What is Trade Spending and Why is It So Complicated?

July 29, 2021

Food and Consumer Packaged Goods Manufacturers (CPG) develop a range of strategies to promote their products, such as online promotions, email marketing, and print marketing.

Manufacturers also engage in marketing tactics in the retail stores. Typical manufacturer promotions may include:

  • Coupons and cash incentives,
  • co-advertising with the retailer.
  • Payment of slotting fees, which are fees to get the retailer to place the products at the ideal locations on shelves to garner customer attention.
  • A manufacturer may offer spiffs to retailers and distribution centers. Spiffs are small and immediate cash bonuses paid to salespeople when they make a sale or perform a demonstration.
  • A producer may pay retailers to hold contests, set up trade booths, or gain special sales access to their customer lists.

This type of promotion in the retail store is called Trade Spending. It is a formal agreement by the retailer and manufacturer, detailed in contracts between the two parties. It includes the trade spend budget and outlines all the promotions to take place and the amount spent on the marketing.

Why is Trade Spend Complicated?

The trade spending budget is used throughout the year on a variety of promotions, and may not always be used completely. When the retailer performs an audit, they may find that the trade spending doesn’t comply with the agreement. In such a case they will file a post-audit claim with the manufacturer to recoup the difference from the manufacturer.

Since post-audits can happen up to two years after the promotion, the post-audit claim can significantly impact revenues and expenses for manufacturers and suppliers. In addition, the claim amount may not be accurate. In fact, in our experience up to 50% of post-audit claims are invalid. These wrongful deductions can be due to missed deductions already deducted/processed or deductions that the retailer is not entitled to according to the signed agreement. Also, third-party auditors on the retail side are often motivated to make excessive dollar claims since they get paid a recovery fee on these recuperated / deducted dollars from the manufacturers.

Post audits on trade spend therefore often result in a dispute between the auditors of national retailers and the manufacturing companies for the promotional products that they’re selling.

Trade Spend Management

To avoid excessive post-audit claims, food and CPG producers are well served with detailed processes to track transactions and trade spending to avoid any data input error, billing errors and duplicate payments.

Many food and CPG producers don’t have the manpower to set up these processes, let alone to do the internal audit necessary when faced with multiple post-audit claims from a national retailer’s third-party auditor.

Using a third-party auditing service on the manufacturers’ side can provide professional audit reviews to claims from retailers by validating all product promotional operations against these proposed post audit claims.

The manufacturers are charged with reviewing two-year-old claims which is time consuming just gathering the past years’ files. This is in addition to maintaining everyday deduction transactions for current year’s promotional allowance deals.

For more information regarding trade spending and how to handle excessive post-audit claims, turn to Claims Recovery Group.