CPG companies invest billions each year in trade promotions. By industry estimates, many spend well more than 20% of revenue on discounts, rebates, product placement and other incentives designed to spark sales.
Yet the payback from these “shelf war” tactics is underwhelming. On a global basis, 59% of trade promotions don’t break even, Nielsen research has found. The failure rate is highest in the U.S., with 72% of promotions not turning a profit. Why?
Siloed systems and growing volumes of disparate data are key culprits and have been for many years. Recent trends of highly demanding consumers, SKU proliferation and still-maturing channels, including direct-to-consumer sales, exacerbate the problem.
Every day, data valuable for promotions is churned out by applications that read like a bowl of Campbell’s alphabet soup: TPM, TPO, RGM, ERP, CRM and POS systems at retail partner stores. Also in the mix are merchandising, demand forecasting and supply chain applications, as well as retail execution systems for planning and reporting.
The result: trade promotions professionals are confronted by a massive data deluge that needs to be sorted through and analyzed to devise effective promotions. They’re forced into data triage, because there’s no way to leverage all that information to put together effective trade promotions.
As Nielsen’s failure rates suggest, that conventional approach isn’t working. CPG companies lack the holistic, end-to-end visibility needed to manage promotions — and intelligently adapt as conditions change. Too much complexity and too much data prove to be an insurmountable challenge for even the most talented trade promotion professionals.
Instead, they resort to best-guess decisions, rather than making choices based on timely, comprehensive information. It’s time for a different approach.
Cognitive Automation To Run Winning Trade Promotions
Cognitive automation offers an alternative that can recommend winning promotions, and steer CPG companies away from unprofitable campaigns. It takes over the complex number-crunching that humans struggle with to deliver analysis, predictions and recommendations at tremendous scale and speed.
Cognitive automation may seem like a future vision to some, but it’s here today. CPG companies are already turning to AI and cognitive automation to help run trade promotions. The Promotion Optimization Institute (POI), a trade organization, said in its 2019 State of the Industry report that 17% of CPG companies surveyed are incorporating AI capabilities into trade promotions.
“For CPG, AI has the ability to impact promotion optimization, retail optimization routing, deduction clearing, organization effectiveness and much more,” POI’s report says. “Early adopters will have the opportunity of outpacing the competition and partnering with retailers to optimize an entire category quickly: pricing, category management, promotion planning, etc.”
Cognitive automation is ideally suited to address the challenges that undermine trade promotions effectiveness, including infrequency and lack of granularity. Those challenges include:
- Promotions are planned many months in advance, with only periodic reviews and adjustments;
- Projections are based in part on last year’s results, not timely information and changing market trends;
- Promotions are often high-level, with limited granularity in SKU variations, customer slices, regions, channels, retailers;
- CPG companies lack agility to quickly revise underperforming promotions, or further capitalize on successful ones;
- Promotion planners face heavy manual workloads in collecting, consolidating and analyzing information; and
- Not all relevant data is not utilized in devising trade promotions (e.g., timely inventory information).
Three Key Differentiators For Trade Promotions Powered By Cognitive Automation
Cognitive automation provides an elegant solution that layers atop existing business applications. The platform “crawls” those applications thousands of times a day (much as Google crawls the web to deliver your search results) to aggregate data into a unified data store — creating the end-to-end visibility that has eluded promotions professionals until now.
Powerful AI and machine learning algorithms run against the data to unearth correlations and insights not otherwise possible. AI will then serve up recommendations on promotions that cover optimal pricing and predicted profitability, based on factors that range from sales trends and regional demographics to shelf placement at retail partners.
Three characteristics of frequency, granularity and comprehensiveness set cognitive automation apart from traditional tools and techniques used for trade promotions:
Near real-time. AI’s ability to work with near real-time data at superhuman speed lets CPG companies adapt swiftly if conditions change, for instance, quickly ending a money-losing promotion. It also lets CPG companies cut out weeks or months of planning cycle time, and re-plan more frequently than typical quarterly adjustments.
Highly granular. Because AI can analyze vast volumes of data, it’s able to recommend promotions based on highly granular variables that are necessarily overlooked in human-driven trade promotions. It can pinpoint hidden factors that boost profitability or cannibalize revenue from other products.
Comprehensive. Because it spans the enterprise, AI can, for instance, easily identify excess inventory that would be a good candidate for promotions. Or caution against a potential promotion because of an expected rise in raw materials costs. Intelligent recommendations are based on data not readily accessible to promotions planners.
Another critical factor for trade promotion success is the ability to increase the frequency of re-planning promotions, as well as connecting promotions with supply chain systems to rebalance inventory and supply across the network based on promotion performance in near real-time. And cognitive automation does just that.
Done right, trade promotions have been proven to yield double-digit revenue lift worth many millions of dollars. AI-powered cognitive automation is quickly emerging as a key to unlocking that value and stopping the insanity of unprofitable promotions.
To quote from the Promotion Optimization Institute’s report: “AI is here today, it’s a perfect fit for the complexities of our CPG industry, and it’s already making an impact to how we make decisions.”
Arnaud Morvan is a Senior Director of Customer Engagement at Aera Technology, helping some of the world’s largest enterprises succeed in digital transformation. With more than 18 years of experience, Morvan’s end-to-end supply chain expertise spans across supply chain transformation, business process improvement, technology for supply chain and program delivery. Previously, Morvan held supply chain executive positions at companies including Carter’s and Symphony EYC (now Symphony Retail AI). Morvan holds M.Sc. in Mathematics from Polytech Clermont-Ferrand, France and M.Sc. in Global Supply Chain Management from Kedge Bordeaux Business School, France. He is APICS SCOR-P certified.