How to Respond to the Call for Zero-Based Budgeting

By Bruce Montgomery, GM, Regional Operations

Over the past five to 10 years, CEOs of large CPG firms have typically dreaded the thought of 3G Capital “taking an interest” in their operations. 3G is a global investment firm that has made investments in companies such as Burger King, Kraft Heinz and Anheuser Busch. A cornerstone of their approach is “Zero-Based Budgeting.” Without going into great detail, it basically means this: every year begins with a clean sheet where managers must build, and defend, their budget across each line item. This approach includes an agreement to utilize metrics to measure progress versus plan.

Whether or not you believe in the benefits of Zero-Based Budgeting, the logic is solid. Earlier this year, I wrote that as CPG Business Executives (Sales, Marketing, Finance), we are frustrated when we meet “SALY” (Same As Last Year) and are pushed toward a repeat of suboptimal trade plans by retailers. When it comes to buyers and accounts (some more than others) they simply want planning “done” and the thought of applying data, creativity, and rigor to building a great plan for the upcoming year with each supplier feels like too much effort for them.

With “budget season” upon us, we, as Commercial Executives, need to reevaluate how we build our internal plans. How many times do we simply start with last year’s budget (whether it be a customer trade budget, a brand budget, or a divisional operating budget) and just tweak it around the edges? Or, take a super lazy approach and say, “Ok, my goal is to deliver top line growth of 6% and a bottom line increase of 3%. Which means I can increase costs I am responsible for managing by about 3% and everything will be fine. Plus, there is always slop in the budget so I know there is a built-in buffer. Now I’m done!”

This is an exaggeration but perhaps not too far off. To truly be a leader of a business (be it over a key account, brand, or division), you must challenge ALL OF YOUR expenses. Why should you accept a T&E budget that is up 7% when your unit is only scheduled to deliver 4% growth versus year ago? Why is headcount going up by four without any substantial driver in the operating plan to merit these additions? Why is there an increase in digital media spend without a decrease in traditional media spend? Why is trade spending going up at twice the rate of growth budgeted for your brand or unit? Why do 30 different people in the office get copies of the same newspapers or trade publications?  

When firms tell us they are “looking for funding to drive consumer marketing programs” this makes sense. The question is are they really looking at all line items within their unit’s budget?  Likely not.

With regard to trade spending, this is often an extremely large line item in any CPG budget, usually the number two or three expense behind SG&A and COGs. It is vital that firms approach annual trade planning meetings with each account armed with a strategy of what you are trying to accomplish as a firm, as well as high quality data and well-vetted options. If you show up and both your negotiating posture and written words indicate that all you want to do is take money back, the conversation may be quite difficult.

In some instances, taking money back from an account is the right thing to do, in cases where the spends are inefficient or the account will not support your major strategic initiatives. It will be hard for an account to challenge your approach if you come forward with ideas, data, and a true desire to figure out how to grow your collective business. In order to accomplish this, tough choices will have to be made. Not every program can be improved, all SKUs can’t receive support, and all the desired new items from Marketing will not justify the slotting investment.

If you are interested in instituting a fact-based decision-making process and working with experienced practitioners to implement change, contact CMG. We can help you build customer specific budgets that work for your firm.