Interview: Manufacturer P&Ls Under Pressure, with Chris Perry, Chief Learning Officer & Co-Founder at FirstMovr

Transcript:

Speaker 1:
Welcome to Unpacking the Digital Shelf, where we explore brand manufacturing in the digital age.
Peter Crosby:
Hey everyone, Peter Crosby here from the Digital Shelf Institute. In this zany world we live in at the moment, achieving increased profitability is on every commerce leader's priority list. In order to fully understand how to impact profitability, it is vital to deeply understand your profit and loss statement. There are some things on the P&L that cannot be influenced and there are some that can be. This is a podcast audio version of a webinar featuring, of course, Lauren Livak, Director of the Digital Shelf Institute and driving force behind the Digital Shelf Playbook series from the DSI, and our special guest, Chris Perry, Chief Learning Officer and Co-founder at FirstMovr. Together they dive into the manufacturer P&L and talk through some actionable strategies you can use to drive more profitability.
Lauren Livak:
Welcome to the Digital Shelf Institute webinar; Manufacturer P&Ls Under Pressure. We are very excited to talk to you about this today, especially in the environment that we are all living in. To start off, hi everyone. For those of you who do not know me, my name is Lauren Livak. I lead the Digital Shelf Institute. So maybe you've seen me on another webinar or from some other research reports, but thank you for being a part of the DSI community, and I'm very excited to be joined today by Chris Perry, and I will let him introduce himself.
Chris Perry:
Hello, I'm very excited to join Lauren in our efforts together to crack the P&L code for manufacturers and retailers jointly. My name, I'm Chris Perry, I'm the Chief Learning Officer at FirstMovr and we are a CPG FMCG e-commerce education organization. We do a lot of trainings, events, thought leadership and advisory work in this space, and come from a background of practitioners in the trenches. So very excited to share our nerdity with you today, but really with an effort to help everyone understand profitability, but also what's pulling it down and how we raise it back up together. So thank you, Lauren. I'm really excited to be here with you.
Lauren Livak:
Thanks, Chris. And just some housekeeping items before we get started. We are going to be answering questions throughout the session, so feel free to add them in the Q&A section of the Zoom meeting at the bottom. If you have any questions, we will tackle them as we go through. Also, we want this to be interactive, so if there's a topic that you want us to cover or go deep dive on, please add that into the chat. And just to reiterate here in terms of what we're trying to focus on, and if Chris you can go to the next slide, thank you, Chris and I had a conversation around what is important to understand for manufacturers of brands and from the retailer side. And this is actually part of a two-part webinar series with an interactive component on our DSI website. So if you want to follow along on the interactive component on digitalshelfinstitute.org under Research, you can. So this webinar is specifically for brand manufacturers who are looking at their P&L and trying to better understand how to drive profitability.
And one of the key elements about profitability is really understanding what happens on your profit and loss statement. Where are things being slated in? Where are things increasing or decreasing, or getting tighter because of inflation and because of the economy that we live in? And so Chris and I are going to talk through more details around the P&L, which for some of you, you might already be super familiar with it. So we're going to go through that pretty quickly. If you want more in depth, you can go into the online experience about that. Then we'll talk about some of the pressures that they're under, but the majority of the time we're really going to focus in on how can you impact it? How can you really affect your profitability overall? And this is really educational research and research that you can take away things hopefully when you're going back to your organization and say, "Okay, let me think about these three things to help increase my profitability overall."
So I kind of covered off on the agenda already, but it'll start with what is profitability, because surprisingly, not everybody defines it the same way. So we will level set how we are defining it today. Then what are the primary pressures, how does it really work in terms of the profit and loss statement and how you need to think about it, and then how can leaders really improve it overall. So I am going to start off, and Chris, what is profitability exactly? How do we define it?
Chris Perry:
Well, it's one of the words that often gets eye rolls from the people that are actually responsible for it because it doesn't sound fun and it is often painful and causes many tears across the industry. But again, it's naturally something we all want to achieve. Yes, many of us in marketing and sales are driving top-line growth, but again, how we're defining it, which is a common definition, but just an important one, profitability is the measure of a company's financial gain or loss, which means you're not profitable, but if you're a gain, relative to what you spent. So really just it's the difference between how much you earned on the top line and how much you spent to get it. And so again, for retailers, that's going to look a little bit different from manufacturers even though a lot of the principles are the same just but we're two players in the same chain of value to the consumer. And that's why we're going to have this two-part webinar to really today dive into something that's relevant to part two, which is our profitability as brand manufacturers and how we can optimize.
But also we want to think through how we create value for the retailers' P&L, which will be part two, so that we're creating value together because that's how we're all going to be more profitable and sustainable. So profitability is really important, even if you're in sales, I can say having been on both sides of the P&L and what may be sides as both top and bottom, there were times where I didn't have to worry as much about the bottom line as I did about the top line. The challenge is everyone ultimately is being bonused and measured and centered on the bottom line. So obviously, the more that all of us take ownership of that, the better. Now, it's not this simple though, as you know well, and it probably was a little bit simpler in a pre e-comm or in that early stage of e-comm back in, remember long ago in the early 2010s, where it was that thing was like, "We have an e-com team, what do they do?" But where it was a very small piece of your business but it was high growth.
