Increase profits by managing categories

PRASANNA PERERA, Marketing and Management Consultant, Chartered Marketer, CIM U.K.

Today, we are living in the backdrop of a mad, mad marketplace. Retailers and manufacturers of fast moving consumer goods are consolidating. The big are getting bigger, whilst the small are either merging, being acquired or going out of business.

The way out of the madness starts with a solid foundation built on the basics of marketing. Who are the customers? What do they want? Despite this new era of competition and product proliferation, business success is still about having the right product, at the right price, with the right promotional support and in the right place.

Category management emerged in the early 1990’s as a method of turning marketing basics into an organised process. Category management builds on the marketing basics to help retailers and manufacturers reach consumers.

Clearly, understanding how to manage categories for these groups is critical. Trading partners need to leverage the power of categories, to drive higher shopper penetration, increase shopping frequency, and encourage larger basket size. Shoppers go to the store to buy products. Retailers must figure out what categories will drive desirable behaviour in the store.

In today’s context, category management is more than a way to manage a category as a business. It is essential to the successful retail operation.

Moreover, the process can give retailers a powerful competitive advantage if executed well. The winners in the marketplace will be those companies that satisfy consumer needs by knowing how to integrate data, insights and merchandising.

Evolution of category management

The retailers that pioneered category management are among the largest chains in the United States. Safeway was one of the original practitioners. On the manufacturing side, Philip Morris and the Coca Cola company were early supporters of category management.

In the early 1990’s 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. The biggest change in category management over the years has been more of a focus on the consumer.

In order to make the category management process more consumer centric, the following components were addressed.

- Clever segmentation and targeting of consumers. This is in order to get the right products, in front of the right shoppers, in the right stores.

- Grouping retail stores based on the sales potential of brands or categories - Determining the differences between existing sales and potential sales in a category.

It must be clearly understood that consumer behaviour changes the categories. If you are not getting a fair share of the category, chances are that you are not doing a good job of understanding consumers and satisfying their needs.

Category management beyond supermarkets

Although category management started as a process for supermarkets, it has now become clear that its benefits are applicable to other retailers as well. Borders (books) and Home Depot (home improvement) now employ category management.

A good retailer strategy is made up of the following components :

- Knowing who you are. The retailer must be aware of the store’s position in the market.

- Know your consumers. The retailer needs to know who the shoppers are, and what they want in a store.

- Be able to execute the strategy. The retailer will be able to carry out the strategy more easily, if everyone understands the strategy and works to execute it.

Every retailer should have a mission statement. The mission statement specifies why the company is in business. Ideally, retailers carry out the mission with a well conceived strategy and effective tactics.

The eight foundational steps of Category Management

1. Category Definition - is to determine the products that make up the category.

2. Category Role - to assign the category role (purpose) based on a cross-category analysis. (Considering the consumer, distributor, supplier etc.,)

3. Category Assessment - to conduct an analysis of the category’s subcategories, segments, brands and sku’s.

4. Category Scorecard - to establish the category’s quantitative/ qualitative measures.

5. Category Strategies - to develop the marketing, product supply and in-store service strategies for the category.

6. Category Tactics - to determine the optimal category assortment, pricing, shelf presentation and promotion tactics, to achieve thescorecard measures.

7. Plan Implementation - to develop and implement a written business plan.

8. Category Review - to measure, monitor and modify the category’s progress on a timely basis.

While an increasing number of organisations are customising or streamlining the eight step category management process, it is essential to fully understand the original eight steps, both their objectives and methods of execution.

The future of Category Management

The key to sales and profits in the packaged goods industry is the consumer, who resides between the manufacturer and the retailer. To develop and optimise the relationship with consumers, trading partners have to leverage consumer touch points.

In the past, the marketplace was characterised by a push-pull effect. Proctor and Gamble (P&G) advertised a new product on TV (push) prompting the retailer to stock the product (pull).

Today, media is so diverse that the push-pull technique doesn’t work so well. That’s because retailers have become the gate keepers of the shelf!!

If Wal-Mart does not list a new product from a company like P&G, the manufacturer will be in serious trouble (by missing key distribution)

Another important factor is that retailers are accumulating more consumer insights through their POS data and some retailers are wondering whether they even need manufacturer data anymore.

Finally, the growth of private labels will also have a major impact on category management. Retailers are producing better private label products and thereby strengthening their bond with the consumer.

Manufacturers would do well to understand the retail strategy and to align their category management efforts accordingly. If retailers and manufacturers work more closely, category management can be improved in the future, for mutual benefit.