CATEGORY MANAGEMENT

LEARNING OBJECTIVES

Introduce category management as an evolving consumer-led approach to retail product management

Become familiar with associated product management systems, such as ECR and QR

Introduce the concept of a category and the category life cycle

Consider the implications of CM for retail buying organisation structures and supply partners

Outline the limitations of CM

CATEGORY MANAGEMENT DEFINITION

“the strategic management of product groups through trade partnerships, which aims to maximise sales and profits by satisfying consumer needs”

KEY PHRASES a strategically managed product group (defined by shopping

behaviour) relies on trade (supply) partnerships aims to maximise sales and profits (of group rather than

item)

Category management in a retail context

Each category is run as a "mini business" (business unit) in its own right, with its own set of turnover and/or profitability targets and strategies.

instead of the traditional adversarial relationship, the relationship moves to one of collaboration, with exchange of information, sharing of data and joint business building.

The focus of all supplier negotiations is the effect on turnover of the category as whole, not just the sales of individual products.

The concept originated in grocery (mass merchandising) retailing, and has since expanded to other retail sectors

Category captains

It is commonplace for one particular supplier into a category to be nominated by the retailer as a category captain.

The category captain will be expected to have the closest and most regular contact with the retailer.

 will also be expected to invest time, effort, and often financial investment into the strategic development of the category within the retailer.

 The category captain is often the supplier with the largest turnover in the category.

Rationale for category management

One key reason for the introduction of category management was the retailers' desire for suppliers to add value to their (i.e. the retailer's) business rather than just the supplier's own.

For example, in a category containing brands A and B, the situation could arise such that every time brand A promoted its products, the sales of brand B would go down by the amount that brand A would increase, resulting in no net gain for the retailer.

The introduction of category management imposed the condition that all actions undertaken, such as new promotions, new products, re-vamped planogram, introduction of point of sale advertising etc. were beneficial to the retailer and the shopper in the store.

Rationale for category management…..

A second reason was the realization that only a finite amount of profit could be milked from price negotiations and that there was more profit to be made in increasing the total level of sales.

A third reason was that the collaboration with the supplier meant that supplier's expertise about the market could be drawn upon, and also that a considerable amount of workload in developing the category could be delegated to the supplier.

ASPECTS OF CATEGORY MANAGEMENT

A philosophy A process An organisational concept

CATEGORY MANAGEMENT AS A PHILOSOPHY

Products are considered as a way to satisfy consumer demand

Demand-pull rather than product-push (forecasting)

Product features and procurement (buying) becomes part of, but not focus of product management process

Suppliers are integrated in category management process, some become category champions

Table 3.1 The Category Management Process Category Definition Define the Category.

Determine the products that make up the category from a consumer’s perspective. Consider the role of sub-categories or individual SKU’s taken in the category.

Establish the strategic role of the category within the total product assortment of the retailer.

Develop a strategic plan for the category, considering long-term trends.

Category Planning Establish the measures upon which category performance will be assessed.

Determine the way in which the performance of a category will be evaluated. Consider various costing and profitability approaches and include both quantitative and qualitative assessments.

Formulate a strategy for the category.

Develop a marketing and supply development plan to achieve both short term and long-term category objectives.

Establish the category marketing mix.

Determine the various tactics to be used within the marketing and supply plan, e.g. space allocation, promotions.

Category Management Implementation

Establish category management roles.

Assign responsibilities for category management implementation within both retailer and supply partner organisations.

Category Review Measure, monitor and modify the category.

Adapted from Fernie and Sparks, Logistics and Retail Management (1998:33, Kogan Page Publishers and Basury et al, 2001

DEFINING A CATEGORY

A category should be established by the way consumers buy the product

Usually products in category are reasonable substitutes for one another (e.g. compact disks and cassette tapes, )

Sometimes a category is defined by products being complementary (e.g. Printers and ink cartridges)

THE ROLE OF THE SKU WITHIN THE CATEGORY

When defining the category individual roles of SKUs (stock keeping units, or product items) are acknowledged: traffic builders sales and profit generators excitement creators reinforcement of retail brand

Products without a clear role should be eliminated from category

RETAIL BRAND REINFORCER New Categories

High fashion and symbolic categories High technology product categories Includes strong (retailer or manufacturer) brands Create excitement and theatre in store