So even if it wasn't fully profitable yet, or maybe it hadn't even been invested in yet, so it was profitable, we didn't really notice it because we were sitting on a pretty mature brick-and-mortar business, mature in the sense that we know how to operate that, doesn't mean there weren't dynamics and disruptions, but really we knew how to go about, we still know how to go about going in store. In store is a skillset you learn, but we've been practicing that for decades. But now we're in a world where e-comm, as we show a lot, and I love these Edge by Ascential charts that just highlight at the global, local level. I would say e-commerce is the number one growth driver globally, locally, spiritually, emotionally, whatever ally you want to throw out there, it is. It was before COVID, it is after COVID. COVID only accelerated it.
Over 60% of all growth is coming from e-commerce globally, over 90% of all growth is either in e-comm or influenced by digital and e-commerce. And when we think about, I know for some of our categories we might still be in some of the early categories that are budding and growing in this space, but when we think about overall categories, I mean, in just a few short years, we're talking almost 40% of global sales will be in e-comm. Not to mention influence, which is what I push over on the right here. It's the number one growth driver, but it's also the number one influencer because the majority of sales are influenced by digital. And maybe Target won't want me to be a guest anymore, but I was at Target the other day and I was actually on Amazon looking at reviews for the product I bought at Target. So I'm constantly, as a shopper, being influenced both subconsciously in the moment, maybe pre-setup earlier on weeks before, before I go buy, and I'm not always tying it back to the digital influence, but I'm constantly being digitally influenced in social, mobile, e-comm, et cetera.
But it's not just the shopper that I care about the most, even though we should all care about the shopper, it's the merchant, it's the retailer because they're starting to make their decisions based on where growth is coming from. And where's growth coming from? E-comm. And technically, where is growth coming from immediately? Those brands who know how to win in e-comm, which may not all be the global or national brand leaders. And winning isn't just, "I know how to win the top line," it's also the, "I know how to win the bottom line too," where I'm setting myself up for long-term sustainability. And so the cool thing is this is all upside, but again, and maybe some of you feel the same thing, I go back 12 years in e-comm prior to volunteering as tribute into this space, and I just remember talking about opportunity, and everybody going like, "Well, yeah, we have lots of opportunity."
And you're like, "Okay, so does that mean you like this?" "Oh no. Well, we've got an MDM at Costco we're going to be doing and we've got a rollback at Walmart, and we've got the shopper marketing program for back to school." And you're like, "Yeah, I know those are big, but there's today and then there's I can live and enjoy my life tomorrow." And I don't want to sound overly dramatic, Lauren, but I would say, I know you shared the same thing as this, this is actually more about survival than it is even is about thrurvival, even though I want us all to thrive as well. So this isn't one of those, "If I choose to do it, great, but if I don't, also okay." If I don't have more to lose than I do to gain, and I have a lot to gain. So profitability is one of those huge Jenga blocks on the bottom of the tower that we don't always focus on or now being forced to.
We always say availability is the number one ability, being in stock and in distribution, yes. But what keeps you from even being that is profitability. So that's arguably one level below that on the Jenga tower. So to survive, let alone thrive, we need to be profitable. And that's what we're going to talk about today.
Lauren Livak:
One thing I'll add to that and the reason why we're doing a two-part series talking about the manufacturer P&L and the retailer P&L is more than ever before, it is so important for manufacturers and retailers to work together because they're both feeling the pressure. So if nothing else, I hope that this entire conversation encourages you to work as a partner with your retailer, and we urge the retailers to do the same thing. You need to understand what each side is considering as important and what levers they need to pull. So I just really wanted to reiterate that part because as we think omnichannel, and as everyone is under pressure with the economy that we live in, it's really important to be able to have that partnership.
Chris Perry:
And Lauren, I love that. And what I'd say is always having sat myself either on the CPG side or helping CPGs, even though we also work with a lot of retailers, naturally you have to put your own mask on first. You do have to be profitable in your own business and worry about your own. If you worry about everyone else altruistically all the time, you may not be in business to be able to keep worrying about them as well. But to that very point, it shouldn't just be a me, me, me story, it should be an us story because A, if you do that, you'll be thinking of better ideas and we'll talk to some of those today. But also, you'll be the go-to because it'll be, "I want to work with X, Y, Z company because they not only are e-comm captains or next commerce captains, they're always thought leaders here, but they're always thinking about us too." And that even if they never bring that up or give you a medal for it, they will come to you for it because they'll know that they're always thinking about mutual growth.
We all say that, but who actually acts that way? And this is going to be one of those early seeds of acting that way. So 100%.
Lauren Livak:
So Chris, how is e-commerce growth placing pressure on brand manufacturers' profitability?
Chris Perry:
That's a great question, and we summarized a few of the ways from a brand perspective. Because again, the retailer is often feeling, and when we talk about part two we'll reframe it because there's some things happening to the retailer that then comes back to us, but there are some things on us that we're feeling right away. And so naturally, and we'll just park here for a couple seconds just because we know there's a lot on the slide, but I articulate that story. We have all these amazing products that were obviously designed to sell in an in-store environment originally, where both physically the way they were packaged but also financially, as an each, even an item that might be only a dollar or a few dollars or less, could sit on a shelf because the shopper came to the store and they put it in their cart. And whether they bought one item or 50 items in a basket, they were walking home with it, they did all that last mile delivery for themselves.
And so then you get a world where many of us, and this may feel like foundational, but this is still a lot of pressure because the majority of our sales, still for most of us, are still in store, meaning that most of our portfolios were still designed for in store because that's where the base businesses. Eaches or smaller price point items very well may not sell sustainably online because of that cost of shipping, or that cost of picking and prepping and packing and delivering, or even for click and collect in many instances. And 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 e-comm, and then that's before we even talk about packaging. And maybe this sounds, it's silly but I equate it to think about the in-store experience is a white glove service to shelf.
