Have you ever wondered why a store merchandises dusters next to cleaning chemicals, a shampoo next to hair dye or chips next to soft drinks? As a shopper, have you ever stopped to think why price is important to you on some products and not on others?
These are all retailer decisions that stem from practicing “Category Management” principles. So, what is category management? Quite simply category management involves organising and managing promotions, merchandising and distribution activity around the way consumers view and buy a product. The changes in business conditions have impeded the focus on enhancing consumer value as the ultimate basis of profitability and competitive advantage.
The combination of business conditions that exists today has created a need, as well as an enormous opportunity, for innovative management approaches. The adoption of new ideas and approaches is high on the agenda of many leading retailers and suppliers. Among these new ideas and processes is Category Management. Any retailer and manufacturer that truly desire to achieve a leadership position needs to adopt Category Management as a method of a “go to market” strategy. The key trends that are driving the emergence of category management are: Consumer Changes and Competitive pressures. This approach provided the vehicle to better understand and meet the needs of consumers, for retailers and manufacturers to collaborate more intelligently, to gain more advantages from investments in information and technology, to more logically allocate resources across categories and brands, and most importantly, to achieve competitive advantage from the ability to attract, motivate and retain higher quality management talent. These benefits were being made possible from the foundationdisciplines and processes provided by Category Management.
8 STEPS OF THE CATEGORY MANAGEMENT PROCESS
1. Category Definition: This step has two purposes: A) it defines the selection of products that should be included in the category based on the needs of consumers; and B) it defines the structure, or segmentation of the category based on how the consumer makes purchase decisions in the category (this structure, consisting of sub-cats, segments etc., is called the “Consumer Decision Tree”).
2. Category Role: The category role establishes the strategic purpose of the category, that is, what is the strategic reason the retailer needs to carry the category? Most typical roles for categories are Destination role (categories that the retailer chooses to differentiate itself with by being the leader in the category); Core (or Routine) role categories (categories in which the retailer decides to be competitive to maintain the “routine” business of the target consumer); Occasional/Seasonal role (categories with definite seasonal shopping patterns or purchased infrequently); and Convenience role (categories that are more impulse, fill-in categories for the target consumer). The roles determine the allocation of resources among categories.
3. Category Assessment: The assessment step analyses the current performance of the category from the perspectives on consumer trends, market trends, and sales, profit, and ROA performances within the retailer. Based on this assessment, opportunities for improved business results are identified.
4. Category Scorecard: This step determines the specific set of performance measures that will be used to measure the results of the category. It also assigns specific numerical goals to each measure.
5. Category Strategies: This step selects the specific set of strategies that will be used within the category to achieve the scorecard goals and deliver the category role. There are two groups of strategies: A) Marketing strategies – Traffic Building strategy to attract consumers to the category; Transaction Building to increase the average purchase in the category; Excitement Creating to put “life” into the category etc.; and B) Product supply / customer service strategies to get the products in the category into the store and to the consumer efficiently. Once the right mix of strategies is selected, specific products within the category are assigned to each strategy (e.g. certain products will be the Traffic Builders etc.)
6. Category Tactics: These are the specific tactical actions that will be implemented to deliver each of the category strategies. There are five basic tactics – assortment, pricing, promotion, shelf (site) presentation, and product delivery / customer service. These are the day-to-day actions that will be used to implement the Category Plan.
7. Category Plan Implementation: This step actually implements the tactics to the customer. It defines the responsibilities of various parties (HQ, stores, suppliers etc.) and provides a timetable for carrying out these tactical actions.
8. Category Review: This final step periodically reviews the performance of the category against the scorecard goals set in Step 4. Based on these performance reviews, the Category Plan is modified as needed.
Modern retail is fast gaining space in the mind of the Indian consumer, but leaves a lot to be desired when it comes to operational efficiencies and merchandising planning. The challenge faced by multi-store retailers is getting the right mix of products that are store specific and also a combination of customer insight and allocation/ assortment techniques. There are several practices that are available for improving these inefficiencies. One of the best practices is Category Management. Category management is not a new term in the Indian market; to some extent this approach is practised in most organised retail and FMCG companies. However, the entire process execution is not seen and it is also missing the collaborative link. After talking to some of the retailers and multi-national manufacturers, the common factors affecting the implementation of category management that seem evident were:
• Size of the organisation
• Reservations in information sharing with suppliers
• Lack of vision for bigger benefits
• Operations of retailers and suppliers are not integrated
• Lack of understanding in positioning the categories
One of the most common factors is a misconception that the approach and basic principles of Category Management are for large organisations and developed markets. Whereas the fact is that the basic principles of Category Management – consumer- centred decision making, strategic planning, and strategy-linked day-to-day tactical decisions – are not and were never designed to be the exclusive opportunity of larger companies. The principles apply to the good management of any retailer or manufacturer regardless of size. Rather than the size of the enterprise, it is the attitude of management that creates the biggest obstacles facing the acceptance of any new technique, including Category Management. In fact, our view and experience strongly suggests that the naïve acceptance by smaller companies that these new tools are only for the larger companies is an incorrect assumption.
