Calculating Actual Brand Dilution and Loss of Sales for a Premium FMCPG Brand Following Product Defects: A Practical Guide for In-House Counsel Recently, a fellow general counsel of a Fast-Moving Consumer Packaged Goods (FMCPG) brand company told me their horror story of a contract manufacturer producing defective finished good products which were then sold by the company to retailers and end-users on ecommerce. They sued their contract manufacturer for breach of contract and were now being asked to compute the costs to the company of loss of sales as a result of consumption of their (defective) product. I then thought about all of the components that go into brand-building and how to compute a brand dilution-driven cost of loss of sales. I offer to you a few steps to take towards computing this hard-to-compute loss, and I hope it serves as a jump-off point to any in-house counsel finding themselves in this position. When defective products reach consumers, especially in the highly competitive and perception-driven world of Fast-Moving Consumer Packaged Goods (FMCPG), the reputational damage can be profound. Brand dilution, loss of sales, and strained retailer relationships are the unfortunate aftermath of such incidents, particularly for premium brands where consumer trust is paramount. Below is a structured approach to quantifying the financial damage stemming from these events, focusing on brand dilution and sales losses. Step 1: Calculate Annual A&P Costs Attributed to the Brand Your first step in quantifying brand dilution is to assess your annual Advertising & Promotion (A&P) spend and other brand-related costs, specifically tied to the product in question. Here's how to go about it:
  • Culling A&P spend: Review your entire A&P budget, which includes General & Administrative (G&A) expenses, agency fees, media buying costs, digital platform licenses, retail promotion participation costs, and brand marketing salaries.
  • Brand-specific allocation: Once you have your total A&P figure, determine what percentage of that is attributed to the particular brand or product affected by the defect. You can calculate this by considering the share of marketing efforts, resources, and sales volume directed at this brand as part of your overall portfolio.
  • Linking A&P spend to brand dilution: Once you have the brand's allocated portion of your A&P spend, you will apply the percentage decreases in consumer purchasing and retailer orders (calculated below) to this spend. This will help to approximate the portion of your marketing investment that has been effectively wasted due to the brand damage.
Step 2: Analyze Consumer Insights Reports for Purchase Trends Understanding consumer behavior before and after the product defect became public is critical for assessing brand dilution. Here's what to do:
  • Collecting insights: Obtain consumer purchasing data from sources like IRI, Nielsen, IQVIA, or SPINS, which can offer insights on consumer purchases and in some cases, repeat customers to show category performance.
  • Calculate the impact: Identify the percentage decrease in consumer purchases for the brand by comparing past purchasing behavior (before the defect) with current purchasing patterns post-incident. This percentage decrease will reflect the erosion of consumer trust and brand loyalty.
  • Quantifying the decrease: Convert the percentage decrease into actual sales losses to quantify the financial impact of brand dilution. For example, if purchases dropped by 20%, and your brand's annual sales were $10 million, the loss of consumer sales would be $2 million.
Step 3: Analyze Retailer and E-Commerce Sales Loss Next, you'll want to gather sales data from your key retail and e-commerce channels to assess how much business you’ve lost due to retailer delisting or reduced orders.
  • Collect data from all channels: This includes sales from Amazon.com, your DTC website, Walmart.com, Instacart, Walgreens, and brick-and-mortar retailers like MULO, large box/club stores, Natural, Convenience Stores (C-Store), and Direct Store Delivery (DSD) distributors.
  • Year-over-year and monthly comparison: Analyze both annual and monthly sales for these channels. Pay particular attention to periods of seasonal sales peaks and valleys, as these will need to be accounted for when calculating percentage drops.
  • Assess impact on orders: Identify how much business was lost due to defective products being pulled off the shelves or delisted by retailers. If a major retailer stopped carrying your product entirely, the loss could be significant. Quantify the actual loss by comparing order volumes before and after the defect surfaced.
Step 4: Assess Social Media and E-Commerce Platform Comments While social media comments and reviews on platforms like Amazon.com may not be hard quantitative data, they provide valuable qualitative insights into brand reputation and consumer dissatisfaction.
  • Culling bad comments: Have someone gather negative comments from social media platforms and product review sections on Amazon.com and other e-commerce sites. This will serve as anecdotal evidence of brand dilution and could be used to substantiate claims of consumer disinterest or distrust.
  • Indication of lost customers: Bad comments can signify no-repeat purchasing and an erosion of your customer base. While not as exact as sales data, a thorough analysis of negative feedback could help in calculating lost sales opportunities.
Applying Loss Percentages to A&P Spend Once you have gathered the relevant percentages from steps 2 and 3 (e.g., percentage decrease in consumer purchasing, percentage decrease in retailer orders), apply them to the A&P costs from Step 1. This calculation can offer a reasonable estimate of the marketing dollars wasted due to brand damage. For example, if consumer sales dropped 15%, and your allocated A&P spend was $5 million, the wasted A&P spend would be $750,000. Professional Note to In-House Counsel: Quantifying brand dilution and sales loss after a product defect can be a daunting process. It’s crucial to compile data from across marketing, retail, and consumer insights to paint an accurate picture of the damage. Beyond this, seeking restitution from the contract manufacturer is essential. If the manufacturer is financially solvent and carries sufficient liability insurance, recovering substantial damages may be possible. This situation is unfortunate, but with careful calculation and legal action, we hope you can recover significant sums from the manufacturer responsible. Best of luck, and may your contract manufacturer not be judgment-proof!   The content of this post is intended to provide general information. Legal advice about specific circumstances should be sought directly from a qualified attorney.