We palletize it, we got engineers that work on how it's going to stack right, they're loaded onto trucks, they're hand-delivered to shelf, kissed as they go off to the shelf by the clerks, and then you've got the Willy Wonka elevator of death all the way to your doorstep, which even, and I'm not knocking any of the couriers out there, but your product does not always stay upright. And so whether it's the package itself, the product leaks or is damaged. I mean, I was in pet food and a centrifugal force is legitimate. I mean, it's not just in that lovely centrifugal motion in that country song, it's legit. The internal cans gets crunched even though it's metal because of the pressure, the real pressure on the actual product. So we're switching a world where financially they may not serve online but physically they may not serve online without some next-level explicit design around e-commerce. That's step one. Using what we already had and moving online isn't necessarily an immediate transition for that reason.
We've also got the fact, and I mean, I know I have cried a tear over this specifically, price is at the sole discretion of the retailer. No one is questioning that. The challenge is we are in a very competitive environment where there are many retailers who are now crossing lines of what used to be channels and classes of trade don't really exist anymore because everyone is everything. To be fair, Amazon is club, it's mass, it's grocery, it's drug. The rules of engagement were made up, they weren't laws, they were rules that we made up that were convenient to drug does this, goes to market this way, and grocery goes to market that way, and Walmart and Target go to market this way, and club kind of operates this way. That was great until you've got Rambo and online e-comm retailers who jump out of the woods and play warfare a little bit differently. And so we've got new rules of engagement. And so while pricing still is at the sole discretion of the retailer, we've got automatic pricing algorithms that auto price match and then everyone else matches each other in real succession.
And it's not wrong, I mean, they have every right to do that. The issue becomes though that, and I use this example, I'm picking on these three retailers, these are just for information, but if Walmart has a rollback on a like item that Amazon sells, Amazon auto matches to that. The eye of Mordor sees it and matches. But then Target might choose, at their sole discretion, per an algorithm as well to match Amazon. That would normally be an issue if we did kindergarten rules where everyone follows in the same order that they went to lunch and back to the classroom. What happens though when the rollback is done at Walmart and that price goes up, Amazon might turn back and say, "Well, I'm going to match target who is at that lower price still," in real time. So now I've got what I call the dreaded back follow right where I didn't follow the forward person, I follow backwards because they're low too.
Well, see, it add five or more other retailers and you've got the domino game of death, where you can't come back up. And again, 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. I mean, there's equity issues, not to mention profitability issues for all parties 'cause that margin is being squished. So that's another challenge there.
Lauren Livak:
Hey, Chris, we actually have a question I think would be helpful to go into. So for the manufacturing P&L, are you seeing RGM, or for everyone who doesn't know, revenue growth management teams, engaged in playing a larger role in e-commerce and omnicommerce?
Chris Perry:
That's an awesome question. So not all companies, so we get that FirstMovr, we get to work with 60 something different CPGs at any given point, we're, again, very lucky to get to work across the space. And I would say not all teams, when I say RGM, some teams, there are some RGM teams and there's some companies that have people that might be doing that kind of work, but that's not really a department or a function. I do think we're seeing a migration towards, if not a named role, more of a responsibility for that area. And in the past, that would've been broader. I mean, they do a lot of things but they're looking at the whole P&L and they're looking at the ROI of different types of trade spends and promotional mechanics and things, trying to set up guardrails for how deep we would promote because obviously there is a point where I'm promoting more than I needed to to get the same lift that I would've gotten.
So there's a lot of those best practices that we want to still employ, but we definitely need, I think there's definitely value in having someone or someone's focus on that as an official role, if not as a key role named in their responsibilities because with so much new pressure and new nuances and practices online, you need someone who owns that and can champion the so what now, what do we go do now, because in the past we had the in-store principles and practices, now we've got this transparency online, all these new things that really disrupt some of what we had as principles before. And so redefining those in a world of omnichannel I think could be very helpful. So whether it's an official role or function, or just someone who's dedicated to thinking about that and being able to lay out those rules and guidelines internally, I think it's very healthy to have someone who's almost like the policymaker, if you will, for some of that, who owns that.
With any change you need somebody at least focused on that for a period of time before it becomes integrated into their everybody's day-to-day roles. That's a great question. And then the third one, which I kind of teased here, this is where, right now, sometimes it feels less partnerly, not because it shouldn't be partnerly as we go forward, but retailers are feeling a lot of pressure. Some of that is because our items aren't ready for e-commerce, and the cost to serve in e-commerce are higher. Some of this is because of that price competition in the market that arguably the retailers may be allowing themselves, not on purpose, but they may be allowing themselves to lose margin. And so their cost to serve across the P&L is getting pressured. So they're coming back to brands in the short term. I mean, they've been doing some of this for years, it's natural. Asking us to help pitch in, to help. If you're not going to design for e-comm necessarily in the long term, I mean, in the short term I'm going to need your help to offset some of this.
