The Ultimate Guide to Category Management
The purpose of this guide is to deliver answers, and understanding, to the following questions about Category Management:
- What is Category Management?
- Why do such organisations invest so much time and money into understanding, or managing, their ‘Category’?
- How do typical Category Management process work?
- What do Category Managers, and related roles, do?
What is Category Management?
The concept of Category Management originates from the 1990’s. And was seen as a significant step change in the relationship between retailers & their suppliers. From an approach where suppliers competed with each other to gain the most from their relationship with the retailer. Category Management began the process of collaboration between the different parties for mutual benefit. In other words, it was seen as an opportunity to better manage the relationship between customers, retailers and suppliers. Where all three parties interacted towards a win-win-win situation. To achieve this, retailers wanted suppliers to demonstrate that they (the supplier) added value to the retailer’s business. Rather than just cannibalizing competitor lines, with no discernible benefit to the retailer.
Take a simple example:
- Brand A sells 100 units per week
- Brand B sells 100 units per week
- So, the Category sells 200 units per week
- Brand A promotes, the following week, and gains 50 units, thus selling 150 units in total
- Brand B does not promote and loses 50 units to Brand A, selling 50 units in total
- The Category has not gained from the promotion and still sells 200 units, despite the promotion of Brand A
Category Management instilled incumbency upon the owners of both Brands. In our example, to recommend strategies and activities which benefitted the turnover of the whole Category. And not just individual products. So, all actions such as promotions, changes to assortment, pricing recommendations, range reviews, new point of sale materials or revamped planograms, for example, had to demonstrate positive outcomes, in terms of profitability and shopper satisfaction, for both retailer and supplier. In other words, a Category was deemed to be a stand-alone strategic business unit. And, through data driven analytics, should deliver overall Category growth and profitability.
Category Management Principles
There are several formal definitions of Category Management:
- Category management is a process that involves managing product categories as business units and customizing them [on a store by store basis] to satisfy customer needs. (Nielsen).
- The strategic management of product groups through trade partnerships which aims to maximize sales and profit by satisfying consumer and shopper needs. (Institute of Grocery Distribution.
- Marketing strategy in which a full line of products (instead of the individual products or brands) is managed as a strategic business unit. (SBU). (Business Dictionary).
- Under the leadership of a category manager, using cross-functional teams to identify product categories and drive category performance improvements through the application of categories as strategic business units.
Category Management Process
We have established that the focus is on the discrete profitability of a particular Category and the task, of the retailer and supplier, is to define the Category, itself, and assess the status of the Category in terms of share and potential growth. The task, then, is to identify the opportunities, for shoppers and consumers. That will ultimately lead to increased overall Category sales and profit. Successful Category Management draws upon, and leverages, various data sources to identify opportunities and deliver recommendations. Whilst this is a collaboration, between retailer and supplier, the latter is expected to drive the process by subscribing to, and understanding, all relevant data, including the mindset of shoppers. Typically, a retailer will appoint a ‘Category Captain’, generally the supplier with the highest turnover in the Category, although it may be a Private Label supplier with Category expertise, to lead the process and take a greater responsibility for the overall Category performance. The retailer, in turn, benefits from a supplier’s expertise and can delegate considerable amounts of workload to its trusted partner.
1. Define the Category
- To reiterate, Category Management is the quest for increased overall profitability of individual categories and sub categories. Some items deliver different levels of profitability, or consumer need, hence the need to sub categorise in order to execute different strategies. The Soft Drinks Category, for example, addresses profitability and consumer need with 2 Litre Bottles for sharing/take home, 330ml cans for sole consumption immediately, Low Calorie v Standard, Reduced Sugar v Standard which are all needed for consumer choice.
- Broadly speaking, a category should consist of products that serve the same purpose or belong together in the consumer’s mind.
For example, retailers may segment Cereals into one of the following, dependent upon how their particular consumers interact with the Category:
- Hot v Cold Cereals, where usage, or season, is all important.
- Adult v Family v Child, where emphasis on consumer and packaging is the priority.
- This step is important as it groups products into common areas, of say potential profitability. In order to tailor merchandising, promotions, pricing etc. but challenges can occur:
- For example, where Categories could not, logistically, sit together in store. Take Milk, for example, which may seem an obvious Category but Ambient next to Chilled raises equally obvious issues and, thus, typically, a ‘Super’ Category, such as ‘Chilled’, would be required to further segment to a Category called ‘Milk’.
