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"We always say availability is the number one ability — being in stock and in distribution. But what keeps you from even being that is profitability. So, [profitability is] arguably one level below [availability] on the Jenga tower. To survive — let alone thrive — we need to be profitable." — Chris Perry, chief learning officer and co-founder at firstmovr
Brands face a range of pressures that are squeezing their margins. Whether it’s supply chain disruptions, growing materials costs, or increased trade investments, brand manufacturers’ profit & loss (P&L) statements are getting hit harder than ever before.
They must find new ways to reduce costs, drive greater customer lifetime value, and, most importantly, boost their profitability.
To help brands create an actionable plan around this, the Digital Shelf Institute (DSI) recently hosted a webinar with Chris Perry, chief learning officer and co-founder at firstmovr, a consumer packaged goods (CPGs) and ecommerce strategy firm.
Perry collaborated with Lauren Livak, director of the Digital Shelf Institute, for the webinar, "P&Ls Under Pressure: The Manufacturer P&L and Levers Brands Must Pull to Drive Omni Profitability." Check out some highlights and best practices for how brands can win the P&L battle.
Before Perry and Livak even shared specific strategies for increasing profitability, it was important to level-set the conversation and establish a standard definition for profitability within the context of commerce.
Perry says profitability is the main focus for pretty much every organization, but it may mean different things to different teams.
"Many of us in marketing and sales are driving top-line growth, but how we're defining profitability [here], which is a common definition, is that profitability is the measure of a company's financial gain or loss relative to its operating expenses," he says. "It's the difference between how much you earned on the top line and how much you spent to get it."
A P&L statement will also look very different for brands than it does for retailers. However, both are key players in the same value chain to the end consumer, so their fortunes are in many ways inextricably linked.
Therefore, brands trying to boost profitability in today’s constantly changing commerce environment will need to pay even closer attention to their retailer and marketplace relationships and the investments they make in these channels.
"We want to think through how we create value for the retailers' P&L so that we're creating value together because that's how we're all going to be more profitable and sustainable." — Chris Perry, chief learning officer and co-founder at firstmovr
Ecommerce undoubtedly makes managing P&L more complex for brands. However, brands also face multiple headwinds that only add to this complexity.
Not all SKUs were created for ecommerce. “Eaches” that sell well in-store may not be as profitable online. Perry says brands still get the majority of their sales in-store, but they also need to grow online. Unfortunately, shipping and other ancillary costs make this difficult.
"Eaches, or smaller-price point items, that do very well may not sell sustainably online because of that cost of shipping or that cost of picking, prepping, packing and delivering, or even for click-and-collect in many instances," he says. "Now, with labor shortages and all these other things that are raising the cost of some of that fulfillment, even the click-and-collect model is becoming more of a challenge. So, not all of our products are actually created for ecomm, and that’s before we even talk about packaging."
Because of these considerations, brands must execute "next-level explicit design around ecommerce" to ensure products made for the physical shelf are also financially viable on the digital shelf.
When it comes to price, brands are largely at the mercy of retailers. The rules of engagement between retailers and brands have changed — often in a way that leads to added costs for brand manufacturers as they try to optimize their reach across channels.
For example, brands now must contend with price matching that poses a greater risk to their profitability, relationships, brand equity, and distribution.
Perry gave the example of Amazon, Target, and Walmart trying to match prices for a particular item in real-time using artificial intelligence (AI)-driven algorithms.
"Add five or more other retailers and you've got the domino game of death where you can't come back up," he says. "We're not trying to control pricing, we're just trying to prevent it from going unnecessarily down forever because it's very hard to bring it back up to a consumer later. There are equity issues, not to mention profitability issues for all parties because that margin is being squished."
Retailers' cost to serve across their P&L is continually going up, so many are coming back to brands to renegotiate the terms of their partnership, Perry says.
"They've been doing some of this for years. It's natural — asking us to pitch in to help," he says. "[But now retailers are saying] 'if you're not going to design for ecomm necessarily in the long term, in the short term I'm going to need your help to offset some of this.'"
As a result, brands are now faced with increased damage and freight allowances, free shipping and margin offsets, chargebacks, and other supply chain fees for not preparing their portfolios for efficiency online.
At the same time, retailers are also offering brands more monetization opportunities, such as new promotional event opportunities, paid search, omnichannel data insights (like from Walmart Luminate), and retail media.
In this complex environment, brands must proactively design their P&L statement to create long-term value for both themselves and their retail partners.
So, given all these challenges — and opportunities — how can brands truly optimize their P&L statement?
First, brands need to develop an ecommerce-ready price pack architecture (PPA). Many lower-cost items aren’t the best fit for selling online, so brands need to approach their assortment more strategically for the models and channels in which they sell.
This may mean promoting certain products online that are only financially viable online while focusing on low-price point items in-store.
Next, brands can take deliberate steps to curb price matching. Perry makes clear that this isn’t an effort to control pricing, which would be illegal.
"I [the brand] create the black hole that they [retailers] swirl in by not creating items that are exclusive or differentiated enough that can't be easily price matched," he says.
Though pricing is at each retailer’s discretion, competing retailers are more likely to match certain promotional offers. Better promotion mechanics can help brands sell more, preventing price matching and retailer margin loss. For example, a brand could offer "gift with purchase" items or provide bounce-back or reward offers to add value without giving away dollars.
This approach to curbing price matching, along with designing an ideal ecommerce PPA, are two optimal ways brands can boost net sales.
While brands can pull different levers to boost net sales and, in turn, overall profitably, other strategies can help them increase their gross profit margin.
Developing and launching new ecommerce packs that are prepared to ship can help brands boost gross profits, though Perry admits that this will add incremental costs and complexities initially.
However, the long-term value is worth the trade-off.
Some benefits brands will reap include greater shipping efficiency, reduced product damage in transit, and fewer returns and chargebacks. They’ll also benefit from improved availability, sales velocity, and shelf visibility.
Retailers are expanding and piloting their dropshipping capabilities using advanced technology, which will make it easier for brands to receive, process, and invoice orders. This will help brands bypass third-party sellers and ship directly to consumers.
Dropshipping offers several advantages for brand manufacturers. First, they’ll encounter fewer out-of-stocks because they won’t have to ship items directly to the retailer — even though the retailer will still take the initial customer order.
Brands also can accelerate new product launches, potentially expand their assortment, and reduce distribution costs, supply chain fees, and retailer chargebacks.
Perry says it’s critical for brands to understand the full return on investment (ROI) and reach of their retail media investment, which will help them validate current investments and justify increased investment in this channel.
"As our retailers ask for a lot more money — and I'm not saying you should just acquiesce to their requests — but the more we lean into retail media in a smart fashion, the more ROI — real ROI — we could drive." Perry says. "That’s not just ROAS [return on ad spend], but real ROI."
Perry adds that brands should keep in mind that everything is negotiable, even in today’s challenging omnichannel environment.
"The rate card might not be negotiable, but other value they can offer as a result of what you're willing to invest with them for that working media, very much is," he says.
Brands undoubtedly face significant cost and operational pressures right now, but, eventually, the costs of doing business in an omnichannel environment will stabilize.
For now, brands’ survival and success depend on proactive P&L management and optimization. As Perry argues, being dangerous with your P&L statement will drive long-term value and position your brand to win on both the physical shelf and digital shelf.
To learn more about P&L optimization strategies, listen to the full "Unpacking the Digital Shelf" episode.