So some of these are directly linked to e-comm challenges, like, "Hey, your products damage more often when they ship, they leak." So the traditional damage rate of 0.5% of your gross sales that we normally had as a reserve isn't enough, it's actually about 2% now. So we may have to up our damage allowances or our freight allowances because of the extra freight cost of shipping in smaller quantities or getting them out to more locations. Chargebacks is a term you often hear when referring to Amazon, but there are a lot of supply chain fees and fines for not prepping your supply chain and your portfolio for efficiency online. You don't have to like them, it's the reality. The retailer will find a way to get that value back if you're not... And to be fair, it's a little bit of an incentive for us as brands to cater to what needs to be done online. In the past, often a lot of retailers start with, "We're going to give favorable benefits to those who lean in." But as always, with opportunity, not everyone bites.
It's only unfortunately when you sometimes have some penalty in play that there's something to lose and so you move towards the direction they want. So we're seeing a lot of that. There are a lot of asks for, "Hey, can you help? We're going to need more funding because to help offset free shipping," which isn't free obviously. Any other margin offsets to help make your items viable online. On the right side though, the other two though, the good thing is more and more of the ways retailers can help offset some of the costs is to monetize things of value to us like media, or paid search, or new events and promotional opportunities that drive a lift and a return, or data like Walmart Luminate, as an example, coming up.
There are new things that retailers, newer things, relatively new in the industry, that they're offering that are working media and/or non-working but highly valuable investments that do start, they still might be aggressive in the ask, like, "Hey, we need this many million from you as a partner," but at least in theory you're getting something for that and you can keep optimizing that spend or using the data more effectively to extract more ROI and value. So the challenge though is that that cost of partnership is going up quite fast on top of all the other costs and challenges that we face. And that is unfortunately, from the retailer, often a shorter term bandaid because a lot of brands haven't proactively design their P&L to create the long-term value that we're going to try to... We are seeing some of it, but we want everyone to be setting up that long-term value for themselves and for the retailers.
So it's not dire straits, it's a lot of challenges, but if you can tell that story, I always like to understand, how are people measured, how are they pressured, why are they behaving the way they behave, that starts identifying good and bad and uglies that we can go after and solve for it together. And if I can tell that story, it makes it a lot easier to identify the comeback story or the improvement story that we're starting to see in some of the ways we'll talk to as we break down the P&L and look at ways brands are leading in this space.
Lauren Livak:
So Chris, how does a brand manufacturer profitability really work? How should they be thinking about it? How does it apply to them?
Chris Perry:
And I'll go through this relatively quickly because some of you might go like, "Oh my gosh, Chris, if you make me go through a P&L training course I'm going to jump off." But I will tell you, my best training in my life was a three-day P&L training that I did as a brand manager at Reckitt. I mean, it was the worst and best training I've ever done because when I think back to business school, I learned a lot, that I can't point at something. That training in three days made me so dangerous on the P&L that, and they may not admit it now, but my finance team actually allowed me to skip some of our steps in the P&L development process in brand, because I already knew how to do it and I would bring them the completed one that they only had to approve.
So I never want to get anybody in trouble, I won't name names, but we were actually allowed to advance a couple steps, where normally we had to keep meeting back and forth with finance 'cause actually, I took what I learned and applied it so that I really was dangerous on P&Ls. But we have this in the interactive site so you can literally click through and see a lot of this great stuff on both the manufacturer and the retailer P&L. But just so that you don't have to do that in this moment, you can see the story that we'll tell because this is also how we'll look at some of the strategies for winning. Today is through the lens of each these metrics. So at a very high level, and this is the marketer in me trying to make what normally looks like an Excel sheet that might make you rethink your life and overwhelm you, I'd like to think of a pretty P&L. We have multiple metrics on most P&Ls, your company might call them slightly different things, so it's always good to get a real P&L internally.
If it's not your retailer or account P&L, look at your brand or category division P&L. And if nothing else, get an old one, if they don't want to share it out, sometimes finance and accounting are a little more protective about stuff, I'm just trying to understand it, can I get a template just so I can see how we're looking at it. But in general, there's three key metrics, three KPIs on the P&L at a high level, that all of us are somewhat responsible for. The first one, for most of us, is really straightforward, it's net sales or net revenue. And as you can see on the left, that is a function of gross sales or shipments, what I sell to the retailer, minus my trade investments, which might include many different things, off-invoice discounts, allowances, co-ops, accruals, fixed amounts, the 1% net 60 days if they pay early, damage allowances, freight allowances, promotional redemption, if we have a bucket for deals that isn't necessarily in the trade allowance element.
There can be a lot of things that go into that bucket, but that's what gets us our net sales number, our net revenue number. And that is off, that can be looked at as an absolute number, it can also be looked at as a percentage. Again, understand how your company is looking at it 'cause sometimes it's once you know, "Oh, well, they look at it this way, now it's not a foreign language to us." It becomes really easy to pick up on. What are some of the pressures? That we talked about pressures, but there are pressures on individual KPIs. The fact that the retailers are price matching and that they're shipping costs are going up and their labor costs are going up, squeezes the retailer's margin, thus incenting some of those asks for money on our end, not to mention some of the retail media and data and some of the things that they're asking us to help offset. So that will increase our trade investment if there's a lot of price matching going on in the marketplace and their costs going up.
And then, to be fair, there's just a lot of competition, not just for retailers but also for brands. Most brands who are winning in store aren't necessarily winning online at those retailers per IRI data and other data because there's so much more fragmented competition online, let alone before you start adding private brands and digitally native brands and other challengers in this space. So just from a share of dollars, there's a lot more little challengers that can nibble away at that precious market share that we might have earned in store as we shift dollars online. So that's net sales. The second one that many of us may be too intimately connected to, depending on how much we have to own it internally, is your gross margin or your gross profit. And that is taking, again, gross sales minus trade spend is net sales. We just talked about that. Then you would subtract your cost of goods sold, what it costs us to produce our products.