- Another, might be the concept of a ‘World Foods’ aisle in store which, clearly, takes into account the consumer decision tree when deciding upon an evening meal. In other words, a typical decision might be choosing between a Chinese v Mexican meal and, seeing them side by side, evidently responds to research in this area.
- At a lower level, defining a Category can become nuanced when deciding on inclusion or exclusion of particular lines. Take Salty Snacks, as an example, which is, typically, segmented into Crisps, Snacks & Nuts and then further divided into Single Packs, Sharing Packs and Multipacks. These definitions are critical to the strategy for the Category, so Retailers and Suppliers examine, in detail, the size threshold for when a Single Pack becomes a Sharing Pack, or whether, for example, Pringles is a Crisp or a Snack.
2. Define the Role of the Category Within the Retailer
- This section of the process determines the role of the Category, that has been defined in Step 1. In the store, in terms of the potential profit margin for both retailer and supplier.
- This is important to ensure resources are allocated in the most productive way i.e to the most deserving Categories e.g Categories with large share and/or positive outlook and/or capable of driving footfall in store.
The TPG model identifies 4 types of category segmentation in a consumer-centric way:
One that drives footfall into the store and will be a deciding factor in choice of store by a consumer. e.g a store that is well known for excellence in fresh bakery or sandwiches or range of beers. These may not be highly profitable Categories but significant investment in them, by the Retailer and Supplier. In areas such as range, space and availability can enhance consumer loyalty to the store and deliver consumer traffic. These Categories will tend to be 5-10% of Total Category count.
Which account for 50-70% of Categories and are the regular, frequent products such as milk, salty snacks, bread, biscuits, confectionery, coffee, tea, cereal, dishwasher tablets, toiletries, and toilet paper. These are the Categories which compete heavily in terms of price, space and promotions.
Complete the everyday offer to consumers. These account for 10-20% of Categories and, generally, have less space, fewer promotions, premium prices and over index in their contribution to profit margin. Categories such as shoe polish, greeting cards and electricals may be typical examples of these.
Are 5-15% of the store offering and, by definition, have a seasonal bias which dictates space, range, price and promotions. For example, Cereals will adjust in favour of Porridge in the winter and revert to RTE Cereals for the rest of the year. An additional aspect is that Seasonal Categories can, for brief periods, become Destination Categories. Such as Fireworks on November 5 (in the UK). Or Roses on Valentine’s Day, which can generate sales in the Core Categories, for reasons of consumer convenience.
3. Category Assessment
- Category Assessment is the periodic review of Categories and Sub Categories to determine the sales, share and profitability performance.
- A detailed SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis will reveal where additional investments, in say innovation or more aggressive pricing, could yield greater profits or whether re-categorisation is required, for example. Recategorisation in Soft Drinks might be necessary. For example, as the Category adapts to new legislation, in the UK, with the introduction of the Sugar Tax.
- Suppliers play a major role in this analysis and will bring data driven evidence from agencies such as Kantar, Nielsen and IRI.
- Suppliers would also have access to Retailer proprietary data such as Dunnhumby or Asda Retail Link. For their own lines only, although Category Captains would have access to the full service. The insight derived from this part of the Category Management is significant and highly detailed, providing information on:
- Top sellers
- Top Profit generating lines
- Out of Stocks, and quantification of lost sales
- Basket analysis (e.g commonest combination of products in the same basket.
- Top, and worst, performing stores
- Time of day analysis (e.g when is the peak selling time for a product ?)
4. Set objectives and Targets for the Category
Following Category Assessment, the next step is to set achievable and measurable goals for sales, volume and margin.
This information should be tracked in a Category Scorecard. A very common document within FMCG suppliers, and will track £ Sales, Volume Sales, Share and Product Assortment, for example.
So, at the halfway point of our Category Management process, we have:
- Defined our Category. (e.g Soft Drinks = Ready to Drink Soft Drinks such as Cola, Water, Energy, Sports but excludes dilutable Squashes).
- Judged the importance and positioning of the Category to the Retailer.
- Assessed the current performance of the Category.
- Set clear objectives for future performance.
5. Category Strategy
- So, what strategy is appropriate, for each Category, to achieve the objectives?
