I wanted to write a case study about a company that had implemented trade promotion optimization, so I conducted some secondary research and came across the following claim in analyst reports, trade publications, and comments made by software vendors: “For consumer products companies, trade spend is the second-largest expense item on their Profit and Loss statements right after the Cost of Goods Sold (COGS). For the average consumer products company, trade promotions account for 18 percent of revenues.” Some articles claimed 20 percent, which sounds impressive. Effective trade promotion must be strategic.
But something about these statements struck me as odd. I’m a supply chain guy, not a finance guy, but according to a financial management textbook sitting on my desk, here is how an income statement is organized:
– Costs of Goods Sold (All supply chain costs, including procurement, manufacturing, and distribution)
= Gross Margin
– Selling, General and Administrative (SG&A) Costs
– Other Stuff
= Operating Income
So, when you say promotion spend is the second largest item after COGS, what you’re really saying is that it is the largest line item in a consumer products company’s SG&A costs.
But still, if promotion spend is 18 -20% of revenues at the “average” consumer products company, that is significant. But is this true?
I went to the Edgar database and looked up COGS and SG&A data for the publicly-traded consumer goods companies listed below. The table shows COGS and SG&As as a percentage of revenues based on each company’s most recent 10-K filing:
|Procter & Gamble||49%||31%|
So, as I look at this chart, I notice a few things. The “average” consumer products company isn’t very average. That 18-20% of revenues coming from promotions does not look credible or particularly meaningful.
I have nothing against spending money on Trade Promotions Optimization applications. In fact, I think it is a good idea for this industry. But if companies choose to invest in new applications, shouldn’t they make an informed decision?
One question that a consumer goods company might ask is the following: If I break sourcing, manufacturing, warehousing, and transportation costs out of COGS, what are the percentages for each? If I break trade promotions out of SG&A, what is its percentage? What is the rank order from largest to smallest of these different spend buckets? By itself, this type of analysis might not tell you where to spend your IT dollars, but it is a good starting place.