After that, that's what would get you your gross margin, your GM, your gross profit, whatever you call it internally. And what goes into COGS or cost of good sold is naturally packaging materials, raw materials, labels, the labor that goes into making those. If you had a co-packer, somebody else that helped you make those. All of that may end up... You may not see all those line items but that's in the supply chain team's P&L that goes into this line item. And there may also be, because of e-commerce, some incremental costs with special packaging for e-commerce or maybe there's a third-party partner that helps bundle your items to be bigger packs so that they meet the online price point to be sellable. So there can be some distribution costs internally and to the retailer that get included in that too. I've seen different companies capture it differently. So that's why I put that little note at the bottom. Something also to capture because again, as we're shipping more and more smaller quantities to retailers for online just-in time-inventory, some of that adds up incrementally and can put pressure on our GM.
So to that point, the pressures would be price pack architecture and new packaging may increase the labor and the process and the materials that are needed to retrofit our products to sell online, we may have more distribution costs, and just in general, there's a lot more labor and materials costs in general with inflation, let alone if you have the incremental steps that you needed to add to sell online. So again, always helpful just to understand some of those things putting that pressure in play. Now, some of us may not own this bottom line one, but to be fair, everyone owns the bottom line one. You may not be immediately measured on it. In sales, I know typically sales typically own the top part of the P&L and then the marketing team and other teams might own the other elements. I would argue, I don't sound cavalier about it, I don't care what you don't own, own it mentally so that you can help contribute to it and contribute to the solution.
Operating profit, often called that internally, or operating margin would be, again, if we get net sales from gross shipments minus trade, that's net sales, then you minus cost of good sold is gross margin, then you would subtract SG&A. I've seen different names for this as well. SG&A is your sales, general and administrative costs. So that would be marketing. And I put a number of the buckets that might be included in your SG&A lines seen A&C and other acronyms used as well to capture this bucket. But that would be the advertising, the national advertising costs, retail media spend, shopper marketing cost, content development, data and insights would sit down here, education and training, travel expenses. There'd be a lot of different things. The actual property costs of our physical facilities, all of our supplies and laptops and equipment, all of that. Now, again, that may actually sit on a corporate version of the P&L versus on your retailer P&L, but these are all things that sit on that P&L overall. So it's just helpful to understand what goes in that.
And again, what is increasing those pressures? Retail media is being increased. We have more opportunity to win on a walmart.com or on a Kroger or on a Target or on Amazon. They're also asking for a lot more money. So there's more money moving into certain buckets relevant to e-comm. We're adding digital shelf management costs, Salsify and any digital shelf analytics are incremental costs to the base business of managing in store, and they only feel incremental because right now we're still transitioning more and more dollars online. But over time, this is the cost of doing business but they do feel incremental when we didn't have to do that before. And then any new data, whether it's shopper insights or sales insights or share insights or anything, from the retailers or other third-party solutions, can add incremental costs that look incremental today, but may the future data that, and when you think of an IRI or a Nielsen, obviously as they expand their services, they used to be in store, they actually can do a lot more online as well.
And they're looking at that full connected commerce omnichannel experience. So everyone's trying to morph towards an omnifuture. But in the short term, in the last 10 years, there have felt like these extra things you pay for that put extra pressure on an e-comm P&L. So that's just to give you a rough view of the P&L. Like I said, it's much easier when you self-service through our interactive page because that'll let you, wherever you know it, you can learn the other parts as well. But again, it's partly being able to tell a story about the P&L that's harder than understanding the P&L. Because then when you see one you can go, "Wait, why did that go up? Was it this, this and this? Oh okay, so if that's an issue, can we solve for two of them? 'Cause the other one I can't change, but I can look at the other two." That's the kind of thing that getting dangerous on this is going to help you do in the long term, no matter what function you're in, no matter what level you're at.
Lauren Livak:
And Chris, just to reiterate that, especially from an operating profit perspective, and especially when you think about omnichannel, everyone needs to wear a business owner mindset hat because at the end of the day, everyone affects the operating profit. And so one thing we talk a lot about from a digital transformations perspective is how can you have shared goals across all of your functions that you have an e-commerce number or you have an overall company number, so that everyone feels like they're owning the success of the overall company and not creating silos. So I would say that's also a great takeaway. And really understanding the finances in the P&L to better bring all of your teams together to make sure you're all in sync.
Chris Perry:
And Lauren, to that point, I second that 100%t. And while this could go off into another training, a whole nother topic of sorts, when we talk about in the past, and I'm not saying this is true about your company, but it's easy to say, it's hard to go organize around, but in the past, I remember when brand owned the long term and the consumer, and sales owned the short term and the shopper. And when I say long term and short term sales had to go chase a monthly gross and net sales number in a trade rate, and the brand arguably had this three-year equity goal. And so we weren't actually all trying to get to Kevin Bacon, we were six degrees away from different actors altogether. And the point is, yes, maybe brand might be thinking longer term because of innovation pipelines and other things, but they should still, in my humble opinion, be tied to the very same goals, end goals, and feel it the same way sales is, even though sales may have different levers it's pulling, and marketing has other levers.
