Accounting for Survival

In December’s column, we discussed the three things any manufacturer needs to execute a successful promotion plan: 1) Know what you want and what you’re capable of; 2) Develop an effective planning process; and 3) Understand how retailers operate.

All of these need to happen simultaneously, rather than sequentially, in order for you to succeed. And, all of these must be `owned’ by both Marketing and Sales.

Knowing what you want is critical. Do you desire competitive advantage and superiority (i.e., total world domination), or do you simply want to survive in the face of tough competition and the retail realities of consolidated buying power?

Obviously, you also need to know your organization’s capabilities; end-cap displays across the country, for instance, may not be a reality for certain brands.

Laying in an integrated, multi-departmental planning process is also necessary for success. Your organization likely has a capital budget-planning process and a volume forecast. Marketing probably writes plans (which, no doubt, change constantly). Are they in any way connected with written retailer-account plans? Do you have account plans at all? The brand marketing plans and account plans should tie directly together, so that they complement each other and roll up to achieve company goals.

Your marketing plans likely are filled with consumer insights and valuable trend data about your brand and its competition. How about the account plans? Do you have real insights into your top 20 accounts? Can you write a true business plan for each? If not, here’s one way to get started.

The typical manufacturer has a 20-percent profit margin while the typical retailer is working on five percent. Most retailers would like to close that gap (at your expense), and would like you to write plans that will help them do it. That kind of thinking gave birth to private label, which is much less about “store loyalty” than it is about margin enhancement. The trick for you is to help your accounts become more “profitable” without giving away your margin. And the method is to fully understand the retailer business model, which means dissecting its key financial measure, the return on net assets (RONA)

STRATEGIC ACCOUNTING

Put simply, RONA is the account’s profits divided by the assets it took to deliver those profits. Why do you care? Because if you can help the account improve its RONA without eroding your margin, your business will improve as well. To do this, you have to figure out all of the touch-points that go into RONA.

The margin the account makes on your brand is obvious, as is your sales velocity. But don’t stop there. If you can help drive sales up and expenses down, then operating profit improves. So things like store-ready pallet displays (which increase sales and lower handling costs) become much more than simple marketing tools. Figuring out how to reduce damages and returns will improve sales and reduce expenses (as well as eliminate those uncomfortable discussions with the buyer and store operations people).

Building an assortment and a promotion plan that moves the top line without adding unnecessary expense will also help. Pricing suggestions based on relative elasticities and sensitivities can help sales and margins. And strategies such as reducing costs with favorable payment terms, lowering inventories, and exchanging information electronically have hard-dollar values associated with them.

Notice that promotion plays a role here but is more a supporting player than the lead actor. Taking an integrated approach to account planning is much more powerful than focusing solely on next quarter’s TPR or cross-ruff. Don’t get me wrong, a strong promotion plan can be a competitive advantage. But it shouldn’t be the only path to success.

Here are some recent examples of actions that improved account RONA:

– Wal-Mart ceo Lee Scott made his mark by drastically reducing the company’s inventories. The benefit to the income statement can be seen in Wal-Mart’s much-improved stock price.

– Procter & Gamble paid more than $2 billion for specialty pet food brand Iams, whose sales aren’t even $1 billion. P&G will likely take this brand into mass channels at attractive trade margins, thus improving its overall relationships with key retailers.

– Gillette introduced the Mach III razor at a premium price with very little discounting, thereby improving the category mix and retailers’ overall margins.

None of these strategies has anything to do with deeper trade dealing, price-cutting, off-invoice allowances, or brand-margin erosion. All will improve the retailer’s RONA. And improved RONA is a winning proposition for the brand, too.