The Ultimate Guide to Category Management
- What is Category Management?
- Category Management Definition
- What are the Benefits of Category Management?
- What is the Role of the Category Manager?
- The Category Management Process
- The 8 Step Cycle
- The MBM Category Management Funnel
- Category Management in Purchasing
- Benefits of Category Management in Procurement
- Further Reading and Resources
The concept of Category Management originated in the late 1980’s. It followed the research of Brian F. Harris, a former university professor at the University of Southern California. It delivered a big change in the way retailers and suppliers worked. Instead of competing with each other, it encouraged suppliers to work together with a focus on the consumer when making retail decisions. For the first time, the range of products offered for sale by a retailer was grouped together with similar or related products based upon the consumer need that they met. These ‘product categories’ were then managed as a strategic business unit, and no longer as stand-alone products or brands.
According to Harris, the reasoning behind Category Management is the following:
- Force consumer focus when making retail decisions.
- Develop a strategy for differentiation and competition.
- Provide a model for collaboration.
- Promote information sharing to help better decision-making.
- Provide greater strategic logic when making tactical decisions.
- Clarify decisions about asset and resource allocation.
- Help further clarify employee responsibilities.
This process allows for better management of the relationship between customers, retailers and suppliers. Ultimately, all three parties moved towards a win-win-win situation.
What we now call ‘Category Management’ developed from the concept of ECR (Efficient Consumer Response). This looked to increase the level of services to consumers through close cooperation among retailers, wholesalers, and manufacturers.
There are a few formal definitions of Category Management, which has lead to some ambiguity. However, most contain the central theme that it is about better meeting the needs’ of the consumer through supplier collaboration. Below are some examples:
Category Management Association defines it as:
‘Trading partners collaborating to decide the point of optimisation in, pricing, promotion, shelving, and assortment to maximise profitability and shopper satisfaction.’
Nielsen describes it as:
‘A process that involves managing product categories as business units and customising them [on a store by store basis] to satisfy customer needs’.
The Institute of Grocery Distribution (IGD) describes it as:
Business Dictionary calls it:
‘Marketing strategy in which a full line of products (instead of the individual products or brands) is managed as a strategic business unit (SBU). It is based on the concept that a marketing manager [Category Manager] is better able to judge consumer buying patterns and market trends by focusing on the entire product category.’
For us at MBM, we see Category Management as an essential activity. We like to think of it as a ‘business as usual discipline’. Our simple summary is:
‘Identify more opportunities. Sell more opportunities. Land more opportunities.’
We like to view it as a three-legged stool. It keeps the shopper, retailer and supplier at the heart of decisions.
Historically, categories would contain lots of brands from different suppliers. The situation would arise that every time brand X promoted its products, the sales of brand Y would go down. One benefited at the others’ expense. They were competing with each other. There was, however, no net gain for the retailer only cannibalisation.
Consider This Simple Example:
For instance, Brand X sells 100 units per week. Brand Y sells 100 units per week. So, the category sells 200 units per week. Brand X promotes, the following week, and gains 50 units, thus selling 150 units in total. Brand Y 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.
Retailers’ recognised the need to grow their own business and to better meet customer needs. To do this they needed to change the way they worked with suppliers. This is where Category Management comes in.
A key premise of Category Management is that all activities need to be beneficial to the retailer and shopper. Not only to the benefit of a single supplier. For example, promotions, range layouts and NPD/EPD have to be in the interest of all.
A further advantage came from collaborating with the supplier base. The supplier’s vast category knowledge could be pooled.
Lastly, suppliers can manage some of the workloads in growing categories. This frees up retailers’ resources.
The Category Manager should recommend strategies and activities which benefit the whole category, not just single products or brands. Categories are treated as stand-alone strategic business units. Consequently, all actions taken should benefit the overall profitability of the category. Through the use of data and analytics, strategies should always look to deliver overall category growth. Furthermore, their efforts should have a positive impact on shopper satisfaction.
This may include:
- Changes to the assortment.
- Pricing recommendations.
- Range reviews.
- New POS materials.
- Revamped planograms.
Category Manager Responsibilities
The Category Manager is the person who builds a close working relationship with their customer, the retailer. This allows them to give useful consumer and category insights. Their main task is to be the key influencer of category strategy.
Below, is a list of some of the other key responsibilities of Category Managers:
Undertake Periodic Range Reviews
This is to consider new lines, seasonal lines and new consumer trends. This is important to keep up category growth.