And so whether it's sales and share goals as an end goal, if not also profitability, profitable sales and share. Lauren, to your point, if everyone's linked to the same outcome, and we clearly know what inputs we have, we can all actually be marching to the beat of the same drum just with I have this type of drum and you have that type of drum, but we're still making the same music towards the end goal. So that sounds easy to say, but the siloed approach of traditional CPG worked when it was a simpler, more mature marketplace. With today's dynamics, it's not that simple, and sometimes we're actually working against each other and not meaning to. And thus then we can definitely, from an internal perspective, not help the retailer because we're not connected internally ourselves, which is why we want to put on our own mask first so...
Lauren Livak:
And Chris, we have two questions. One I'm going to ask now and one I'm going to save until another section. But someone asked, where does EBITDA fit on the P&L? And for those who do not know what EBITDA is, it is earnings before interest, taxes, depreciation, and amortization.
Chris Perry:
That's a great question. So this, you are clearly the next level above me on the P&L, so I'm going to have to hire you as my finance lead. But EBITDA would be aligned, arguably, depending on how your company is measuring profit, that would be below what we just talked about. So obviously I'm staying a little bit high level only because everyone today may be at different points of their own journey. But as a company, we're going to have our actual final earnings before and after interest and taxes and everything else that comes out as we're submitting for quarterly and annual submissions for our public companies and private companies. So that's the next layer down below the ones that we were just talking about as many of us are owning accounts or brands. But very important part of that 'cause that's the ultimate earnings of the company before and/or after taxes and other implications. So that's a great question.
Lauren Livak:
So Chris, how can brand manufacturers actually improve their profitability? We talked about a lot of the scary stuff.
Chris Perry:
Yeah.
Lauren Livak:
We talked about how it works. How can they actually impact it?
Chris Perry:
I think we should just end on scary and not share anything else. I'm just kidding.
Lauren Livak:
Halloween's over, so no.
Chris Perry:
No, no. I like movies where the hero wins. Even though I also like in Marvel where Thanos seemingly ends the universe but then the Avengers come back and take him on. So let's be the E-vengers, the E-vengers not Avengers. So there are lots of things you can do. Actually Lauren was very thoughtful and diplomatic in telling me I had to reduce the number of slides I could show today because I always come in with more than the amount of time. But by all means, you may be doing some other things too, so don't limit yourself to just what we're talking about here. But if this doesn't validate or spark good conversation during the session or even after, we're always here to help. We'd love to ideate with you to help you continue driving change, positive change internally. But let's look at a couple things per line item. Some of them impact lots of line items, but if we think of each of those KPIs, there are some things that can help in all instances.
So we talked about that example of so e-comm packaging and price pack architecture may not be designed for e-commerce, especially ship to home like the amazon.com, if not also home delivery or click and collect. That's easier because the shoppers still may be coming to the store or for click and collect, or the basket may be built for a grocery order that's delivered to home. So the bigger basket helps make up for the smaller items that wouldn't have been profitable individually. But in general, we want to be thinking about our assortment from a price pack architecture perspective that works for the models we're selling on. And in that instance, even if we're selling at a retailer like a Target or a Walmart or a Kroger who has many models, maybe it's something more about which ones we're promoting and driving, so that the ones that are being promoted online are the ones that are most viable online. Whereas the ones that we would be driving in store might include the ones that were a little bit of a lower price point.
So this was just to highlight an example, maybe, and this is just for information purposes only again, so if this is your Neutrogena item, don't get scared, I'm not showing your numbers or anything, but an individual item might not long term be as viable due to the rising cost of shipping, but a three-pack might not be too much for the consumer to buy. So it's not a barrier for them to buy, but the price to ship three is a 3X the number of products. So the good thing about the cost of shipping, it's not the same slope as the price of the product if you were to jump three times or two times. So it's thinking about e-comm price pack architecture, and especially when we're thinking about new items as well, making sure that we've got items that are already ready to be sold viably online. And so that is a broad statement because every product is going to be a little bit different. But that is an important part of that.
And Lauren, I think I saw one of the questions was related to that, so I don't know if you wanted to jump and ask that one.
Lauren Livak:
Yes, yes. So there was a question, which CPG/pet brand have successfully executed a PPA strategy with e-commerce or Amazon-specific packs that you might be able to share to help sell internally as an option?
Chris Perry:
That's a great question, and maybe as a follow-up too, because I can't show you links, but if you want to follow up with me, I can point you to a couple of pages because again, I can't share anything insider knowledge, but there are a lot of brands that are testing and learning, and they might openly say, "Oh, it's not perfect." But from a public-facing perspective, I mean, I see a lot of really interesting packs from the Reckitt team, and I worked at Reckitt so I know we were early in e-comm. They'll be the first to say they're not perfect at everything, everybody's learning, but they've had many years ahead of some other players in the category to develop really thoughtful bundle packs.
And they do it in a really cool way too, where especially even on their cleaning products as an example, like Lysol, Lysol wipes might only be a handful of dollars per each, so it's not just multi-packs, they actually have so multi-solution bundles that they use to help A, differentiate the assortment so that they can overcome some of that price matching, but they're also creating something that actually has very limited low common denominator. All the products are high valued, highly desirable cleaning products that are better together. So we've seen a lot of that. To be fair, a lot of products that came out of Prime Day in July this year are still live today online, and they were multi-bundle packs. So P&G did a ton of them with, some of these seem really basic, but diapers and wipes. Hmm, had never thought of that before. No, I mean, but it made sense. But now it's the combination of them that created a unique item but was also price pack architecture appropriate for e-commerce.