An excellent example of this situation and the potential benefits for smaller companies is what is happening in the independent retailer channel in a number of countries. This channel has typically been dominated by smaller business entities, whether they are smaller wholesalers, distributors, retailers, and more local-based product manufacturers.
Recent studies and initiatives, however, have demonstrated that not only are methods such as Category Management able to be used in the traditional channel, the benefits from their use can produce business results that actually exceed those achieved by larger chain retailers. And importantly, the use of these techniques provides a basis forfurther leveraging the inherent competitive advantages of smaller retailers and their wholesalers and manufacturers. The key development that has facilitated this opportunity has been the adaptation of the traditional Best Practices Category Management approach to address the unique needs of smaller players. An adapted model, Operational Category Management (OCM), has been developed and has already proven its business potential in several countries. Below is the detailed view of OCM stated by Dr. Brian Harris, Chairman and Founder of TPG (The Partnering Group). Dr. Harris is a founder of Category Management and also known in the industry as “Father of Category Management”.
Operational Category Management (OCM)
The OCM model is a simplified version of the ECR Best Practices Category Management model that was also developed by Dr. Brian Harris. According to Dr. Harris, the biggest difference is that the OCM approach focuses Category Management much more on the opportunities at store level and what the retailer should do at store level to implement good Category Management decisions. In other words, OCM focuses much more of store level implementation of decisions, such as having the right product assortment, the most effective product presentation, and promoting the right products.
The OCM approach is really “Store Level Category Management”. To get the maximum results, however, a team effort is required by the retailer, the wholesaler / distributor, and the manufacturer. The OCM model defines what each of these parties must do to perform their role and to get the maximum benefit from the use of this approach. A particularly powerful component of the OCM approach is the complete, step-bystep description of what actions need to be completed at the store level to achieve these benefits. This element was not specified in the traditional Category Management model that focused more on the use of Category Management methods in a retail chain environment. The OCM model is firmly based on the realities that exist in stores operated by smaller independent retailers.
Dr. Harris also mentions that the use of the OCM approach by smaller independent retailers in several countries has produced significant sales and profit increases (up to 21% increases in unit sales, 12% increases in sales values, and 7% gross profit improvement in categories) and more efficiency, and hence lower costs in the use of in-store labour and inventory resources. Most importantly, these results confirm the fundamental proposition that Category Management is, as it was originally designed to be, merely the use of good business management methods by any company regardless of size. It is a logical way to identify sales and profit opportunities, to meet consumer needs more effectively, and to focus the use of resources on opportunities that contain the highest potential. These are the basic tenets of good management for any size business organisation.
Dr. Harris emphasises that the key for smaller retailers is to focus on a few very practical areas of improvement that the OCM approach clearly identifies and then to implement these changes well in their stores.
While the biggest improvement opportunity areas will vary by retailer, so far the most consistent opportunities that have been found are in the areas of product assortments (having the right product offerings in the store) and in improving how products are presented to consumers in the store and on the shelf. When a Category Management way of thinking is used to discover these opportunities, the merchandising decisions of the smaller retailer become more consumer based. This leverage even further the most basic asset of smaller retailers – being closer to their customers. The OCM model provides the process to accomplish this.
The Road Ahead
The principles of Category Management are sound regardless of the size of the company trying to implement it. At its core, Category Management is nothing but the application of good and proven business principles and logic to a business situation. One of the key steps in the continuing evolution of this practice will be the adaptation and re-application of these methods to medium and smaller retailers and manufacturers. The ultimate determining factor, however, regardless of the size of the company, will always be the willingness of management to view new approaches such as Category Management as a strategic opportunity for achieving competitive Advantage.
Despite the fact that category management in India is still at a nascent stage, most retailers are rather clear that it will gain importance within next two years. We are now in the early days of evolution of the next steps of these methods. A decade from now when we will look back at the evolution of Category Management methods, we believe that one of the highlights will be the use of this approach across the broad spectrum of the industry – across all segments and across companies, large and small. For one, it will evolve into an essential component of business planning by virtually all retailers. It will also be driven by better partnerships between retailer and suppliers. And finally, there will be greater focus on the consumer.