Review of ROS (Rate of Sale)
Reviewing the ROS will help that the range is profitable and includes the best-selling lines. Moreover, it should also deliver consumer choice. Consumer choice should be at the core of category planning decisions
Track Customer Loyalty
Key metrics of customer loyalty needs regular monitoring. These will include:
- Repeat purchases
- Frequency of purchase
- Weight of purchase
- Switching analyses
Ensure Space Optimisation
This means avoiding out of stock products and maintaining a profitable product assortment.
Execute a Fixture Strategy with the Retailer
This will focus on flow, brand blocking and multi-location siting for products.
Analysis of Promotional Activity
This is to understand the most effective mechanics in driving trials and sales. This involves the tracking of sales and promotional support by SKU. It is important to make sure that they complement each other. For example, SKU ‘A’ may have a higher share of promotional support than it makes in sales. Reallocating some promotional events to other SKUs could add positive sales to the category. Increasing usage and penetration.
Step 1. Define the Category
A category should consist of products that serve the same or similar purpose. They will likely belong together in the minds of the consumer. Category Managers must, therefore, consider how consumers shop the category when defining it.
Category planning is about increasing the overall profitability of the category as a whole. Within the individual category, some items will deliver different levels of profitability. They will also need to meet different consumer needs. We, therefore, need to develop subcategories to further break it down. This allows for the execution of different strategies.
Let’s consider how this works in the ‘Soft Drinks Category’ for a moment. Below, is a list of some of the subcategories:
- 150ml cans for fast consumption.
- 330ml cans for sole consumption immediately.
- 500ml resealable bottles for when you’re on the go.
- Low or zero calorie v standard.
- Reduced sugar v standard.
- 2l / 1.5l / 1.0l bottles for sharing with the family at home.
- Larger bottles for parties or special occasions.
- Multipacks for packed lunches.
- Limited editions and seasonal.
This is an example of how all of these subcategories of the soft drinks category might look on the shelf:
Further Examples of Category Management in Retail:
Let’s now think about the ‘Cereals’ category. Retailers may segment Cereals into one of the following:
- Hot v Cold Cereals, where usage, or season, is important.
- Adult v Family v Child, where the emphasis on consumer and packaging is the priority.
Challenges for Category Managers:
Challenges can occur, for instance, where Categories could not, logistically, sit together in the store. Consider the ‘Milk’ category for a moment. This seems an easy and obvious category to define. Yet, it poses a logistical problem. There is fresh milk, which needs to be chilled. There is also UHT milk which needs storing at ambient temperature. Typically, this is resolved by creating a ‘Super Category’, such as ‘Chilled’. This is then further segmented into ‘Milk’.
Another challenge might be the concept of a ‘World Foods’ aisle in the store. This clearly takes into account the consumer decision tree. It follows the thought process many of us take when deciding upon an evening meal. For instance, choosing between a Chinese or Mexican meal. Presenting them side by side responds to research in this area.
Furthermore, defining a category can become nuanced when deciding on lines to include. Consider ‘Salty Snacks’. This is often segmented into crisps, snacks and nuts. It is then further divided into single packs, sharing packs and multipacks. Clear definitions are critical to the strategy for the category. For instance, retailers and suppliers will look at, in detail, the size threshold for when a single pack becomes a sharing pack. Or, for that matter, whether, Pringles is a crisp or a snack.
Step 2. Assess the Role of the Category
Now that we have defined the category, it is necessary to decide its role. It is important to consider how the category will work in-store, and how it fits with the retailer’s whole portfolio. Moreover, assessing the role of your categories and how they relate to each other in-store will aid in understanding the total basket profitability of your customer. It is important to check the potential profit margin for both retailer and supplier. All efforts surrounding the category should be consistently contributing to its purpose or ‘category role’. This is important to ensure the efficient allocation of resources, and that resources go to the most deserving categories. For instance, categories with large share and/or positive outlook and/or capable of driving footfall in store.
The following are 4 types of consumer-centric category segmentation. These can be used to help assess the role of the category:
This is one that drives footfall into the store and will be a deciding factor in the choice of a store by a consumer. For example, a store that is well known for excellence in its fresh bakery, sandwiches or a range of beers. These may not be highly profitable categories but have a significant investment in them, by the retailer and supplier. In areas such as range, space and availability it can enhance consumer loyalty to the store and deliver consumer traffic. These Categories will tend to be 5-10% of the total category count.