Mondelez and PepsiCo have some really nice snack packs that are variety packs but that they've created of both their normal products but also individual products, that you can see on Amazon as well as on other dot-coms that are very thoughtful. Pet food, I mean, there are quite a few in pet food. A lot of pet food, to be fair, for premium pet food is already at a very high price point, for natural dog and cat food as an example. The challenge obviously with those, and having been in pet food myself, was the weight of the item really pops up and the dimensions of the large dog food bag makes the cost to ship disproportionately higher than it would be to sell beauty products, smaller beauty products in a pack. So maybe as a follow-up, and I'm not deflecting, if you want to email me directly or through Lauren, you can reach out to me on LinkedIn. I can send you URLs to a number of pages that I might use as thought starters if not inspiration for internal mirroring, if you're looking at that for your own pet food brand.
But there are lots of cool examples. And sometimes they don't show up 'cause they're in other categories. So we might want to look at other categories too that are trying to do some of the same things we're doing because they often give, again, I see this in some of the categories I'd never look at, from a competitive standpoint, are actually the ones leading in this space and might give us some ideas. So that's price pack architecture. But I kind of implied, in just what I said was, I don't want to just create a bigger pack alone, I may have to just to be able to sell online, but I also want to make sure I'm not causing price matching. So this is a very important note. I'm not controlling pricing, I don't want to cause price matching, so I can't stop, I can't make my retailer price differently, that's illegal.
But what I can do is not cause the problem that they are often... I create the black hole that they swirl in by not creating items that are maybe exclusive or differentiated enough that can't be easily price matched, or in the short term, the easier thing to do, I want to say, is how I promote. So if I'm doing, and I'm not criticizing rollbacks or MVMs at Costco or in-club savings events or anything, but price matching is literally happening like for like items down to the ounce. So it doesn't matter if it's a club item versus a mass item, it may be matched at any given point per the retailer's discretion. So I may need to think about different ways to promote to drive lift. And so these were just some of the many. I collect them. You may collect real things in life, I collect screenshots of really cool promotions. But whether it's gift with purchase, like J&J does a really cool gift, first aid bag when you buy three full price first aid items, the bag is the value. It's really cool though.
And you realize it's very useful for many occasions, so you might actually buy more first aid products than you'd ever have bought from them as well as from Target because of the gift, as opposed to a discount or a gift card. But it could also be a bundle, as just bundling so it's not a discount on any one item. Maybe it's a bounceback or a rewards offers. And now that we've got Walmart Rewards and Walmart+, and Target Circle obviously has some really great rewards capabilities and Kroger Boost may add some and there's a lot, the rewards element could be a really interesting way to add in value without giving away dollars. Amazon does allow for gift credit of Prime Video. So if you're doing movie night type offers, or I've seen lots of brands do it even outside of movies.
 Cause marketing, charity marketing, everybody likes it but you're like, "Would that drive a lift?" In my experience from three different CPGs we saw anywhere from a 7 to 15% lift minimum on campaigns with no discount at all, only a you buy one, we give one, or you buy one, we donate a dollar. People love that. When they needed the product anyway, give them a reason to buy you instead because you're going to do good and then you can make that a much bigger campaign and even a value for the retailer. So it's really this idea of being price matching proof, first in promotion, longer term you could look at maybe some unique items as well.
Lauren Livak:
Chris, we have a question.
Chris Perry:
Sure.
Lauren Livak:
One challenge we're seeing is with the ease of comparing prices online, shoppers are trading down more with inflationary cost of living pressures, which is putting more pressure on retailer P&Ls and therefore higher investment asks. Have you seen any great examples of brands communicating brand value online above just price? I think that's a great question.
Chris Perry:
That is a great question. So what I'd say is some of these things can help with that natural like... So when you think about it, the first aid bag, I don't know the exact dollar amount of the bag but I would imagine that probably doesn't necessarily even cost the $5 that you normally get from a gift card offer at Target. So you're still getting a really great value but you may be saving a little bit in that whole investment. So basket building will obviously help overcome a little bit of that. Even if people are trading down, they may still build a bigger basket because of the value you're creating. Definitely just, I mean, we'd say best in class and very compelling digital shelf content may help drive increased conversion, if not justify your premium over either for the larger packs or just in general versus private brand or whatnot. Cause marketing could be a really great way because then I'm not only giving you a value and something that solves your need, but I'm also doing good for others.
I would say, I'm just trying to think through, there're quite a few examples of brands that are trying to add incremental value to the shopper. I think the key is going to be, in both media and marketing and then the proposition you're communicating the why you're different. And actually, I've done a couple trainings recently where we actually looked at some examples of comparative advertising or competitive advertising, which obviously needs to be legal and brand approved internally. But remember in old TV copy how they would always show, "Our brand is 50% better than the other brand." Well, then we go to the digital shelf, nobody says anything about that. There was a reason your brand won before with national copy that gave a reason that it was better than the leading private brand or the leading whatever. And sometimes it's just showing the product next to one another.
The other way you can take this pill is I always think of Reckitt with MegaRed and MoveFree. You can take the two pills, the large pills of the other category, or you can take our one small pill. We didn't say anything about performance, even though arguably we're implying. You don't like swallowing pills, ours is easier to take and it you that benefit. So there could be a number of ways to communicate value while still justifying yourself in general, let alone also versus maybe some less expensive options. But that's why creating other values, giving people a promotion, but that isn't necessarily just giving a discount off the product individually, can be a great way to keep the call to action but yet not lose your shirt by giving away too much in discount. Just with our last little bit, I want to highlight a couple other things and then we can obviously answer questions and whatnot as follow up too. 'Cause if you're like me, I always think of questions after I leave a session, which doesn't sound helpful but we're not going anywhere, we're here.
