before sales initiatives, as fundamental disagreement would thwart any business building discussion. Given the often tense nature and unpredictability of trading terms discussions, it is better to organize a completely separate meeting about sales building initiatives, also as the latter requires a different and larger group of attendees.
Put category before brand
It is unlikely that retailers will match CPG companies' enthusiasm for their brands. Retailers are interested in growing the category faster than the market, and hence to win market share. They are not interested in e.g. P&G brands taking share from e.g. Unilever brands on their shelves, especially if their margins on P&G products are lower than on Unilever's. Every manufacturer (should) know this, but surprisingly few act accordingly. A trade marketing initiative should foremost be category-building; with at best the supplier's brands over-averagely benefiting.
Get all the right stakeholders around the table
Suppliers should make sure that they speak to senior enough people from all relevant retailer departments. Of course the sponsorship of the purchasing department is key. This support requires senior (at least category director) involvement, as more junior purchasing staff risks being only interested in buying prices and trading terms. But support from the marketing and store operations / sales departments is equally fundamental for a successful implementation of the program. CPG companies should make sure that these departments are at least conceptually onboard, so the main discussion can center on execution.
Keep it simple
Given the enormous complexity that retailers face, any initiative's success would be greatly helped if implementation would be as simple as possible. The more work that is taken care of by the manufacturer, the more likely the retailer will support. And language and terminology should be simple: retailers are smart street fighters, not esoteric intellectuals.
Stress what's in it for them
Growing brand sales or improving its consumer satisfaction are supplier objectives, not retailer ones. Retailers think in sales, market share, profit and margin on a category basis. Suppliers should make sure that they motivate each initiative with one or several of these criteria.
For CPG companies to receive a warmer reception for their trade marketing initiatives, they need to show more understanding and empathy for their retailer customers' complex operations, and act upon it. Provided that gross dissatisfaction about buying prices and trading terms is out of the way, following a few simple rules should lead to much better results.
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The author André van Regenmortel has a successful 20 year track record in Strategy Consulting and Industry Marketing in Consumer Products, Business Services and Retail. He draws from extensive experience at among others Philips Electronics, McKinsey & Company, Danone, and METRO Group. For the latter two companies, he occupied Board positions in Vietnam and China, being P&L responsible for businesses of up to $2 billion.
André founded Asturias Consulting Ltd in 2012. Asturias Consulting Ltd is a global strategy and marketing consultancy which helps manufacturing, services and retail companies to grow sales and profit through smarter serving consumer and retailer needs, by jointly developing factual and implementable strategies and marketing plans.
For more information, please visit www.asturiasconsulting.com/business-solutions.