These account for 50-70% of the categories. They are the regular, frequent use, products. For example, milk, salty snacks, bread, biscuits, confectionery, coffee, and tea. These are the Categories which compete heavily in terms of price, space and promotions.
Convenience categories account for 10-20% of categories. Generally, these have less space in-store and fewer promotions. These complete the retailer’s assortment of products. Typically, are products not usually found on a routine shopping list. This category aims to guarantee a one-stop-shopping. Furthermore, its premium pricing plays an important role in enhancing margins. Categories such as shoe polish, greeting cards and electricals are typical examples.
These account for 5-15% of the store offering and, by definition, have a seasonal bias. This will dictate space, range, price and promotions. For example, ‘cereals’ will adjust in favour of porridge in the winter and revert to ‘ready to eat’ (RTE) cereals for the rest of the year.
Another aspect of Seasonal Categories is, for brief periods, they become Destination Categories. Such as fireworks on November 5 (in the UK), or roses on Valentine’s Day. This can generate sales in the Core Categories, for reasons of consumer convenience.
Step 3. Assess Performance
Category assessment is the periodic review of categories and subcategories. It is a regular appraisal of the current performance of the category. This step involves evaluating retailer sales data. This will help decide the sales, share, and profitability of the category. Furthermore, you will need to do an in-depth analysis of key competitors.
As a starting point, perform a detailed SWOT analysis. This will show useful category insights. For instance, where more investment may yield greater profits. You may discover that focussing on innovation or adopting an aggressive pricing strategy could help. Furthermore, you may discover that re-categorisation is necessary. A recent example of this is the introduction of the ‘Sugar Tax’ in the UK. A re-categorisation of soft drinks may be necessary to adapt to the changes in legislation.
Suppliers will play a major role in this analysis and often bring data-driven evidence from agencies such as Kantar, Nielsen and IRI. They will also have access to shopper research and retailer proprietary data, such as Dunnhumby or Asda Retail Link. This is for their own lines only. Note, Category Captains, however, will have access to the full service.
The insights gained from this part of the category planning are significant. The data is rich and highly detailed, providing information on:
- Top sellers
- Top profit generating lines.
- Out of stocks, and quantification of lost sales.
- Basket analysis (e.g most common 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?).
Step 4. Set Objectives & Targets (Scorecard)
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. It will help you track:
- Volume Sales
- Product Assortment
Step 5. Devise Strategies
Which strategy is right for each category to meet its goals? The process is circular in nature within this part of the business process. The supplier and retailer are building strategies which, in turn, determine the category role.
Here are seven strategy examples:
Traffic Building Strategy
This lends itself to ‘Destination Categories’. The aim is to attract the consumer into the store – and buy from the category.
But, the strategy is also useful to attract consumers to ‘Core Categories’. This is because, price sensitivity, promotions and frequent purchasing benefit from shopper traffic. The most obvious example is petrol. It draws consumers from a wide area, they then shop in the parent store.
Turf Protecting Strategy
This is about defending existing sales and market share. It is in response to competitor activity and is reactionary. It, however, has consequences for profit margins. Therefore, it is used as a last resort. Nonetheless, it is important for the perception of the store. It also maintains competitiveness.
Transaction Building Strategy
Used to quickly build sales of a particular category by selling larger volumes. The goal is to drive up the average weight of purchases per visit. It is achieved through packagings, such as multipacks and larger packs. Also through aggressive pricing and promotions. Examples would be ‘Core Categories’ such as ‘Crisps’ and ‘Soft Drinks’.
Profit Generating Strategy
This emphasises the high margin categories or subcategories, which command high consumer loyalty. They are, therefore, less price sensitive. This, for example, may include a retailer’s ‘Own Brand lines’.
Excitement Generating Strategy
The strategy is about creating excitement in a category, or subcategory. Often by innovation, or tapping into a relevant and current social trend. Typically, this falls into the ‘Seasonal Category’. For instance, new flavours of ice cream introduced during a hot spell.
This can also fall into ‘Core Categories’. For example, ‘named’ cans of Coca-Cola or limited edition of chocolate bars.
Cash Generating Strategy
The focus here is on large volume, high turnover categories. Those that bring balance to the retailer’s cash flow.
Image Enhancing Strategy
This strategy focusses on the intangible aspects of the retailer offering. Those that improve the overall image and engender loyalty. For instance, quality, variety, price, service, convenience, presentation and delivery.