So let's talk about some of the ones on the gross margin line. We talked a little bit about e-commerce-ready product packaging. Now, this may add cost in the short term because it may be incremental to the line, the process, the materials being bought. As this becomes a more normalized approach to how we sell online, having packaging that is A, prepped to ship. Amazon does a lot of, I would say they've led in this space around creating different tiers of prep-free, ships in own container and frustration-free packaging. You can see this example of the leap frog here is the frustration-free packaging, which is the top tier packaging. I could buy the retail packaging that's displayed for me on a shelf, but I could also just buy the box, which if, for a gift might be less, depending on how I want it framed, could be less of my choice, but I get the choice.
But actually, that boxed one is a ships in own container, prep-free, easier to open for the shopper and does actually convert often better in the long run online, and lowers the cost of doing business for that individual SKU over time with an Amazon or with an online retailer. So the idea is that in the short term it might add a cost, in the long term, maybe your trade rates and some of your other things would come down, and you'd sell more so you'd get more up upside, but it would trickle down and you'd be able to negotiate more value because you're actually leaning in and helping design for the retailer. Dropshipping is another thing that's coming, it's been around, but I think more and more retailers are going to add it. Right now, it's only available at a lot of our mass retailers today, and it's only for some brands and some categories today, it's often electronics and appliances, and some of the high velocity and higher price point items. But more and more brands are being tapped and invited to test.
But the idea here is that the retailer sells your product, but when they get the order, they send it to you and you send it to the consumer. So you're not actually a third-party seller and you're not really a direct-to-consumer. The retailer took the order, but then the software sends you the order, you ship it and then you get reimbursed for the shipping from the retailer. But what that opens up is potentially greater speed, lower out of stocks, because you have the product, you don't have to ship it to the retailer, you have it, incremental items. You might be able to offer a lot more items out of your own warehouse that they don't have to carry internally. That lowers their costs, which may, again, in the short term, it might increase some costs. Over time though, it may actually help you lower it and get some incremental sales out of it as well. And then just last two levers here on the bottom line that just we'll touch here is I want to say progressive retail media measurement. This is easy to say and hard to get people to buy into.
But as our retailers ask for a lot more money, 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, not just ROAS, return on ad spend, but real ROI. Because ROAS can be deceiving, and if you only go after your branded shoppers or branded terms, in a less incremental way. But if we lean into retail media ahead of just the ask to lean in, and realize that there's a much greater ROI and lift off of the retailers and in store as well, that we may or may not be fully capturing, we want to start trying to do that, we may actually not look at this as a crazy inflated cost to us, but actually as a real driver of the growth, and I also always want to say is, remember, retail media is helping you win the digital shelf. If you win the digital shelf, you're not only capturing digital commerce sales, you're influencing the in-store sales because they're looking at in the store, often on their phone, at the top ranking items.
And so those are the ones they see and those are the ones that influence their purchase. So whether it's intuitive, conceptual, or actually able to be measured, if a tree falls in the woods and you're not around, it did make a sound, you just didn't measure it. So the point is, not that I have to convince you all of that, but we may need to really push that agenda, is I don't want to just give more and more retailers more and more money without actually getting something back for it, and that's what leads me to my second point here is everything is negotiable, everything. 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. And so I don't say that because I can just say it and then walk away and I don't have to do it, I've had to do it too.
But it's being relentless about, "You're asking me for this, I can lean in there, but I'm going to need this, this and this because maybe right now if I give you this media, you don't have the digital shelf capabilities to convert. So I'm going to need to offset the ROI we're not getting from you right now. Thus, I may need some incremental value in store." Or lay it out in contract, not in a contentious way, but as a value creator. I can get more money for you long term if I can prove out that this is working. And I know a lot of you are actually pushing that agenda right now, but I just say we need to lean into retail media, but we need to make sure we're really getting as much out of retail media investment as we can so that the bottom line doesn't look like it's being diluted, it's actually attributing to the incrementality that we're really driving.
So I know we're close to time here, Lauren, so I would just say, remember, we're going to have a part two as well and we would welcome you to join that because we're going to continue the story, understand the retailer's side and some of the things that we can do explicitly to help them, which will come back and pay it forward back to us, our survival and success is dependent on proactive P&L management and optimization. That does require all of us to be relatively dangerous on P&Ls, whether or not we own it outright internally, even if we just own a view of it that we can see that we're dangerous there. And again, I know we only talked about a couple of the levers, but those are some of the heavy hitter ones that can make the biggest dent earlier in helping you manage the P&L on a glide path towards legitimate profitability. Because in the short term, we're leaning in and there is a lot of pressure so it may look dilutive in e-commerce today. But it will get better because this will become a normalized way to market.
Costs will come down as more and more business is just done this way. And if we measure more effectively, we'll see that a lot of the incrementality we're really driving is coming from those newer or incremental investments. And so they'll actually pay for themselves, if you will, long term.
Peter Crosby:
All right, thanks to Chris for joining us. In the upcoming weeks, we will feature the second part in this series, where we tackle the retailer P&L so that you can negotiate more successfully towards their business priorities, while making sure to maximize yours. Make sure you know the webinar and the podcast episode is coming by becoming a member at digitalshelfinstitute.org. Thanks for being part of our community.