By Bruce Montgomery, General Manager
As a CPG executive, you are very familiar with the two primary retail formats: high-low and every day low price (EDLP). Depending upon your category, the percentage of customer ACV in the high-low format may be about 40%. Walmart is the obvious leader of (and highly committed to) its EDLP heritage. Other retailers vary, some with a hybrid or evolving strategy, as they seek to maintain and grow market share in this age of immediate price transparency across channels.
How do you respond when a retailer asks — or simply places — your brand or entire portfolio on an everyday low cost (EDLC) program? There are several reasons this could happen, one being that the retailer feels this will result in the best sales and profit performance for your brand. Or, it could be that the retailer does not feel your brand drives traffic, and therefore is not worth their time to develop a more comprehensive plan. They may feel that the economic return of a promotional plan for your brand is too small to justify the effort required to get it up and running.
Brands, especially smaller ones, often feel compelled to agree to the EDLC approach in order to be “easy to do business with”, build goodwill, or, if they don’t have data to prove otherwise, because they simply feel that they have no choice.
In some instances, EDLC may in fact be the right approach, and all parties end up happy. However, if sales velocities begin to slow, the retailer will contact you and explain that you have to take action to improve sales or you will run the risk of getting delisted.
This is when you then remind your retail partner that you have agreed to an EDLC program. Therefore, there are no incremental funds to invest. The retailer may work with you to deploy other tactics to turn sales around. However, it is more likely that they will not want to spend a lot of effort on a brand struggling to meet velocity hurdles. The result? Your buyer is now targeting you for one of two things: incremental funding OR deciding who will be swapped into your shelf space at their next reset.
Since CPG leaders are competitive — and likely paid good money to get their items on the shelf in the first place — we usually eliminate failure as an option and head to management for incremental funding. Unfortunately, this outcome is the ultimate losing hand, as you are boxed into an EDLC program PLUS you’re using incremental funding for programs as a last-ditch effort to “save” the brand or sku.
Data shows that in most cases a brand will do better NOT entering into an EDLC program. The wiser choice is to allow a higher everyday price and create a promotional plan with the retailer to appeal to the consumer and drive sales. This approach accomplishes three key goals. First and foremost, if your decisions are made with proper data, both the retailer and your company will make more money. Secondly, the fact that your brand is being promoted will draw consumers’ attention, which puts you on their shopping radar. This is particularly important for brands that experience a lot of switching within their category. Never underestimate the power of the ad, end cap, or TPR tag up in store to drive awareness and trial. Lastly, collaborating with your retailers to build a promotional plan enables your brand to be a leader in driving profitable category growth, an upshot where both parties win.
If your brand is being pressured into EDLC agreements, or if you want a higher level of confidence in understanding how to best allocate, apply and measure your firm’s investment in trade spending, please contact CMG here. We’d welcome the opportunity to discuss your specific retail customer challenges, with a focus on helping you achieve your goals.