98. Breaking Down Distributor Deductions and Chargebacks

Yuval - Promomash (98)

[00:00:00] Distributor chargebacks collectively cost brands, right? Millions of dollars per year, and most of these are in the distributor agreement, but many of them are erroneously charged to brands, and it's up to them to contest it. When I ran my brand TSS back in 2018, 2019, we invoiced Kehe for about $32,000 worth of product at our wholesale cost.

But after all the deductions and fees, we were only paid out $21,000. That's an $11,000 difference with about 8,400 of that because of a poor retailer relationship. Today's conversation is all about pulling back the veil on deductions and how you can effectively manage them. So this doesn't happen to you. Down me with this conversation.

I've invited on my friend Yuval Selik, who is the founder of Promomash and a frequent contributor to the show. [00:01:00] Yuval, how are you? I am doing great. Thank you for having me again. Always a pleasure, and our episodes do really well. So I'm excited again to share all this knowledge that you and I have with the C P G community.

I am too, because you always bring the best stories and experience. So starting from the top, what are deductions and why do they exist? Well, Jordan, I think that. Kind of putting the cart before the horse . The real question is why do we have deductions in the first place, right? So, well, it all starts with trade spend, which is the tactic that's utilized by brands, right?

To raise product awareness and to really just play at retail, right? Is the pay-to-play scenario, but just as a reference point in 2020. I remember correctly, the estimated US sales for C P G were around. You wanna guess? Ooh, I have no idea. 860 billion [00:02:00] Wow. Globally, 1.9 trillion in spend. Now consider this on average trade spend hovers around 15.

Up to like 30, I've seen more, but 15 to 30%, which is why trade spend is the second largest line item on the p and l. Right? Right. After cost of goods. And then it even gets worse because Nielsen reported that 71% of all promotions are ineffective and unprofitable. Mm. Saw this firsthand. Of course. And I've been writing about this for years now on LinkedIn.

Right. So now let's understand. Why deductions exist. So that, that was the first part. But let's understand why they exist. So back in the eighties is a little lesson that I've learned and I've learned it from this book right here, the Invisible Economy of Invisible Economy of Consumer Engagement by Robert Hand, Jr.

I love it. Shout out to Robert. He [00:03:00] wrote the definitive book on trade, so let's understand why they exist, right? So back in the 80. Deductions were not a thing, okay? When brands were promoting with retailers, the retailer was providing proof of completion. Can you imagine? And the retailer will then pay them, right?

Mm-hmm. . But soon enough, the brands were overwhelmed with accounts payable. So imagine they had, let's say an ad. All of a sudden you promoted an ad with Kroger. Kroger after the ad ran, sent you a copy, like a little snippet of the ad in all the different markets, and then your accounts payable at your brand would then cut a check to Kroger's.

But they started getting overwhelmed and started paying 60 days, 90 days, 120 days late. And we know the retailers operate on a very small margin, right? So that's true. And they were just not gonna stand for that practice for too long, right? So, bam, you get deductions. It was a way for the customer to put the burden of proof on the brand, so it was a full 180 degree turn and [00:04:00] deduct the trade expense on the next payment.

It was a brilliant move on the retailer side, believe me. And if you think about this right, as with any organization that accumulates power, I'm not gonna say like the mafia or anything else. There was corruption, right. And deductions were then taken out, err, erroneously. And since the burden of proof was on the brands, and since the brands were already short on resources, it really just became a profit center for the distributors and retailers.

And the brands started considering it as a cost of doing business. If, you know, if you ran a brand, you have a GL account, a GL fund. For different charges. When I ran my brand, I had one GL fund and it was called the cost of doing business cuz I didn't have the resources to manage deductions, you know, effectively enough.

So that's the story of deductions and why they started and what's going on. And I think that's the one thing where there's a little confusion, right? Because. Some deductions are legitimate in the sense that you as a brand have made an agreement with the distributor, the retailer, to agree to pay for these charges.

Yep. I think what's confusing are the [00:05:00] ones that are overwhelming or they don't realize the breadth and the scale of the deductions. And then also, as you mentioned, the erroneous one. Since there's that burden of approved switch back to the brands. Absolutely. I mean, I see it every day from brands that are even a half a million dollars, a million dollars in revenue, all the way up to brands that we work with at a hundred fifty, two hundred, two hundred 50 million dollars

it's the same problem. Everyone is lacking some resources in some way, in some capacity. There's very little transparency. You need an educated expert in order to understand the codes and all of that good stuff. Yeah, it's a big problem in this industry for sure. So let's talk a little bit about the different types of deductions that brands are charged.

