Trade spend is a powerful promotional tool for food and beverage companies that, when managed well, can drive growth, strengthen retail relationships, and boost brand visibility.
But to maximize its benefits, trade spend must be tracked and accounted for carefully. Without proper accounting controls, trade spend can distort financial reporting and hamper cash flow.
What Is Trade Spend?
Trade spend is a collaborative investment between a company and its retail or distribution partners. Depending on the arrangement, this may include discounts, volume rebates, chargebacks, or slotting fees, with each incentive designed to support sales and shelf presence.
For example, a beverage company may offer a rebate to a grocery chain for stocking a new flavor, pay a slotting fee to secure premium shelf space, or offer a chargeback to reimburse a retailer for advertising a product in a weekly circular. A promotional discount might offer retailers $2 off per case during a seasonal push. Volume rebates, such as $0.50 per case after moving 1,000 cases quarterly, can reward retailers for reaching specified sales targets.
For food and beverage companies, trade spend arrangements can help products stand out in crowded categories and encourage retailers to prioritize them. But they require careful tracking to understand performance and maintain profitability.
Trade Spend Benefits
Trade spend can drive measurable results when executed strategically by increasing sales volume and market share by making products more attractive to retailers and consumers.
Strong trade spend programs can also deepen retailer relationships. Partners view collaborative investments as signs of a shared commitment to mutual success.
Accounting Implications
Trade spend creates complex accounting challenges because it reduces revenue either directly or indirectly. It is important to understand the key principles of how to account for trade spend as either a revenue reduction or as a marketing expense:
Under the guidance of ASC 606, payments that a company makes to a customer are typically treated as reductions to the transaction price, which reduces the amount of revenue recognized. The main question is whether the payment is in exchange for a distinct good or service:
- If the payment is for a distinct good or service, and that good or service is transferred to the company, then the payment should be accounted for like a normal purchase (i.e. as an expense).
- But if the payment does not correspond to a distinct good or service, then the payment must be accounted for as a reduction of revenue (i.e. a “consideration payable to a customer” that lowers the transaction price) under step 3 of the ASC 606 revenue model.
In practice, that means many incentives or payments tied to a sale end up reducing recognized revenue, not being expensed separately. Here are some examples to illustrate the differences:
Revenue Reduction and Consideration Payable: When a “distinct good or service” is not received
- Slotting allowances or shelf-slotting fees: A manufacturer selling to a large retailer may pay the retailer a fee to secure favorable shelf placement. If that payment is not for a distinct service the manufacturer receives (i.e. they don’t get a separate marketing service in return), then the payment is considered a reduction of revenue rather than a marketing expense.
- Customer rebates, coupons, or cash-back incentives: If at the time of sale there is a reasonable expectation the customer will receive a rebate or coupon, that expected concession is considered “variable consideration.” According to the standard, it should be estimated and included in the transaction price, resulting in a lower recognized revenue amount.
Expense Treatment: When a “distinct good or service” is received
- Payment in exchange for a distinct service or good from the customer: An example of this would be when a seller pays a retailer for specific in-store marketing services (such as product display setup, promotional events, etc.) that the retailer provides. If those services are distinct and the seller receives them, then the cost could be treated as a normal marketing or advertising expense (or cost of sales). This would be comparable to purchasing services from a vendor.
Additionally, it can be difficult to estimate and record trade spend properly because it may not be defined clearly in contracts. This can make understanding historical trends essential to estimate the recognition methods outlined above, and is why recognition requires careful judgment that can be subject to heightened scrutiny in an audit.
Financial Statement Disclosures
Food and beverage companies have two primary options for presenting trade spend in financial statements, with each offering different implications for stakeholders.
- Show gross sales, then subtract trade spend as a line item to arrive at net sales. This approach provides transparency about a company’s promotional activity levels by showing investors its gross pricing power and promotional intensity.
- Report net sales directly, with trade spend noted in a footnote. This creates cleaner revenue figures but reduces visibility into a company’s promotional strategies.
A company’s choice depends on materiality and stakeholder needs. If trade spend exceeds 10% of gross sales, the gross method often provides better transparency. Companies with robust promotional strategies, such as those in highly competitive categories, often benefit from presenting a comprehensive view of their revenue generation approach.
Either way, consistency matters. Choose a method and stick with it.
Accounts Receivable Impact
Trade spend can influence accounts receivable in subtle but important ways. Rebates and discounts often encourage larger orders, which can increase AR balances. That’s great for volume, but it can also complicate forecasts and performance comparisons by shifting orders into different periods.
Large promotional orders can also shift purchasing patterns between periods. Retailers might accelerate Q1 purchases to capture Q4 promotional pricing, creating artificial spikes that complicate forecasting. This forward-buying behavior can leave a company with lower-than-expected Q1 reorders.
The cash flow impact can extend beyond collections. Larger orders require increased production and distribution capacity. The company may need additional raw materials, overtime labor, or expanded warehouse space to fulfill promotional demand, creating upfront costs before collecting on higher AR balances.
Documentation Requirements
Proper trade spend accounting requires meticulous documentation. Trade agreements should ideally specify exact terms, including discount percentages, volume thresholds, and performance requirements.
Food and beverage companies should:
- Maintain promotional calendars that track start and end dates for all programs. This prevents disputes when retailers claim promotional pricing beyond agreed periods. A beverage company might run summer promotions from Memorial Day through Labor Day, requiring clear documentation to avoid extended claims.
- Track all deductions against original terms. Retailers sometimes take unauthorized deductions or miscalculate rebates. A company should compare claimed deductions with agreed terms monthly. Discrepancies caught early prevent larger disputes and maintain accurate financial reporting.
- Keep backup documentation for all claims. This includes proof of performance for volume rebates, advertising tear sheets for co-op programs, and delivery confirmations for slotting fee arrangements.
Effective trade spend management balances growth opportunities with financial controls. Companies that master this balance typically outperform their competitors while maintaining predictable cash flows and accurate financial reporting.
To learn more about the role that effective trade spend accounting can play in your company’s success, contact us.
