Consumer-Centric Category Management

How to Increase Profits by Managing Categories Based on Consumer Needs

John Karolefski, Al Heller

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9780471703594
• eBook ISBN: 9781118429105
• Edition: 1
• Topic: Business
• Subtopic: Decision Making
• Index: Business

In some parts of the world, especially in developing markets, category management today remains a stretch goal – a new idea full of untapped potential. In other areas, the original eight-step process that emerged in the late 1980's forms the foundation of many companies' approach to category management. In still others, particularly in developed countries like the U.S., the U.K., and others, refinements are being made – most of them designed to place consumer understanding front and center.

New ideas are emerging – from "trip management" to "aisle management" to "customer management." Whether a new descriptor emerges to replace "category management" is yet to be seen. Even if that does happen, what won't change is the overall objective – to help retailers and their manufacturer partners succeed by offering the right selection of products that are marketed and merchandised based on a complete understanding of the consumers they are committed to serving.

This book, which explores both the state of and the state-of-the-art in category management, is for everyone with a vested interest in category management. It can serve such a broad audience because category management is about bringing a structured process to how executives think and make decisions about their businesses, no matter what information and information technology they have access to.

PART I

IN THE BEGINNING—THE PURPOSE OF CATEGORY MANAGEMENT

Category management began as a process that enabled retailers to manage product categories as individual business units. The original version had eight steps, beginning with category definition and ending with a review. Along the way, a category plan was created and deployed.

The process has evolved over the years into various customized versions with fewer steps. However, the traditional process remains the starting point for many companies and its original intent and spirit remain.

Today, category management is more than a way to manage a category as a business. It is essential to operating a successful retail operation. Moreover, the process can give retailers a powerful competitive advantage if executed properly. The winners in the marketplace will be those companies that satisfy consumer needs by knowing how to blend data, insights, and merchandising savvy.

CHAPTER 1

The Evolution of Category Management and the New State of the Art

In the early 1990s, grocery retailers in the United States were ready for a better way to run their business. Margins of about 1 percent at that time were unacceptable. New products were proliferating, while consumers were becoming more diverse and demanding. Other classes of trade such as warehouse clubs were emerging. Wal-Mart was getting ready to roll out its supercenter format that combined the retailer’s traditional general merchandise store with a full-line grocery store under one roof.

Clearly, a dramatic change was needed. Retailers sought a way to improve margins and compete more effectively. They wanted to reconnect with consumers and satisfy their needs, or face the prospect of an eroding shopper base. Given the endless variety of new products pouring into the marketplace, retailers wanted to ensure that their shelves were stocked with products that consumers wanted to buy. Mainly, they wanted to stay in business.

Birth of the Eight-Step Process

Many progressive retailers and manufacturers realized that there was gold in the reams of data available from retail point-of-sale (POS) systems. Was it possible to figure out which products to stock in a certain store? Could analysis of the data tell retailers how to customize the shelf sets in all the stores of a chain according to what shoppers were buying and wanted to buy? Could they attract and retain specific niches of high-value shoppers?

The answer was yes. The way to do it was a process called category management that was developed in the early 1990s by The Partnering Group (TPG), a consulting firm. A few of the larger retailers began testing the process. Soon the manufacturers jumped on board with advice and support. They then started to help other retailers adopt the principles as well. In no time, category management was promoted enthusiastically and became a must-have process for retailers and manufacturers.

TPG’s process, which is now considered the traditional form of category management, consists of eight steps:

1. Category definition

2. Category role

3. Category assessment

4. Category scorecard

5. Category strategies

6. Category tactics

7. Plan implementation

8. Category review

Early Practitioners

The retailers that pioneered category management are among the largest chains in the United States. Safeway was one of the original practitioners. Others included Kroger, Albertson’s, and Publix. SUPERVALU, the first wholesaler to practice category management, brought the process to small independent retailers.

On the manufacturer side, Phillip Morris and the Coca-Cola Company were early supporters of category management. The latter developed a training program about the process that is still distributed to retailers. It helps them understand what category management is all about and what Coca-Cola’s role in the process is.

Some of the early practitioners saw nearly immediate benefits through reduced inventories and increased sales. For others, it took more time. But word soon spread about the potential of this new process.

Evolution of Category Management

The original version of category management started a revolution in the way retailers operated their businesses. More and more retailers built their businesses around its principles through the 1990s.

Eventually, however, the process proved to be too complicated for many retailers to adhere to. There were too many details and variables. It was too cumbersome and unwieldy. Too much coordination was needed from too many departments such as logistics and finance.

Problems even developed on the manufacturer’s side when salespeople were asked to learn the intricacies of category management. Their primary job was developing relationships, moving products, and building the top line. They weren’t analysts. As a result, many manufacturers created category management departments staffed with analysts to support the salespeople. But even then, training somebody to be capable with the entire category management process remained a daunting task.

Meanwhile, some larger manufacturers came up with their own way to simplify matters.

