of Merchandising & Marketing

Customer Insights at the Point of Decision

totaltradeoptiMizationone plan. many perspectives.

table of contents

introduction

the size of the prize is compelling

demandtec total trade optimization

the challenge

about demandtec

2

4

6

16

18

totaltradeoptiMizationone plan. many perspectives.

2 Total Trade Optimization

3

Who knew three little letters could mean so much? TPO can stand for Third Party Origination, Technical Planning Objective, and even Thermo Plastic Olefin. However, most involved with trade in the consumer packaged goods industry know it as Trade Promotion Optimization. The clarity of what constitutes Trade Promotion Optimization begins to lose focus shortly after the acronym is spelled out.

Trade Promotion Optimization, or TPO, was born of trade planning management system gaps. The industry has recognized a short list of innovative consumer products leaders that have invested in trade optimization with demonstrated success as advanced econometric modeling techniques allow consumer products manufacturers to simulate the impact of proposed plans against volumetric and profit targets. But much has changed in the world of TPO during the past several years as it has evolved beyond promotions to include pricing and can even be inclusive of shopper insights. Due to expanding needs, the analytics that

are inclusive of TPO have not been entirely clear until now.

introduction

much has changed in the world of tPo during the Past several years...

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3Introduction

4 Total Trade Optimization 5The Size of the Prize Is Compelling

The stakes of understanding TPO are high. In 2009, The Nielsen Company reported that almost 43% of grocery items in the United States were sold on promotion. That is up from about 41% in 2008.i To put it simply, trade promotions are big business! Each year, consumer products manufacturers invest roughly $125B to $175B in trade-based pricing, promotion, and merchandising programs. According to industry estimates, this massive pool of spending accounts for roughly 14% to 22% of manufacturer sales – historically with little to no return to the brands.ii

the size of the Prizeis comPelling Even small improvements can deliver big returns. For a $5B

manufacturer that annually invests $750M or more into trade programs, a 3% improvement in return can yield $15M or more in incremental margin – profit that can be dropped to the bottom line, or reinvested into additional trade programs. These numbers make it nearly impossible for management to ignore the opportunity to plan trade programs with a new approach.

With this much at stake, a specialized system is required to help you make the best decisions in creating better trade events and plans – but how do you know if your existing system is maximizing your return?

enter total trade optimization.

TradePrograms

$5BManufacturer

IncrementalMargin Increase

$15M

$750MInvestment 3% Improvement

i The Nielsen Company, “Almost Half of U.S. Supermarket Purchases are Sold on Promotion”, October 5, 2009 ii Cannondale Associates, “Trade Promotion Planning & Analysis: A Game that Needs Changing”, 2009

6 Total Trade Optimization 7DemandTec Total Trade Optimization

demandtec total trade optimization™Total Trade Optimization is the framework used to measure how comprehensive your existing TPO approach may be while identifying areas that need improvement. It consists of five core components that enable better plans and sales forecasts, lower process inefficiencies and costs, and improve retailer collaboration and execution. The Total Trade Optimization framework addresses TPO’s roots, where it is currently, and what the future holds, using the five components detailed below:

• Drive Trade Strategy + Account-Level Planning

• Support Predictive + Post-Event Analytics

• Incorporate Shopper Insights

• Integrate with Existing Systems

• Enable Retail Collaboration

First, though, we will lay the company dynamic groundwork that makes success much more likely. Step one is identifying if the organization has the necessary skill set. The right talent, skill set, training, and ongoing support are critical. Step two is ensuring the company is focused on improving trade effectiveness. That includes who owns and sponsors the solution as well as the metrics for success. Trade decisions can reside across finance, marketing, customer teams, and sales, so depending on the organization, multiple champions may be required. These dynamics enable ongoing success after opportunities are identified with the Total Trade Optimization framework.

demandtec totaltrade oPtimization™

9DemandTec Total Trade Optimization

linking trade strategy and customer-level planningShould it be top down, or bottom up? The answer is yes. A planning system should address the macro needs of brand marketing and trade finance in order to enable macro planning. This allows strategic teams to utilize science in their decisions on how price changes, display and ad coverage, and adjustments in trade funds or accrual rates would affect the annual sales and profitability. Strategically, teams must be able to understand consumer demand and use this insight to allocate funds across regions and accounts. However, it does not stop there.

An effective solution passes along the annual objectives and guidelines to field sales so they can create customer-level pricing and promotion plans. In this way, tactical promotions may be coordinated with national campaigns, but more importantly it involves starting from an optimized plan versus reusing last year’s figures as an opening point. The customer-specific planning system then enables the customer teams to understand the best promotional tactics not individually, but within the larger category campaign.

Ultimately the recommendations fuel predictions back to the strategic planning level, which enables mid-year changes in the event of additional funds, a widening gap, or a change in direction. This also enables greater retail collaboration as the total category view and impact are measured. The tandem is essential for Total Trade Optimization.

SOFTWARE• Planning templates• Common science

• Work�ow

CUSTOMER TEAMSNeed �exibility

HEADQUARTERSNeed consistency andon-strategy planning

Science andGuidelines

Account-Level Plans

ImprovedPlanning

10 Total Trade Optimization 11DemandTec Total Trade Optimization

support predictive & post-event analytics Predictive analytics is about distilling historical performance to demand drivers and understanding their impact on the future. Think of all of the elements that can affect a promotion, be it price, cannibalization, cross-category affinities, or competitive actions, and translate that to an overall measurement of baseline and promotional lift. Predictive analytics enables you to estimate a $1.79 price point with 60% ad acv, 80% display acv for a single week in July even if it has never been tried individually or as a combination.

