Whenever I think about trade spend — I define this as any spend (money, resources, discounts, etc) required to get a product on physical retail shelves — I find myself continually asking why?
Why does trade spend even exist? Why is it so complicated? And, why should I care?
As an investor and former operator in CPG, trade spend is one of the most archaic concepts I’ve ever come across. It disproportionately benefits retailers and distributors (compared to brands) and enables them to perpetuate bad behavior (see Ryan Caldbeck’s epic tweet storm on this topic here and my colleague Karen Howland’s piece outlining her talk at the California Grocer Association titled Is Grocery Stifling CGP Innovation? Spoiler Alert: Yes).
Any consumer brand selling through retailers and distributors must have a trade spend strategy. It’s an antiquated world that is tough to navigate, especially for a startup CPG brand. Trade spend is complicated, unfair, and I can’t wait until someone disrupts the ecosystem. Until then, here’s a framework to think about trade spend. I welcome anyone to continue this conversation on Twitter (@aditi_sf).
- Plan for trade spend: Include a realistic expectation in margins & sales forecast. At a high level, 12–14% of gross sales for trade spend is a nice place to land
- Don’t trust the middleman: whenever possible, work directly with the retailer on any promotions or price reductions (instead of the distributor).
- Cash is king: prioritize spend that doesn’t require upfront dollars, and prioritize variable trade spend above flat fee.
- Get into programs that support emerging brands: take advantage of UNFI Next, KeHE’s Natural Show and KeHE CAREtrade. If you have a woman on your team, apply to get the business Women’s Business Enterprise National Council (WBENC) certified, which exempts businesses from trade promotions in many cases.
- Think small: work with regional and local distributors and smaller broker partners (for example Greenspoon has a great reputation for emerging brands).
- Don’t offer up the wrong thing: it can be tempting to offer something like private label or a highly custom product to a retailer in exchange for lower trade spend. Be very careful going down this path, because customization creates complexity.
- Be strategic on retail expansion: start with retailers (or prioritize) that don’t charge slotting i.e. Whole Foods, Costco, Publix, BJ’s Wholesale, and Walmart. Note that they do charge other fees and will negotiate hard.
What is Trade Spend?
Trade spend or trade promotion includes everything a brand spends to get a product on shelf (must be treated as contra revenue); once it’s on shelf, the spend is characterized as marketing (falls below the line as a traditional expense on income statement). Trade spend varies dramatically across category and product type. Some companies spend 2–3% of gross sales, while others are spending up to 25% of gross sales. It depends on whether your product is refrigerated, frequency of promotions, slotting fees, new distribution growth, and age of the brand.
Why does Trade Spend exist?
Before digging into why trade spend exists, it’s important to note that there is no consensus today about the purpose of the fees. As far as I can surmise, trade spend started in the 70s and 80s when manufacturers started to introduce lots of new products to retail. Each new product has a cost associated with it, and given that most new products fail (~70%), retailers started charging fees to pass the cost of failed products to the manufacturers. In a nutshell, trade spend exists to pass costs associated with failure back to the manufacturer or brand.
When most new products were coming from large manufacturers, trade spend became a part of doing business. But, trade spend has a much different impact on smaller brands. The game is very difficult to navigate for emerging brands, which have to fly blind when negotiating with behemoths like UNFI, KeHE, or a slew of retailers.
Why is Trade Spend so Complicated?
Today, I think trade spend is indicative of a last ditch effort by retailers and distributors to squeeze manufacturers/brands for profit via fees. The same thing is happening in the airline industry: with declining margins and increased costs, airline profits have been squeezed. As a response, airlines now routinely charge customers silly fees that don’t make sense i.e. $100 for a few inches of extra legroom.
Just as airlines have slowly increased the amount they charge for fees and made the process increasingly difficult to understand, the cost and complexity of trade spend has increased significantly in last few decades. According to Forbes, manufacturers spent 5% of sales on trade promotions in 1978; today it’s up to 13%.
Part of that increase is due to complication. There are too many types of spend to keep track of…from slotting fees to discounts to temporary price reductions, fees are compounding and new brands are suffering.
Why Should I Care?
There are 10 major buckets of trade spend today. The first step in getting a handle on trade spend is understanding each of these; only then, do we have a shot at changing the system.
Hit me up on Twitter or via email (firstname.lastname@example.org) to let me know if you’re seeing the ranges below.