Step 6. Set Category Tactics
Category tactics are the tools in your planning toolkit. They enable category strategies to be fulfilled. These include:
The supplier, particularly the ‘Category Captain’ will be expected to lead the analysis. This helps them to decide the level, frequency and timing of tactics. Furthermore, it will also depend upon insight from agencies such as Nielsen, Kantar and IRI.
The adoption tactics will vary by retailer, by store and SKU. For instance, an SKU may have a ‘Destination Category’ in one retailer, and ‘Convenience Category’ in another.
Step 7. Implementation
This is arguably the most important step of all 8. That is because it involves executing the plan that you have already developed in steps 1-6.
The planogram is the most effective vehicle for executing the plan in store. It is the embodiment of the category planning process. It ensures the correct mix of products, with the correct adjacencies, are implemented. Furthermore, the planogram also ensures that it is at the correct price where shoppers interact with the category.
Merchandising managers will often manage a team of space planners to create the plans. Alternatively, they will outsource to merchandising companies with display optimisation experience. Their role is to maximise the return on shelf space. They will also consider ease of shop. The goal is to make the shopping experience more pleasurable and less stressful. This is achieved by following industry standard space planning principles, such as:
- Merchandising by product subcategory.
- Displaying cheapest to the left.
- Positioning large products on the lower shelves.
Accurate implementation of the plan is important. It is key to make it as easy as possible for store put in place. Imaged plans with product images sourced from companies, such as Brandbank can help do this.
It is also possible to take the planogram one step further and use VR technology. Using virtual reality can help to improve planogram legibility. Many merchandising managers agree that this approach increases in-store compliance.
After implementing category plans, the retailer now monitors the profitability of the category. ‘Canned Soup’, such as, is treated as one unit, and not considering each brand on its own.
Step 8. Review
The 8-Step Category Process requires regular review and changes, where necessary. This is because it is important to keep up relevance in a changing business environment. Furthermore, category dynamics often change. Strategies and tactics need to adapt to stay competitive. As a result, this is a critical stage of reflection and analysis of earlier assumptions.
A review of successful category planning would expect to see:
- Cost reductions through supply chain management, such as, out of stocks and wastage.
- Improved Consumer satisfaction. For instance, availability and ease of store navigation.
- Increased market share, versus competitor retailers.
- Increased sales and improved margins.
A Streamlined Process
The average grocer in the UK has over 100 categories which mean that each category will have a full category plan every 2 years – if it’s lucky!
Following the 8-Step Cycle fully takes between 16 and 24 weeks (excluding implementation). It requires a team of at least 12 people and involves the completion of between 60 & 100 different data templates. Furthermore, it requires an external consultant or facilitator just to organise and run each category plan. Consequently, it is often poorly implemented and generated mixed results.
It is still relevant today, but in a more streamlined version and more applicable only when you are doing a ‘Big Category Plan’. Above, is an adapted version which is a little more pragmatic. We’ve identified the areas which will very rarely change and require fewer resources. We also show the things that are part of your day to day Category Management. These become easier to complete as you’re always doing them. Lastly, we highlight the areas where we believe you should be focussing the most attention and resources. These are the areas that if you invest the time will give the greatest benefit. However, don’t forget the need for constant category review.
We’ve further adapted this into something that we feel is a little more relevant for today, The MBM Category Management Funnel.
73% of opportunities fail to make it in-store, often due to a lack of understanding of the needs, motivations, and barriers of the shopper. We devised the funnel to help Category Managers focus, and ‘funnel down’, on what is important. The idea is that by following this process you will develop greater shopper understanding. This, in turn, will help increase the landing rate of opportunities that reach the store.
At MBM, our Category Management training course follows our tried and tested ‘Funnel Process’. This covers all the core topics, as detailed below:
1. Agree Category Tactics
Often we find Category Managers fail to have agreed on a specific target for their category. Thus, they have no idea if it will be achieved. Without targets, you will have no idea where you are going, or indeed if you are already there.
We suggest choosing from one of the following:
- More people to buy from your category (Penetration).
- Existing customers to buy more often your category (Frequency).
- Customers to buy more from your category on each visit (Average Spend).
The choice is a simple one, and should only be one of the above. We say only one, as, for instance, often an increase in penetration may result in a net decrease in average spend. If you focus on all three at once your tactics will likely fail.