- The overall process is circular in nature, and so, within this part of the business process. The supplier and retailer are building strategies which, in turn, determine Category role. Here are seven strategies:
Traffic building strategy
Lends itself to Destination Categories as the objective is to attract the consumer into the store and purchase from the category. But, the strategy is also relevant in attracting consumers to Core Categories where price sensitivity, promotions and frequent purchasing benefit from shopper traffic. The most obvious Destination Category is, arguably, Petrol which draws consumers from a wide catchment, who then shop in the parent store.
Turf Protecting strategy
Defends existing sales and market share from competitor activity but has consequences for profit margin and, therefore, used as a last resort. It is important for the overall perception of the store in terms of competitiveness.
Transaction Building strategy
Used to rapidly build sales of a particular Category through multi packs, larger packs, aggressive pricing and promotions. Examples would be Core Categories such as Crisps and Soft Drinks where the intention is to drive up the Average Weight of Consumer Purchases per visit and move large volumes of product.
Profit generating strategy
Refers to the emphasis on high margin Categories, or Sub Categories, which command high consumer loyalty and are less price sensitive. This may include a Retailer’s Own Brand lines.
The strategy of creating excitement in a Category, or Sub Category through innovation or identifying key trends. This would fit naturally into the Seasonal Category role, with, say, new flavours of ice cream during a hot spell. But also in Core Categories with, for example, ‘named’ cans of Coca Cola or limited editions of chocolate bars.
Focus on large volume, high turnover Categories which bring balance to the Retailer’s cash flow position.
The intangible aspects of a Retailer offering that improves image and engenders loyalty. So, Quality, Variety, Price, Service, Presentation and Delivery would all feature as components of this.
6. Set Category Tactics
- Category tactics are the tools in the Category Management toolkit, which enable Category strategies to be fulfilled. These include Pricing, Promotions, Penetration and Product Assortment.
- The Supplier, particularly the ‘Category Captain’. Will be expected to lead the analysis to determine the level, frequency and timing of tactics and will, in turn, depend upon insight from agencies such as Nielsen, Kantar and IRI.
- The adoption of these tactics will vary by Retailer, and, indeed, by store and by SKU. A SKU may have a Destination role in one Retailer, and Convenience in another.
- Arguably, the most important step is executing the plan, drawn up in steps 1-6.
- While the correct mix of products might be in place, excellent merchandising implemented, pricing optimised etc.. Rigorous adherence to the plan is the key to successful overall Category Management.
- More succinctly, after implementing Category Management. The Grocery store now monitors the profitability of all canned soups, for example. As one unit, rather than considering each brand on its own.
- The 8 step Category Management process requires regular review and changes, where necessary, to maintain relevance in a changing business environment. Category dynamics change and strategies and tactics need to be versatile to maintain competitiveness. Hence this critical stage of reflection and review of assumptions.
- A review of successful Category Management would expect to see:
- Cost reductions in supply chain, out of stocks and wastage, for example.
- Improved Consumer satisfaction, in terms of, say, availability and ease of navigating the store.
- Increased market share, versus competitor retailers.
- Increased sales and improved margins.
Category Manager Roles and Responsibilities
The Category Manager is the person who builds a close working relationship with their customer (the Retailer). To deliver actionable Consumer and Category insights. Their task is to be a key influencer in the strategy for their Category. And to ensure optimal performance by undertaking the following actions:
- Periodic range reviews, to consider new lines, seasonal lines and new consumer trends is vital to maintain Category growth.
- Review of ROS (Rate of Sale). To ensure a profitable range which includes the best selling lines but also delivers consumer choice. Consumer choice should remain at the core of Category Management.
- Monitoring Customer Loyalty by metrics such as Repeat Purchase, Frequency of Purchase, Weight of Purchase, Penetration, Switching Analyses.
- Ensuring space optimisation which means avoiding out of stocks and maintaining profitable product assortment.
- Execute a fixture strategy with the Retailer focussing on flow, brand blocking and multi location siting for products.
- Analysis of Promotional activity to understand the most effective mechanics in driving trial and sales. This involves the tracking of sales and promotional support by SKU to ensure they complement each other. For example SKU A. May command a significantly higher share of promotional support than it represents in terms of sales for the brand. Reallocating some promotional events to other SKU’s, SKU B & C, could add positive sales to the Category due to increased usage and penetration.
Category Management Summary
Category Management is a structured, analytical and data driven approach to the decisions taken in store. To maximise Category and Retailer profitability. Execution of the Category Management process is key. It relies on effective management implementation of activities, supported by effective analytical tools which enable accurate decisions to be made.
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