CPGs Can Tame Inflation’s Impact with Trade Promotion Optimization

07.13.2022 | Mike Troy

Inflation has gone from bad to worse since the beginning of the year. Customers can be heard grumbling in store aisles where price increases seem to be evident on every product. Sticker shock hits them at checkout and at month’s end the realization sets in that the increased cost of food and consumables has left households cash-strapped.

While the surge in prices continues to have a significant effect on shoppers, it has also created new opportunities for CPGs to win with shoppers who are hunting for value. To aid in this quest, CPGs must be armed with the right technology and insights to offer on-target promotions that satisfy shoppers and improve ROI. To understand how that is possible, it’s helpful to look at recent data from key markets to get a sense of the macro environment in which trade promotion is occurring.

  • Food at home inflation increased 12.2% in the U.S. in June, according to the Bureau of Labor Statistics, marking the largest increase since April 1979.
  • 1% was how much the Consumer Prices Index (CPI) increased in the United Kingdom in May, according to the Office for National Statistics.
  • 7% was how much food and beverage inflation increased in the European Union in May, according to the European Central Bank.
  • The Bank of Canada said the May CPI index increased by 7.7%.
  • Food and beverage prices in Mexico increased by 11.27% in May, according to the National Institute of Statistics and Geography.

Those are depressing numbers which explain why consumer confidence in the U.S. has never been lower, according to the University of Michigan Index of Consumer Sentiment. The widely followed survey’s sentiment metric sank to 50 in June, an all-time low since the survey was created in the late 1970s.

“Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines,” according to Joanne Hsu, director of the University’s Surveys of Consumers.

It’s Time to Optimize Trade Promotions

Nearly half of those in the University of Michigan survey blamed inflation for an erosion in their living standards. That makes sense given how quickly prices increased, but what’s less understood is how the current environment creates an opportunity for brands to connect with shoppers, showcase value and improve the effectiveness of trade promotion spending.

For starters, the run-up in prices can make it easier to showcase value because promotions are occurring off ever higher benchmarks. However, to truly optimize promotions requires a much deeper understanding of behavior, promotional receptiveness, and countless other interconnected variables all of which have a bearing on whether a promotion will generate sales at a desired ROI.

Further complicating things are two major forces; the pandemic caused major changes to shopping behavior and affected product trends while inflation has impacted loyalty and price sensitivity. Things get exponentially more challenging when CPGs layer in other promotional considerations such as product attributes, price elasticity, margin effects and category impact, all while designing to meet business objectives.

AI is the Answer for what Ails Trade Promotion

As in other areas of retail, be it category planning or supply chain, a digital divide is widening in the trade promotion area. Simply put, those who embrace technology are gaining capabilities to optimize trade promotion to achieve superior ROI while those who stick with traditional methods are quickly becoming outdated and less effective.

This phenomenon was evident in a recent survey of more than 100 CPG companies featured in the Promotion Optimization Institute’s 2022 State of the Industry Report. The data showed 83% of CPGs rely on Excel for managing and driving the efficiency of trade programs. The issue with Excel is it doesn’t allow for modeling of “what if” scenarios the way AI-based systems do, which helps explain why the POI survey showed 41% of companies are dissatisfied with their ability to manage trade promotions. Only 24% of those surveyed said they were satisfied, and zero respondents said they were extremely satisfied.

Combine low levels of satisfaction with a growing understanding of what will be needed to win in the future and the result is predictable. CPGs ranked promotion planning optimization tools with what-if scenario capabilities as the top area for improvement to transform trade efficiency and effectiveness.

The what-if capabilities inherent in AI-based trade promotion optimization solutions allow CPGs to detect patterns, evaluate options based on different variables and generate recommendations based on business rules. AI helps CPGs invest in trade promotion activities that work while avoiding those that don’t.

The Size of the Trade Promotion Prize

Huge sums of money are spent on trade promotion, which affects the profitability of every company. The CPG industry spends between 11% and 27% of revenues on trade promotions, according to the POI survey contained in the organization’s 2022 State of the Industry Report.

Given the large expenses involved, even small improvement can have a big impact. But the bottom line with trade promotion optimization isn’t just about reducing spending, it is about making sure investments yield optimal results whatever the level of spending.

That is why trade promotion optimization has emerged as a powerful new source of competitive advantage. CPGs who get it right will make smarter decisions faster, improve execution of promotions that resonate with shoppers, improve loyalty and increase sales with retail partners. This will be true regardless of the future trajectory of inflation.

Did you miss the webinar, “Solving the Trade Promotion Problem” To watch the replay click HERE.

Want to learn more about Trade Promotion Optimization? Connect with a solution consultant.

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