In my last post, I discussed the spike in sales of consumer products such as beer and soda that can be expected in the days preceding the Final Four. With the economy continuing to struggle, pricing will likely be a key factor in the decision making process for most shoppers. Brand owners will spend millions in trade promotions this weekend as they try to maximize sales volumes through discounted pricing. Yet despite the tens of millions of dollars in beverage sales that occur during promotional periods such as these, very few retailers or suppliers know what the actual price they should be charging the consumer or, for that matter, one another should be. Sure, there is price on every six pack of beer or soda on display, but that does not mean the price necessarily reflect all of the discounts and manufacturer incentives that were intended to be passed on to the consumer. Management of pricing and promotional data for beverages is among the most complex processes I have encountered in the retail supply chain. And it is rarely done with a high degree of accuracy. In this post, I will outline some of the root causes for the challenges beverage companies face with managing pricing data during high volume promotional periods.
Carbonated soft drink brand owners such as PepsiCo, Coca-Cola and Dr. Pepper Snapple and alcoholic beverages manufacturers such as Anheuser-Busch, Miller and Heineken spend billions on pricing incentives and trade promotions every year. In fact, in the average consumer products company trade promotions spend equates to approximately 15% of revenues, rivaling or, in some cases, surpassing media advertising budgets. As you might expect, consumer products companies such as those in the beverage sector have developed highly sophisticated pricing models designed to optimize sales of different products to different consumer segments. Not surprisingly, therefore the root cause of the pricing challenges in the beverage segment is not the fault of the brand owners. The problems arise downstream in the channel.
The Three Tier Distribution Model
In both the carbonated soft drinks and alcoholic beverage sectors a three tier distribution model is used to move product through the supply chain. In the alcoholic beverage segment, the three tier model is necessary to safeguard the distribution of beverages to only certain consumer segments (e.g. excluding minors) and only via selected retail channels (e.g. state-approved retailers). In the US, for example, prohibition era regulation requires the distribution of licensed beverages through only state-authorized wholesalers. Distribution of alcoholic beverages in the US is highly fragmented with at least one distributor, if not more, per state. In the carbonated soft drinks sector, marketing and supply chain practices dating back almost 100 years have established a three-tier model. PepsiCo, Coca-Cola and Dr. Pepper Snapple each license the rights to distribute their products in specific territories to selected bottlers. Manufacturers typically provide the ingredients needed for the final product to bottlers who then move the product to retail stores, vending machines and food service establishments. In many cases, the bottlers are not limited to one particular company’s brand. Alcoholic beverage distributors and carbonated soft drink bottlers typically carry products from other categories or even competitive brands within the same category.
Six Points of Inefficiency in Pricing Beverages
The challenge with managing price and promotions information for beverage products arises from the use of the complex three tier model for distribution. In the beverage sector, it is the bottlers and distributors who are ultimately responsible for establishing the price for product in their region. However, pricing is often influenced by trade promotions funded and managed by the brand owner. The processes for communicating and managing price between brand owner, distributor/bottler and retailer are highly complex and therefore not very automated. There are six points of supply chain inefficiency that I have found:
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Wasted Funds – Promotions communicated to retailers less than 30 days in advance are often wasted investments. Approximately, 50% of retailers do not pass on these last minute price changes to consumers. Instead, the promotion results in an effective gross margin gain for the retailer. The brand owner has invested the trade promotion funds, but not achieved any uplift in consumer sales.
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Market Timing – The complexities of communicating pricing and the timeframes required for retailers to process the changes prevent brand owners from quickly executing trade promotions. As a result, brand owners cannot respond rapidly to changing market conditions. If a competitor makes a significant pricing change, it will be at least 30 days before a brand owner can respond with a promotion that reaches most of its channel.
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Sales Focus – Pricing data is not easily accessible via a centralized system. As a result, account teams spend up 40-50 hours per week aggregating, checking and communicating price information to retailers. The time spent on price communication has a high opportunity cost for sales organizations. Account teams could be investing this time in business development activities that result in higher revenue or profitability.
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Distributor Uptake – The complex process for tracking promotional pricing is a deterrent to greater adoption of promotional activities amongst distributors. Whole teams of people in distributor operations are often deployed to track sales volumes and apply for rebates with brand owners. The process is highly manual and error-prone making distributors question the ROI of participating in these initiatives.
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Unsynchronized Pricing – Because pricing is communicated by both the brand owner and the distributor at different time frames to the retailer, there is often a difference between the two price schedules. All parties must then attempt a complex reconciliation process to determine the actual price at each store on each date. Unsynchronized pricing is one of the many factors contributing to retailer’s inability to execute on promotions as described above.
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Invoice Deductions – If reconciliation is not successful in advance of the promotion, the pricing in the invoice is likely to be incorrect. Statistics promoted by the GS1 organization state that 60% of invoices in the retail sector have data inaccuracies. Invoicing errors result in significant amounts of time spent between retailers and suppliers negotiating invoice deductions and charge backs. Studies have demonstrated that 43% of invoice errors result in some form of deduction. Each deduction costs $40-$400 to reconcile.
How can the multi-tiered beverage supply chain improve the management of price to reduce these inefficiencies? The answer, of course, is B2B e-Commerce and the concept of price and promotions synchronization, which is a topic that I will discuss further in posts later this year.
