MYSTERY IS IN THE MARGIN

An Executive Interview with

Tim Kregor, Vice President,
Sales and Marketing, aWhere

Jim Pollock, President,
Vertical Market Development, aWhere


Interview Highlights

> The inner workings of the consumer packaged goods industry and culture

> The battle for margin between manufacturers and retailers

> The role of location intelligence as a competitive advantage for smaller brands competing against big money brands


asktrik BACKGROUND Tim Kregor and Jim Pollock of aWhere spend a lot of time in the Consumer Packaged Goods (CPG) Industry working with grocery stores, big box retailers, food and beverage manufacturers, and wholesalers. Prior to joining aWhere, Tim Kregor was President of Spectra Marketing, a Nielsen company where he focused on the data products and services that support the retail industry, and Senior Vice President with Kraft Foods. Tim lives and breathes the food and beverage industry with experience from product brand management to market segmentation and customer analytics.
Jim Pollock has spent his career understanding customer requirements and managing the development of software and technology products to meet customer needs. We were fortunate to speak with Kregor and Pollock on their experiences in the CPG industry and on the current challenges and opportunities presented by an increasingly hyper-local competitive marketplace.


LBX Let’s start with the CPG industry landscape. Can you describe for us the industry structure?

KREGOR The two pillars of the industry are the manufacturers of packaged foods and beverages and the retailers that sell the goods. The manufacturer is almost never the seller in CPG. Despite a number of online experiments, the industry has primarily remained physical because of the logistics of distribution: most people buy food and beverages from retail outlets – supermarkets, big box retailers, convenience stores, and liquor stores.

The tension for manufacturers and retailers is the fight for margin. Who is going to retain the most margin? Traditionally, the margin gain has gone to the brands. Wholesalers obviously sit in between the manufacturer and the retailer, but for purposes of understanding CPG culture, it is important to understand this fundamental battle for margin between these two camps.

LBX What’s the role of location in CPG?

KREGOR The store, or rather the real estate and the store infrastructure, are the biggest costs in retail. Therefore, location, location, location! The retail industry is very serious about site selection analysis. Site selection for retailers is generally about the ability to push through volume and drive time for prospective customers. Location analysis is conducted by the real estate department and generally not used by other parts of the organization. In other words, location analysis within a CPG company has nothing to do with product mix and customer segmentation analysis.Retailers are all about profiting on shelf space, because that real estate is
their biggest cost. Retailers therefore focus on how to maximize volume on the shelves.

Manufacturers, on the other hand, basically want to rent space in the store. Therefore the retailer’s view is simple: “I have precious real estate; what is so special about your product?” This is where the margin battle between the manufacturer and the retailer is played out.

LBX How would you describe the culture of the industry?

KREGOR CPG is a block and tackle industry. It is structured around making deals for a promotion. Manufacturers pay for the discount that is passed on to the consumer to push volume. The game is how to get incremental behavior from the consumer to get more movement on the goods. Two-thirds of a manufacturer’s marketing budget is spent on discounts going to the retailer.

LBX Earlier you mentioned that location analysis isn’t leveraged for product mix allocation at the store level. Can you elaborate on that?

KREGOR  Historically, most major grocery chains want to make the least product assortment decisions. Wal-Mart broke ranks and realized that the competition was too fierce, that it could not afford not to think about how to make the stores more attractive. A refinement of allocation of products based on location was critical. This decision is huge, because making an assortment change in the store is a complicated issue. Store by store assortment changes require resetting entire sections, which involves labor and cost. Assortment change on a store by store basis is probably not a rational approach. Instead, the notion of clusters of stores emerged.

The emergence of store clusters was the beginning of location analysis, or rather location intelligence (LI), being used beyond real estate. LI begins to enter the equation because of this connection to assortment decisions. These decisions are based on physical and environmental factors – people have to drive to the store, the demography of the store, the proximity of the competition. All that is location- based. The more you know about a store and the world it is competing in, and the stores that are like it, the more you can rationalize putting the right goods in the right store.

Jim Pollock
Jim Pollock

LBX Given all that, why hasn’t location intelligence taken CPG by storm beyond site selection?

KREGOR  Fundamentals of the industries are sales trends, and it’s a slow-growth, trend-based industry. Financial and market analysis inside manufacturers is generally around the deal – money spent on promotions, and how that did or did not move more cases of products. Throwing money at promotions and coupons and discounts moves product. That is the nature of retail. Anything else has a minimal impact.

The problem is that LI is not well aligned with how media are purchased. Once you roll up to a DMA (Demographic Metropolitan Area) or MSA (Metropolitan State Area) or larger geography, consumer profile data gets watered down. LI allows you to target to the household level, so it is hyper-local; but traditional media buying is at a macro-level. Promotions are usually developed at a regional or divisional level, which doesn’t line up nicely with a hyper-local strategy.

LBX Ok, so if what I’m hearing is correct, that basically this is a “money talks” game of buying promotions, how does LI help a manufacturer compete, especially a small manufacturer, when it can be outspent by the big brands?

POLLOCK Knowing your customer territory is critical. With that said, LI helps a small brand better target its demographic so that it can allocate its marketing or promotional resources to, for example, 6 stores in a region that have the highest likelihood of success as opposed to 15 stores based on macro-level demographic information.

LBX Everyone is talking about hyper-local competitiveness, which is what LI allows you to achieve, but what I’m hearing is that the organizational structure of this industry is not set up to do hyper-local management.

KREGOR The execution has to line up hyper-locally. If you can’t execute effectively at that level then you can’t apply the benefits of the technology. You have to align with the business decisions that can be executed hyper-locally.

LBX Where do you think business processes or execution points in the CPG industry naturally align most effectively with LI hyper-local benefits?

KREGOR Assortment is the most applicable. Second is any form of physical allocation of goods—for example the need to deploy x number of goods at y stores and they don’t line up nicely—that kind of merchandizing decision. Then you get into more distant merchandizing decisions where there’s an opportunity to deploy a sales crew more effectively.

Tim Kregor
Tim Kregor

LBX How much uplift is obtainable from that type of targeted assortment?

KREGOR That’s a very hard question, given the industry dynamics we discussed. Targeted refinement of assortment allocation could result in a 3-5% lift; but there are so many variables in the business that could lead to a 3-5% bump that it is hard to prove, whereas with the right price discount and end placement, you could get a 3-4x change in volume in sales.

LBX What are the systems that the CPG industry has to deal with?

KREGOR There are major data sources that any manufac- turer is going to need. Internally, a set of internal tools to report volume and spend on trade discounts, and internal analysis on how much is being spent and how much is sold are needed. Companies of any major size are going to buy market share data either from IRI or Nielsen. The bulk of the analytics is around correlating all these data points.

LBX What’s the benefit of being more informed by LI, as opposed to throwing more money at promotions?

KREGOR Well, everyone wants to be smarter. But, becoming more informed via LI costs less than what is traditionally spent on promotional discounts. Smaller companies will probably benefit more from being smarter, because it’s really only the big brands that can afford to purchase those volume discounts. Small brands can’t compete against that entrenched system, so they have to find ways around it, to become laser-like in their targeting of store profiles, and understanding and communicating with their target custom- ers. Unlike the big brands, small brands can’t afford to waste their resources.