Unfortunately, the future does not always follow our plans. There will be times when we do only 35K cases when we expected to do 45K, and we are left wondering what happened. Post-event analytics present a retrospective on what was planned and what was executed, providing clarification for trade optimization. This retrospective diagnosis enables us to identify if we were expecting 60% and we only received 40% or instead of 80% display compliance we only received 50%. This understanding allows the identification of operational gaps that can be addressed or accounted for in the future. It may also identify new causality which can be used to improve the model.

incorporate shopper insights A recent Nielsen study found that in 2009 Chicagoans bought the most items on promotion, a whopping 55.9% versus the 43% nationwide grocery average. Are Chicago shoppers more deal savvy? Are they exposed to more trade opportunities? Is it a combination of both? How do we capitalize on this insight? Trade preferences can be noticeably identified at the market level, but the incorporation of Shopper Insights in the Total Trade Optimization framework allows us to be even more precise.

in 2009 chicagoans bought the most items on Promotion, a whoPPing 55.9% versus the 43% nationwide grocery average.

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Stores with more kids in their trade area sell more cookies. Not a very profound statement, yet traditional TPO encourages us to promote all stores in the exact same way. The introduction of shopper insights into trade decisions allows teams to not only know but act on the differences through targeting. The net result is a more efficient trade spend as shoppers with a higher lift toward a particular vehicle such as a temporary price reduction are targeted, while those who are less responsive are given another. It may even be extrapolated to a higher level and allow us to determine the right promoted product mix in a geography for the best results.

Shopper insights typically utilize transaction log (t-log) data or syndicated panel sources to identify desired behavior. The shoppers are then identified though loyalty cards or a geodemographic targeting system in order to locate them on the ground and cluster stores in which a specific action needs to take place. A store cluster may include “Deal-Sensitive Moms,” for which specific promotions may be customized, and underperforming stores may be identified based on their sales to potential ratio. The Deal-Sensitive Mom clusters are then brought into the TPO system and aligned to events to create customized promotions and realize more effective plans.

Gross Margin

-$0.45

Preferred Shopper Segments

General Shopper Population

RESPONSE

RESPONSEA

-$0.25B

MANUFACTURERCHANGE IN

SHELF PRICE PER UNIT

CompetitiveThreat

14 Total Trade Optimization DemandTec Total Trade Optimization

integrate with existing systemsInsights without action are overhead. The Total Trade Optimization framework recognizes that companies may have a variety of Trade Promotion Management (TPM) systems as well as an ERP system but if you pardon the analogy, it will need a bigger analytic engine without replacing the whole car. This enables TPM and ERP systems to excel at funds tracking, checkbooks, settlements, and execution while incorporating predictive trade planning. Key to full integration is the alignment of analytic planning and execution systems to reconcile their respective consumer consumption and factory shipments.

Integration comes in varying degrees that do not require full exchange of information. The ability to pass promotion events and plans to a trade planning management system with the reciprocal results creates a repeatable cycle that greatly improves efficiency. Interaction with a deal management system simplifies the process of deal approval with the retailer as the terms of the deal are imported directly.

enable retail collaboration The desire to be a strategic partner with a retailer is a common aspiration—and should be. Collaboration may be founded through joint insights, common modeling, or joint systems. In the marketplace, superior insights and partnership provide the foundation for a more profitable business.

That can take the form of comprehensive analytics. When evaluating an event, the ability to measure the impact on the category and store brand down to a SKU level is not only collaborative, but good business. The ability to understand the impact of an event based on the retailer’s pricing strategy not only leads to better forecasts, but a stronger partnership.

Shopper insights also enable collaboration. Segmentation is a tool that has been used by retailers and manufacturers for decades as a way to identify the 80/20 shoppers, or the 20% of shoppers that make up 80% of your volume. Introducing segmentation into trade via shopper insights allows retailers and manufacturers to identify where their respective segments overlap. For example, a retailer may find their High Perimeter Suburban segment highly overlaps with a manufacturer’s Brand Loyal Families, which enables mutual activities toward a common goal.

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16 Total Trade Optimization 17

the total trade optimization challengeRedefining the three letters T-P-O for better plans and sales forecasts, lowered process inefficiencies and costs, and improved retailer collaboration and execution: those are the goals of Total Trade Optimization. The stakes are high, but the rewards are proportionally high as well.

the challenge

Are you ready to take the Total Trade Optimization challenge? Will you find yourself one of the innovative trade leaders in the CPG industry or in a position to greatly improve your performance? How will you score across the five components of the Total Trade Optimization framework?

contact your demandtec representative to find out.

the stakes are high, but the rewards are ProPortionally high as well.

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demandtec totaltrade oPtimization™

18 Total Trade Optimization 19About DemandTec

DemandTec (NASDAQ: DMAN) connects more than 280 retailers and consumer products companies, providing common tools to transact, interact, and collaborate on core merchandising and marketing activities. DemandTec’s software services enable customers to achieve their sales volume, revenue, shopper loyalty, and profitability objectives. DemandTec customers have collaborated on more than 3.5 million trade deals. DemandTec software services utilize a science-based software platform to model and understand consumer behavior. DemandTec customers include leading retailers and consumer products companies such as Ahold USA, Best Buy, ConAgra Foods, Delhaize America, General Mills, H-E-B Grocery Co., The Home Depot, Hormel Foods, Monoprix, PETCO, Safeway, Sara Lee, Target, Walmart, and WH Smith.

aboutdemandtec contact us

DemandTecOne Franklin ParkwayBuilding 910San Mateo, CA 94403USA

inquiriesPhone: +1.650.645.7100Please visit www.demandtec.com