And typically it's through the distributor. Yes. So can you share like what those typically are in that come in? Yeah. So there's two types of deductions, right? Do you have trade spend? And non-compliance. Okay, so trade spend pertains to all the pre-negotiated contract. You got contracts, you have free fills, you have e [00:06:00] DLPs price reductions.

It could be mcbs, bill backs advertising, end caps, coupons, right? What else? Demos. And you also have some that are kind of in the gray. Such as overages and shortages and early payment terms, distributor allowances, and I say gray zone because some consider those as non-compliance and some consider those as trade.

Okay. I think the ones that we see the most often are the non-compliance type, right? You don't see many. M C B or scan or advertising or E D L P deductions come in as invalid, but you do have a lot of deductions that come through as damages, returns, shortages over pulls. The fee that you called me on Tuesday instead of a Monday, and I'm gonna charge you an extra $200.

These are what I call the gotcha fees. Gotcha , and you're like, holy shit. Like, what is [00:07:00] going on? I, I was expecting a $10,000 check and I know I shipped this the right way. Like I saw the pallet, it was perfectly fine. And you're telling me that you're giving me $2,000 out of this 10,000 screw you. And there's a whole thing, I mean, with Alex Bayer right now, speaking about it on LinkedIn, everybody's up in arms.

I'm. Lawsuits, you know, class action lawsuits, it's a problem. And emerging brands are just suffering. And that's a, you know, that's what we deal with on a daily basis and try to help with, I remember that early on with t squares, it wasn't with one of the national ones, it was actually a regional distributor.

But we shipped out product and I think just because we started hearing these stories, we took a picture of the truck as it went out. And also, I think we were like in the background too, to make sure that we could tell our story. Yep. Just, you know, on, on social media. And we got a shortage kind of bill back , from the distributor and say like, Hey, you were short 10 cases or whatever, and like, like 10 cases at a time.

But we were like, wait a sec, we know we sent that [00:08:00] product. And so we looked back at our pictures and we sent them the picture and said, Hey, this is the picture of all that we sent to you. And they were like, oh, sorry. Yep. We miscounted. Right, but that was, you know, for us it was probably a couple hundred dollars, but at scale that can be tens of thousands or millions of dollars from something where if you don't.

So like accurately document every single thing that's going out and retain that paperwork. Then as you mentioned, like it's on you and oftentimes brands will just, it's not worth doing that headache or they don't think it is, and so they know just losing tons of money out the door. Yeah. We have a brand, the gelato brand, probably about a 15 million brand, 15, 18 million brand.

We were able to. Recover $320,000 of deductions and 296,000 with shortages. That's how crazy it, and that's in six months worth of deductions. Well, and the worst part right, is on the other side. Once they pay those out, which can also take months just to get your money back that they owed you in the first place.

[00:09:00] They're just like, oops, sorry. Not even, they're just like, here's the check. Right. They don't even apologize. They're like, our bad. We'll check on it. They're just like, ah, you got us . They're not apologizing for shit. No. . Exactly. I mean, , and that's wild when you realize the scope of these changes, and I've talked to some brands, they're like, we like have a full-time person who's managing these for us internally, or, you know, they'll use an outsourcers and it's worth the cost because it's real money on the table.

Yeah, I think it pains us to charge for deduction management services because hope, you know, hopefully that wouldn't be a problem. Right? Whatever you contract it to, you would get a deduction. Everything's happy and good, right? And everybody's in a good place. But there's so much abuse in this industry that.

You almost have to hire somebody internally or externally as a service provider to help you capture some of those dollars back because they're so erroneous and so egregious in a sense, right? I mean, it's just smaller brands have a real hard time with. Just managing cash [00:10:00] flow because as a result, let's talk about some of the waste that's included within the quote unquote legitimate charges around trade spend.

You mentioned that 71% or so of. Promotions are ineffective. And when you think about that, those are legitimate deductions that you agree to as a brand, but because of the reality of how the market is or you not tracking it correctly, there's a lot of waste in there. Mm-hmm. , can you share kind of how that waste manifests and what brands can do to get them under control?

I think that it all starts with, okay, so there's three things that every brand needs to hit if they want to succeed in retail, if you don't understand, I call it the trifecta of hanging out and playing in the sandbox of retail. The first, and this answers your question on how to not avoid how to avoid , the erroneous spend or the spend that isn't profitable.

Your, as I mentioned earlier, your trade spend is your second largest line item, so it needs attention. The first part of the [00:11:00] trifecta is your plan and forecast. You have to have tools and discipline to capture all of your spend. Most brands don't. So that means everything, your brokers do, everything. Your sales folks commit to everything.