CASH-FLOW CONTRIBUTOR Established categories Non-symbolic categories Consistent value provision

PROFIT GENERATOR Growing categories Fashion categories Symbolic categories High profit margins

SERVICE PROVIDER Stagnant or declining categories Staple product categories Well established market leading brands Competitive with other category providers - low profit margins

DESTINATION Growing or well established category Contains leading brands Deep and wide assortment Considered the best retail offer by target customer

THE STRATEGIC ROLE OF THE CATEGORY WITHIN A RETAILER’S PRODUCT ASSORTMENT

PRODUCT CATEGORY LIFE CYCLE

The category life cycle is more useful than the (individual product life cycle) to the retail product manager

The different phases of the category life cycle have implications for category management

CATEGORY MANAGEMENT AS AN ORGANISATIONAL CONCEPT

Category management brings a stronger marketing orientation to product management

More cross functional role: tending to reduce the role of ‘buying’ and augmenting the role of ‘merchandising’

More involvement with store level product management, e.g. space allocation, display and in-store promotions

A team organisation that spans across supplier’s and retailer’s boundaries .

CATEGORY MANGEMENT AND ECR (Efficient Consumer Response)

Truly responsive product management requires retailer’s supply chain (as well as retailer’s buying organisation) to be responsive to consumer demand

CM is usually part of responsive supply chain management (e.g. ECR) “a seamless interface from customer purchase to manufacturing

schedules”

ECR aims to maximise customer satisfaction while minimising

supply costs

Market research company Nielsen has a similar process based on only 5 steps : reviewing the category, targeting consumers, planning merchandising, implementing strategy, evaluating results.

Benefits of category management

better value for money through aggregation of demand

standardizing requirements in terms of specification, quantity and purchasing authorization

skilled procurement personnel are actively involved in purchasing processes

resources can be committed cost effectively to market watching and analysis.

CATEGORY MANAGEMENT LIMITATIONS Category management relies on theory and jargon, many well-run

retailers have adopted the principles of CM and ECR without the help of consultants

Change in organisation not always possible due to skills shortage

Retailers often have difficulty accepting suppliers as partners

‘Efficient’ ranges have danger of becoming boring and looking like those of competition

Smaller suppliers can be squeezed out

Smaller retailers may not have resources to adopt CM

Governmental concerns about category management

Many governments have viewed increased collaboration between suppliers and retailers as a potential source of antitrust breaches, such as price fixing.

For example the UK Competition Commission has raised their issues on market distortion in principle.

They have also acted on milk price-fixing in Britain

Example of category management

A category could be 29 different software products for children. Each product is i.e. defined as high, medium or low quality. At the same time, they are defined as games, edutainment, or graphics. In the table below you can see that each cell in the category has a certain number of products.

Example continued…

Retail focus on the categories and not necessarily on each product. The mix of products is used by retail to optimize their profit. To complete a category, retail can have products that customers expect to be there but not necessarily buy when they see the alternatives. Retail also regularly needs new products to make the shopping experience ever exciting.

Where does my product fit in?

Once you know which category (and cell within the category) your product belongs, you can start developing your strategy.

Focus on one of the following 3 strategies:1. Pushing out competing product2. Expanding a cell (on behalf of another cell)3. Establishing a new type of product (and category).

1. Pushing out competing product

Evaluate the strengths and weaknesses of your product compared to a specific competing product.

You must be able to communicate the strengths of your product compared to competing products in an easy, logical, and understanding fashion..

Do not use technical language –unless that is the language for the specific chain/target customer group.

2. Expanding a category

If you find that your product cannot beat a competing product, you can argue for expanding a whole category. Your product might be useful as a way to complete a category.

3. Establishing a new type of product (and category)

All new products are forced into an existing category. New categories are first established when the sales of a product type exceed a certain sales and on the same time do not really fit into the existing category they were originally placed in.

Selling-up strategy is an old trick where retail attracts customers with low prices that often mean lower profits. It is the task of the headquarters to feed the salespeople with the selling-up arguments/information so they know which products they shall sell to customers and which sales arguments to use.

conclusion Category management helps to increase the sales of the product

whose sales has been a cause for concern.

Each category is run as a "mini business" (business unit) in its own right, with its own set of turnover and/or profitability targets and strategies.

It gives better value for money through aggregation of demand.