Prepare now for HFSS Impact on Terms
While the primary impact of HFSS regulations in 2022 is on Promotions and off-shelf Display, HFSS also has significant implications for the Customer Terms that fund Display, Feature Space and Merchandising. This is especially true for brands that currently fund their promotions and feature space with on-invoice promotion funding, or ‘Back to Front margin’ (B2F Margin) as it’s also known. For a detailed review of the HFSS Impact on Promotions follow this link here, however, the impact on Terms is closely linked as Brands must ASSESS, PLAN, and then RE-DEPLOY their terms in order to get the best from the HFSS regulations change.
At stake is a significant amount of money on display fees – Sellex research* indicates over £5Bn is spent each year in the UK Grocery estate on renting feature & display space instore, with over 40% of this or £2Bn coming from HFSS brands and categories. It is no surprise then that retailers are concerned by this loss of display funding from HFSS brands on their back margin, and will fight hard to retain it. While some of this investment can be replaced by other non-HFSS brands gaining more display, it is unlikely that they will afford the same level of fees that HFSS brands can afford.
However, we expect HFSS brands to re-deploy their display fee funding into other growth drivers as soon as they become available. These are likely to include one or more of the following
- Seasonal aisle space
- Branded shelf merchandising
- In-aisle feature space, which will require a new shelf layout for most categories
- Permanent secondary shelf siting in relevant adjacencies, such as crisps in BWS aisle
- Permanent branded ends – for rent on an annual basis, and likely sold via auction
- The equivalent options online (HFSS regulations also impact online feature and display)
This evolution has two key elements of complexity. Firstly, many of these growth drivers are new or inconsistently available today, with various levels of operational complexity, so it will take time for the drivers to become efficient and the true sales impact to be established. The implication is that any future terms plan must be flexible enough to dial investment up or down by driver as these options mature. Secondly, many brands currently pay for display on invoice as part of their B2F Margin plans, so for their display fees to be re-deployed then they must first be identified and split out from the promotion case-rate element of B2F margin. This task has been made even harder recently as the impact of COVID-19 means there is currently an inflated base sales rate and an unstable promotion plan for many categories.
We believe brands need to prepare well ahead of the HFSS regulation launch to be able to control their terms spend and influence their customers positively. To do this they should follow a simple 3-step process to ASSESS, PLAN, and then RE-DEPLOY their terms.
The start point for any terms discussion is usually ‘what do you pay for today, and how much does it cost?’. Unfortunately, few businesses can give a straight answer either because their systems are not up to scratch, or because over time the original robust expectations for each term have degraded in conditionality into a blunt commercial inheritance from previous managers. Occasionally we have come across some terms that a new account manager was not even aware of – which is symptomatic of terms rarely getting the review and refresh time that they deserve from their owners.
The critical first step then for managing customer terms is to Assess the current situation in full detail, identifying all the current term investment levels and conditionality and allocating them to a consistent set of terms buckets in all accounts. Without this platform of understanding, it will be difficult to Plan and Re-deploy.
This will take a few iterations to get right, but the intent is to balance the ‘perfect’ future terms package while taking into account the less-than-perfect start point. In addition, the terms need to be widely applicable, easy to understand and also future-proof against changes in Promotional funding, Display and Merchandising options. Finally, creating Conditionality can be challenging in a short time period so in some cases there will be steps in the Conditionality plan to allow progress over time.
Most sales teams have never negotiated a terms revision, so this can be seen initially as difficult and intimidating. However, with the right support, capability and confidence there is nothing that a good sales team cannot achieve on terms, and in many cases their Customer relationship will benefit from the experience. The main challenge here is on timing – as ideally a revised set of terms for HFSS in 2022 would benefit from an initial sell as early as September 2021, which is only a few months away from now.
If you would like to discuss how Sellex can help you with one or more of these steps on Customer Terms, please contact us using the button below:
* Sellex research on display fees March 2021, please contact us for details