They restricted their proprietary category management to the larger retailers; that is, they invested most of their time and effort on full-time account teams for their largest customers. Smaller chains received less interest and support.

Role of Technology

The development of technology and its steady growth spurred the use of the process. But the journey from the beginning to today was full of obstacles.

In the early days, the software applications for category management required too much number crunching. Instead of talking to customers, salespeople were sitting behind a personal computer pulling data, putting it on Excel sheets, and then creating PowerPoint slides for a presentation. The process was tedious and time consuming.

The problem of data overload and the time spent crunching numbers led to a major change in category management. Companies were forced to streamline their approach to data analysis and develop appropriate applications for the job. Proprietary systems emerged that simplified and quickened the process for many practitioners. Training focused on working with user-friendly template-based customized software as opposed to a process of pulling data and learning to manipulate it.

Category Management Today

Many retailers and manufacturers refined the process of category management over the years. They still began with the traditional eight steps, but developed processes with fewer steps while keeping to the objectives of the original version. The resulting processes are shorter, tighter, and easier to absorb and act on. Some processes have five steps, others have six. The “standard” eight-step process has become less of a standard and more of a starting point.

In addition, in some organizations the sequence of steps has been rearranged compared to the original eight. For example, financial targets were originally done after the assessment step. Now some companies are starting off with their financial targets, saying, “Here’s what we want to achieve. Let’s do an assessment of where we are versus those targets. Let’s look at the gaps and then figure out what are the strategies and tactics that we are going to use to meet those targets.”

Many executives start off with the retailer’s goal and financial objectives. “What are we trying to achieve? What margin do we want to hit? What’s our growth rate? What are our shopper goals? How many more shoppers do we want to bring into our stores?” They believe that such variations make a lot more sense than starting off by defining the category and its role. Trading partners already know that information and skip over these preliminary steps.

Others have dropped the scorecard down in the sequence, arguing that financial targets cannot be set accurately until the other steps are completed.

Today, major manufacturers have a whole suite of applications that any executive can use effectively. Armed with sophisticated tools, salespeople find the process user friendly and easy to implement.

Consumer-Centric Process

In the early 1990s, everyone involved in category management focused on the data and what the numbers revealed about product movement and the category. Surprisingly, they forgot that the consumer drives what happens in the category. While always part of the process on paper, the consumer got lost amid the accumulation of data.

The biggest change in category management over the years has been more of a focus on the consumer. By the late 1990s, manufacturers were giving retailers data that was more consumer oriented. For example, there was consumer data collected from a panel of households. Analysts could work with data on an account-by-account basis, which was not possible in the early days. Other new sources were demographic/psychographic data.

A new chapter in category management was unfolding. It included components designed to make the process less product-centric and more consumer-centric:

• Segmenting and targeting consumers to get the right products in front of the right shoppers in the right stores
• Clustering stores based on the sales potential of brands or categories
• Demand gapping, or determining the difference between existing sales and potential sales in a category
• Developing a marketing plan for each significant customer group

Retailers also jumped on board with the focus on consumers and started looking to incorporate shopper data collected by a store’s loyalty card program. While its use is still relatively new, this creates another whole new dimension in terms for category management.

These new sources of information contribute to embedding the consumer as the centerpiece of category management. Today, executives understand that consumer behavior changes the categories. The new mind-set: If we’re not getting a fair share of the category, chances are we’re not doing a good job of understanding consumers and satisfying their needs.

Beyond Supermarkets

Category management began as a process for supermarket retailers. Before long, it was clear that its benefits were applicable to other classes of trade. Wal-Mart was using the process before expanding from general merchandise into grocery via its supercenters. Drugstore chains adopted the practice, as well. Even Peapod, the online grocer, uses category management.

Today, the practice has expanded well beyond consumer packaged goods. Retailers as diverse as Home Depot (home improvement) and Borders (books) employ category management.

Role of the Retailer

If the consumer is at the center of category management today, the retailer is the linchpin. The retailer sets the overall tone in terms of the objectives, strategy, tactics, and financial goals. What is the retailer trying to accomplish in the marketplace? Does the retailer want to be perceived as a low-price leader, as an upscale purveyor of goods and services, or as something in between? The decision has implications for assortments, category role, strategy, and tactics.

The retailer’s role has a number of key components that we discuss in the next sections.

Sets Strategy

The retailer must communicate corporate goals and category strategy to the vendor partners. Without such communication, trading partners may go in different directions rather than effectively working together. A mutual understanding lays a solid foundation for category management.

Determines Process

What version of category management should be followed? How many steps to the process? Retailers proficient in category management typically take the lead and inform suppliers. However, some retailers defer to their trading partners and their expertise.

Gathers Data

The retailer gathers relevant data for category management applications. This includes POS data, financial data, and per...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Foreword
• Chapter 0: Introduction—Why Category Management is More Important Than Ever
• Part I: In The Beginning—The Purpose of Category Management
• Part II: The Eight Foundational Steps Of Category Management
• Part III: Category Management Success Stories
• Part IV: The Way Forward
• Acknowledgments
• Index