You know, your sister agreed to on the phone the other day and sent you an email that you didn't get right. You have to be able to account for everything, and I'm talking about every M c b, every free fill, every short, you know, spoilage fee that you agreed to at 2%. The early paid discounts you have to account for mcbs OIS scans, you know, the whole, all the tactic.

that's your first part. You gotta get that right and usually with Excel or email, it gets lost in the shuffle and you really don't understand. Most brands that come to us don't understand their actual spend, so they need discipline. That's what we do. We provide discipline on the planning and forecasting side.

Then after you plan, unless you are a genius, you are not gonna plan effectively because the plan is [00:12:00] predicated on lift. What's gonna be my lift? All right. Well, if I know my lift as a plan, I need to validate it. How do you validate it? You gotta get data. So whether it's through a interaction with CRISP and US where you get realtime daily data into the platform and analyze your plan, or spins, uploads, or any way that you get that data, you gotta get that right.

Yuval, just to stop you for a sec, for those who don't understand lift can you give a quick definition of what lift. Yeah, so we're talking about base ver versus incremental, right? You have a certain base volume that you're selling without promoting. So let's say you sell 10 units every single week of your product.

When you promote, you expect that you're gonna sell more than 10 units or else don't spend your money, right? There's no point of spending money if you're not gonna do better than you would normally do if you didn't promote. So if you promote your lift, is the difference, the delta between your base and your next incremental value.

So that might be 12 units for the next week [00:13:00] during promotion. That's gonna be your lift. And then ideally you'd like to see a sustained lift after that. So maybe if you went from 10 to 12, then after the promo, maybe a couple weeks later, you wanna see 11 as your new base because you have new customers who are now used to trying your brand.

Right? Yeah. I mean, I think we can have a whole conversation and podcast and that, but it's base velocity and volume. Incremental volume over time. If you're flat or you're going down in volume, your only path is to discontinuation because that shit's not happening. But if you see incremental, you know upticks in your in your base velocity, then your base volume, then you know that what you're doing is working.

That's the goal. Perfect. So we talked about planning and forecasting. Talked about lift. What's next? I think we need to think about how do we better track and manage deductions, I think. What do you think? Should we go there? Let's do it. Okay. I think the problem though, with the current state [00:14:00] of affairs is.

In order to track and manage deductions properly, you kind of need both the sales and finance accounting to speak with each other. Right. And I think that's the big problem that I see with a lot of brands is that every division is siloed. Marketing is doing their own thing. They're scheduling demos and merchandising.

 They don't support the promos. A bunch of deductions come through. Sales folks don't understand what they planned. Actualizes in some respect. Right. And as you know, Well, let's go there. So basically the way it's done now is that sales has a beautiful and robust Excel spreadsheet, right?

It has their forecast and all of it. And I, believe me, I spoke with so many people on the sales side that would swear up and down that their spreadsheet is beautiful and they spent a ton of time on that spreadsheet, right? And accounting, you know, has their e r P system, right? That houses all of their finances, including all the deductions that their team uploads into or enters into the E R P, right?

So accounting gets a deduction invoice and they usually don't code the [00:15:00] detail as we call that line item and they usually also look at those charges. In a not so detailed way to separate the uniqueness of, you know, those pre-agreed upon contracts that sales negotiated, right?

Because sales negotiating different contracts, finance needs to match it up. So to get the deduction invoice and the deduction invoice in this 200 page document, you need to understand if it's valid or is invalid, right? So you wanna guess what? What happens? The sales folks who are already busy get asked by finance to validate their deduction.

Hey, sales team, you got an M C B or E D L P that came through, is this valid or invalid? And they're busy. And they're busy and they're like, Yeah. Yeah, that's valid. That looks good. Yeah. Yeah, yeah. Yeah. We did a sale. Was that quarter for someone? Yeah. Yeah. Without looking at the contract. Without looking at, so there lies the issue, right?

Sales and accounting or finance, they don't speak with each other and you know [00:16:00] that gorgeous spreadsheet. If it can't match up the deductions easily, how do you ever know what's planned versus actual? Right. And that's because the spreadsheet is a two-dimensional tool, right? The better way, and that's why we created a platform, is that it gives you the ability to manage interactions, right?

And the platform only approach still involves team management and the validation and disputes, which again, you know, not optimal, but usually doesn't work out well. So I guess I'll plug Promomash for a second, right, because we are the only solution. To this type of issue because we're a 360 degree platform, right?

We are a platform that's plug and play. We do the deductions for you, so we're a do it for you service. You don't have to hire somebody and worry about, you know, whether they're knowledgeable enough or they leave and take all the information with them, or having to speak with your sales team. It's all validated and done and coded on our side and match to your [00:17:00] plan.

