CPG companies that have both a retail and foodservice division often had challenges using a software solution from one vendor to manage both retail promotions and foodservice contracts.
Why is this? I believe the answer is in the differences between retail and foodservice. Here are a few of the differences:
Layers of discounts: Foodservice has a more complex deal stack.
- Retail: Typically there are only one or two layers of discounts that might apply to a wholesalers or retailer. Three layers at most. For example, let’s consider an individual SKU. A direct retailer like Kroger might qualify for EDLP (everyday low price), a Scan, and a new distribution allowance concurrently. For a very small brand, a retailer may buy through a wholesaler. However, the number of discounts that ‘stack up’ on any given shipment of product is still typically no more than three layers. For any one customer or entity, typically there are three or fewer layers of discounts.
- Foodservice: Almost all foodservice sales qualify for more than three layers of discounts. Here are just a few examples:
- Earned income; The corporate office (like a Sysco) may earn “x” percent on every purchase to any of the operating divisions.
- Re-distribution: A re-distributor may not purchase your product from you, but from another distributor. (i.e., Dot Foods buys from Sysco). Similar to this, a distributor can claim additional discounts when product is moved from one op-co to another.
- Deviated pricing: These discounts are the result of contracts with operators at a fixed price, where the the distributor must honor the contract price. For example, the operator’s contractual price is $20 per case, but the distributor purchased it for $30/case. This results in deviated pricing of $10 per case. The distributor will claim the deviated pricing.
- Growth programs: Grow your business by x%, get y, grow by x+% and get z.
- Bids: Schools, prisons, etc.
- GPO: Group Purchasing Organizations like Premier and Foodbuy, where members of this organization receive discounts on top of all the other contractual discounts.
- Management companies like Aramark, Compass and Sodexo have their own contracts and discounts.
- Buying groups: If you are a member of Unipro , you get an extra discount.
Direct vs. Indrect? Foodservice is all indirect, while some retail can be up to 70% direct.
- Retail: Some retail brands sell 70% or more of their product directly to their retailer customers, making for 30% indirect through wholesalers. This gives the retail brand more visibility to how their product is purchased by the end consumer. In contrast, retail brands in the natural and organic categories are the opposite, with 70% to 90% of their sales being indirect.
- Foodservice: Virtually all of foodservice can be considered indirect because the end ‘user’ of your product, the operator, buys through a distributor or redistributor.
Frequency: Retail has far more promotions to manage.
- Retail: While retail promotions have fewer layers, they make up for that simplicity in frequency. It is not uncommon for a brand with national distribution to have thousands of promotions every year, some as short as a week or less. Yes, thousands, with each one requiring workflow approval, analysis, and matching of customer deductions.
- Foodservice: Foodservice tends to have annual contracts, that often are renewed with a few changes each year. Not only are the contracts longer in duration, there are fewer contracts because many are at the brand or category level. All the items within the brand or category have the same percent discount or case pricing across all items.
Analytics: Retail has more data to perform both pro-forma and historical financial analysis.
- Retail: There are many third-party sources of data to analyze retail promotions. These include AC Nielsen, IRI, Spins, and POS data in customer portals like Walmart’s Retail Link. Analytics include baseline volume, projected and actual promotional lift, category share, profitability ROI, and other pro-forma and historical measurements.
- Foodservice: Distributors are protective of their sales to operators, both in name and address. While there is third-party data available, it typically doesn’t have the level of detail that’s available in the retail division. The complex deal stack and lack of detailed usage data limits the type of analysis that can be done.
These are just a few of the differences that make it challenging for our retail and foodservice divisions that software tools must address in order to manage trade spending in one solution.
Go to our other blog at www.i-TPM.com to see some similarities between retail and foodservice promotions and contracts.
Alex Ring
Co-founder & President
CG Squared