Why Does My Margin Not Matter?

When people in our industry sit down to discuss objectives with our managers, executive team, or investors, one of the metrics that is bound to come up is margin expansion. As a CPG executive, you are most likely tasked with driving some combination of top line sales, market share growth, household penetration growth, selling in new items, and margin expansion. For the purposes of this discussion, let’s use the following simple equation: profit/total revenue = margin. This is also known as ‘the money left over for us’.

When a CPG salesperson meets with their buyer, that buyer has a series of metrics they are being evaluated against, as well. Many are quite similar to those of the CPG sales professional. Retailers want their buyers to drive category topline sales, build market share, and be first to market on key new items. Simultaneously, they need to build their store brand business and expand margins. A good CPG sales professional not only knows the metrics their buyer is held accountable for, but also which ones are the most important.

Is it possible for both the CPG brand and their retailer to increase their margins at the same time? Yes…but it won’t be easy. If only one of you gets to expand your slice of the margin pie, who do you think will be most likely to win? If you guessed the retailer, you guessed correctly. The likely scenario is that you’ll end up attending an annual planning session where your buyer says their goals are, “X, Y, Z and expanding margin by 2 points.” That margin expansion has to come from somewhere — most likely, their vendor base. Since you’re one of their vendors, the situation impacts you directly. Sure, the buyer might be able to alter their shelf set or focus their mix on higher-margin items. But higher margin items actually have to sell, or the buyer will miss their topline sales commitment.

Now, stop for a moment. How many CPG sales executives talk to their buyers and say, “well, my goals are A, B, and C and to expand my margin here at your account by 2 points.” Not many. We all know there is tons of pressure on the salesperson and their firm from every direction. On the pricing side, many professionals are ‘trapped’ by the specter of Amazon in a rock-bottom price game. Any hint of taking a price increase is generally met with a very unfavorable response, quickly followed up with real, or implied, threats of “grave consequences.” Many a CPG salesperson folds at this juncture, telling their executive team that taking price is “impossible.” Or, maybe, “we can do this so long as we price protect my account.” Of course, when you start price protecting everyone, you can’t realize margin expansion and your trade spend line item goes up. Even more importantly, it goes up without corresponding merchandising support. You are basically spending money to buy price, which means your margin is definitely not improving.

On the cost side of the equation, CPG firms are facing real commodity input pressures, rapidly rising transportation expenses, and of course SG&A increases as they face factors like health insurance, regulatory compliance, etc., which always find a way to increase. The reason many of costs on the ‘expense’ side of the ledger keep rising is because change is difficult and risky. Are you going to change payroll, healthcare, or your 401K providers over a 2% price increase? Likely not. Yet, if you try to pass on 2% price increase to a retailer, it is awfully easy for them to knock you out of a shelf set or cut back facings.

So what is the CPG executive to do in order to try and drive their margin? First and foremost, be a supplier that is easy to do business with for the retail community. Do what you say you are going to do when you said it will be done. And when there is a problem, bring it forward rapidly, preferably with some possible solutions.

Here are other specific things a manufacturer can do to improve outcomes:

• Don’t flood the market with loser SKUs. It is always better to have fewer stronger SKUs than to constantly split the business across more items. That approach generally results in wasted inventory dollars (yours and the retailer’s) and is a velocity-killer for your brand in total.
• Price items properly at launch. The current intolerance for price increases looks like it will be with us for a while. That means ‘correcting’ a poor price, post-launch, will be very tough.
• Aggressively seek lower COGs on anything that is imperceptible to the end consumer…i.e., shippers, labels, bottles and other packaging components.
• Be highly disciplined on your trade spending. This is generally the number two or three line item on a brand P&L, following cost of goods and SG&A. Spend intelligently with the right accounts, on the right SKUs, in the right programs. Do not get lured into participating in programs that you know will not work (based on past experience) simply because you are asked to. Bring facts to the table and spend the time necessary to build a logical plan.  

If you can’t leverage a true innovation or an advertising campaign to shift your mix to higher margin SKUs, the intelligent application and utilization of your trade budget will be your best bet to drive margin. That’s exactly what we specialize in at CMG. We’re here to help you balance the natural tension in order to create solutions where both the retailer and the manufacturer win.

As Jeff Bezos of Amazon stated in regard to manufacturers, “Your margin is my opportunity.” There is no doubt he means it. What are you willing to do to protect your margin?