And analyzed with sales data. So you have those three trifecta, you know aspects to understanding your second largest spend. And I can tell you, Yuval, that that miscommunication happens all the time and. Brands have no idea what any of those line items mean. They don't have those tools to match up.

Yep. And so I think that, like that, if you can solve that or have someone that's dedicated, that's why I love promo match so much because it takes the reality of the time crunch that the team is going through and makes it really simple to match up the plan to actual, to the build upon deductions. It makes all that process streamlined.

And you can save, as you mentioned, hundreds of thousands of dollars for. . And more importantly, I had a brand I believe it was a plant-based brand, but I believe there were about a 30 million brand. Okay.

The sales executive came to me and asked me, what is my trade spend at U N F I? And they just didn't [00:18:00] know. They had no idea, and they had a board meeting that they had to go to, and they had no idea. In two seconds, they click on U NFI and they see the exact trade spent by indirect customer, by charge code, and understand whether it's valid, invalid, coming to them back as a credit.

Right, disputed. They have all that answers and all the detail where before it was impossible to do because again, different tools not speaking with each other, and everybody that's really busy with a team that's not equipped like a Nestle is with 50 people on their deduction team.

Right. Well, I totally could relate to that too because even with the story that I mentioned at the beginning, we had $8,400 in product that was getting returned by a customer because they weren't selling through it and they weren't allowing us to do any marketing programs with them. But it took us.

I think eight months to realize the scope of the problem and eventually just stop selling to them. Yep. Now imagine if we are selling in a hundred different retailers and tens of [00:19:00] thousands of doors, right? Like this is really, really hard stuff for the smartest people to keep track of because there's so many moving parts and it happens over the span of months.

And so you can't rely on your memory to do that. Yeah. And so I think that's where the biggest problem lies and simplifying your life with that. Yeah. I always joke that, you know, business is done now in terms of managing trade with Smoke signals and pigeons. And I was like, you know, carry pigeons.

And I was like, you know what? Leave the pigeons to Mike Tyson. You need a better way. All right, so well, and I'll tell you like I love a good spreadsheet, but I also realized after building tons of spreadsheets myself, that they all break. Eventually, yeah. And you end up losing so much information and data from that process.

And so instead of reinventing the wheel from scratch, yeah, use something and use a tool that already exists to make your life easier so you can focus on the real impact, which [00:20:00] is managing the sales of your business, right? Like you're not hired to be an Excel wizard at the company. You're hired to sell product and so do the thing.

That's going to move the company forward. Yeah, and I will say, you mentioned, you know, get on the right tool. There are a lot of tools out there. There are other providers that manage T P M trade, right? There are some that will scan and potentially look at some deductions. You know, there's some teams, there's one in India, there's a couple of places where they.

You know, the work that it takes to at least categorize or analyze some of the deductions. There are products and tools out there to manage field marketing and merchandising. There are tools out there to train your staff. There are tools out there to get the data right and analyze the data like Chris Spins, I r I, Nielsen's, et cetera.

Right? The problem is, These brands are committing to, again, you know, it's the next level above spreadsheets, but it's not that great. Right? And you can have the best tools in the world, but even if those tools don't speak with each other, right, it's not gonna be [00:21:00] effective. It's, you're gonna still have issues and spend more time doing so and still lose data through the cracks.

What Steve Jobs did, which was genius, right? He understood when the whole mp3 and, and I'm aging myself cuz I'm really old, but you used to have to take a CD people, I dunno if they know what a CD is anymore, , but they used to take a CD and they had to literally upload the CD onto a computer. Then they had to take like a Rio or whatever.

There were a thousand different MP3 players and then they had to burn it and trans. Nobody knew how to do that. You like, grandma could not rip a cd, right? So it was just a horrible experience. Steve Jobs came about and said, you know what, we're gonna create an ecosystem and a an all in one platform, a closed loop solution, so that when you plug something in, You know, you get the music, you don't have to worry about all these different tools, right?

So when Chris and I created Promo MASH back in 2015, the whole business [00:22:00] plan was around the iTunes concept. There's no point of having different tools that don't speak with each other. So we created, and it took us a long time, and we're kind of surprising the market right now with our Proma 360 approach, but we're the only place where you.

Field and merchandising and trade and deductions and data, and it's all within a closed loop system. So you're not missing anything and everybody has an easy time working on it. So that's really my passion and what I'm trying to work with you on and and other partners who understand that there's a better way.

Right. And to your success. That's the. Definitely is Yuval. Thanks so much for joining today and breaking down deductions trait spend and how brands can manage this going forward. Definitely a huge opportunity for brands to better take control of their business, so I appreciate it. Always a pleasure.