2. Understand Your Shopper
We have found that Most Category Managers only focus on a 1/3 of the overall ‘Shopper’ opportunity, the in-store customer. This, in part, brings us back to the old Customer vs. Consumer question. We, however, like to use the following labels: ‘Shopper’, ‘Preparer’, and ‘Eater’.
We think it is important to consider that each stage of the process could include a different person. These different people will likely have different needs, motivations and potential barriers. By using these terms we can better understand and target the ‘Whole Shopper’. Obviously, these could all be the same person. However, by breaking them down we maximise the opportunity to meet needs which may otherwise have not been considered.
3. Know Your Supermarket
How aligned is your Category Management to the goals and needs of your Supermarket? We all know that you can’t fit a square peg in a round hole. For instance, do you know their strategies? Internal processes? In-store operations? Knowing your supermarket is essential. Awareness of these things will help you develop category tactics that fit.
4. Turn Analysis & Understanding into Opportunities
Many Category Managers get lost in the minefield of category data they have. Unfortunately, they often fail to correlate the best sources of data with the correct analytical tools and skills. As such, they rarely find deep insight and opportunities. This is because they fail to develop hypotheses before they start. By identifying hypotheses before you begin analysing the data, you will be more focused on category sales opportunities. We like to think of it as a targeted approach.
5. Sell £ Opportunities to Supermarket
Only 27% of opportunities ever make it in-store. Selling the opportunity can be the toughest part. A lot of hard work has gone into understanding and identifying the opportunity. Yet so many suppliers fall at this hurdle because they have not considered alternative ways to engage the Buyer. On our e Learning Category Management course, we show you alternatives so that you can build-up your toolkit.
6. Land Opportunities In-Store
Making sure that your recommendations to your Buyer don’t just look good on paper, but that they also will land well in-store. Often described as ‘the last 100 yards’, store operations are often forgotten or ignored. As a Category Manager at a supplier, you have a responsibility to close that gap too. We can no longer abdicate responsibility for understanding stores to the Buyer.
7. Evaluate & Improve
We quickly move from one project to the next, without knowing how to make the next project better. It is essential to understand how to measure your performance as a Category Manager and to continuously improve. Your target is to beat the industry average for landing rate and time!
The concept of Category Management has evolved. No more is it the sole reserve of the retail industry. In fact, it is now an essential strategy to adopt for all purchasing decisions. Applying the fundamentals of Category Management to purchasing can lead to reduced costs of goods, reduced supply chain risk and increase the overall value of the supply base.
Peter Hunt (ADR International) describes it as:
“..the term category management can mean different things to different people, so a working definition is needed. A ‘category’ is the logical grouping of similar expenditure items, such as spend on advertising agency services or IT hardware. Category management is the sourcing process used to manage these categories to satisfy business needs while maximising the value delivered from the supply base.”
Whilst this approach spans many industries and is beyond the remit of this guide, it is interesting to also consider how developments have led to changes in FMCG. I.e. how it has altered the approach to purchasing and procurement in our industry.
A key benefit of category management is the role it now plays in procurement and the wider supply chain. Procurement, simply put, is about sourcing or getting the goods you need to fulfil your business model.
Historically, grocery sales were driven by what we call a ‘production push’. In essence, the supply chain decided what the customer was meant to buy. Because it is using data and analytics to drive strategy, Category Management has changed this. Decisions made by Category Managers are based around two key things, efficiency and meeting a consumer need. Because of this, sales are now driven by consumer demand. We like to call this ‘consumer pull’. Through data, consumers are telling us what they want to buy. It is the role of the supply chain to respond to this and offer it.
- It has extended engagement and teamwork with stakeholders.
- There is a greater process of governance across organisational boundaries.
- The depth of category-specific knowledge which can be shared.
- An emphasis on the use of planning and analytical tools.
Category Management encourages more communication and end-to-end thinking. For this reason, procurement and purchasing now work closely with supermarket facing teams. This allows them to give the customer what they actually want to buy.
Category planning is a structured, analytical and data-driven approach to the decisions taken in store. To maximise category and retailer profitability execution of the category process is key. Consequently, it relies on effective management implementation of activities, supported by analytical tools which enable accurate decisions to be made.
Category Management Training
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About Andy Palmer
Andy started at the coal face with eight years in food retailing. Prior to joining MBM he then spent five years in the supply base in positions of category analysis, category planning and account management. He works as part of the team enabling suppliers to UK supermarkets to secure more profitable wins through people development. He specialises in Category Training and is a qualified HBDI practitioner.