Category Management: The Road Ahead

Win Weber’s Leading Edge Perspective

Category management, which is based on sound business principles, has heightened awareness of the importance of category level planning, and it has changed, for the better, behavior throughout the industry. It is producing favorable results with a vast majority of those retailers who are implementing the concept. There are countless examples of how category management has contributed to sales and share growth, reduced costs, improved profits as well as how it has influenced customer count, transaction size and market basket composition.

Despite the many successes, the concept is receiving mixed reviews from both retailers and suppliers. Retailers are concerned about the exhaustive resources required to implement the textbook version of the concept, and the apparent inability of suppliers to remove brand biases and truly focus on total category performance. Suppliers are questioning the return-on-investment for resources deployed to support category management initiatives. Whatever the case, there is a growing consensus that while the concept is producing favorable results, it is falling far short of achieving its fullest potential.

When category management is not measuring up to expectations, the causes can usually be found in one or more areas related to the implementation practices being pursued: the retailer has not been able to translate the “Best Practices” textbook to practical application; there is no formal retailer/supplier collaborative relationship strategy, plan or commitment across the organization; the focus is more on internal measures than on the consumer, and category plans are poorly executed at store level.

Our perspective regarding each of these areas follows:

· The publication of industry “Best Practices” four years ago established a common understanding of category management as well as standardized practices. A good “starter kit” that is must reading for all beginners. But over time this textbook has proven to be too theoretical, too comprehensive and template driven. It does not provide adequate guidance on how to translate theory from the classroom to practical application in the marketplace. Consequently, those retailers who are trying to follow the “Best Practices” guidelines are having difficulty doing so within existing resources and capabilities. Several leading retailers have flatly rejected the guidelines. This has led to broad ranging applications and considerable compromise of the concept. We have learned, beyond a doubt, that one size does not fit all. In fact, a recent industry survey indicated that less than ten percent of retailers are following the guidelines.

It appears that category management may be moving forward like a rudderless ship in the sea… with a dire need for course correction. The direction must shift toward practical application with specific guidelines to tailor the concept to fit individual retailer situations.

· Establishing collaborative relationships between trading partners is an essential component of category management. Collaboration aligns strategies, systems, processes and people for the sole purpose of reducing the cost of conducting business while better serving the consumer. There has been good progress in this area driven primarily by technology and logistics initiatives. Overall, relationships between trading partners have definitely improved. But not to the extent required to support the evolution of category management.

A very small percentage of retailers are doing it right. A large number of retailers do not believe collaboration is an important part of the category management process; some believe in collaboration only when it is self-serving; few have formalized collaborative relationship strategies and plans; and investment in upgrading collaborative skills is limited to a handful of retailers. This situation is compounded further by behaviors such as charging slotting allowances, charging for category captaincies and diversion of product.

In many instances, supplier behavior is also undermining the concept. This includes marketing programs and policy decisions that erode retailer profits, inconsistent business practices across markets, channels and retailers, as well as quarter-end-load programs designed to shift inventories instead of building consumption. The inability to put brand biases aside and focus with the retailer on total category performance is also an issue. Over 80% of retailers surveyed say suppliers are too brand biased when participating in joint category planning.

Most relationships between trading partners have only moved to a more sophisticated level of the traditional buyer/seller relationship. A few have reached the level of true collaboration. There is still a long way to go to achieve the levels of collaboration necessary for both parties to achieve the full benefits of category management.

· During the past nine years we have stated time and time again that unless the focus is on consumer satisfaction, category management will not deliver the desired return-on-investment for retailers or suppliers. Unfortunately, our warnings went unheeded. The emphasis has been on cost management, not on the consumer. The majority of retailers practicing category management have been focusing on internal measures instead of using balanced scorecards that include consumer based measures. The pressure on category managers to manage margin percentages and achieve buying income goals has resulted in short term decisions based solely on cost… at the expense of good consumer based decisions that deliver quality sales and profits.

This internal focus has also been a key barrier in moving collaboration forward to a higher level.

As we look to the future, we are very encouraged by an apparent shift in focus toward the consumer. A growing number of retailers are investing more on consumer research, upgrading marketing competencies, taking advantage of supplier consumer knowledge and encouraging suppliers to invest in retailer specific consumer research at the category level. A few progressive retailers are routinely analyzing the composition of the market basket and incorporating consumer loyalty program data into the category planning process.

Several retailers are moving away from their traditional category management structures to more advanced concepts that better position them to “touch the consumer.”

These are encouraging developments that we hope will continue.

· The ability to execute category plans at store level is a real dilemma and the potential Achilles heel of category management. Most retailers are spending an exorbitant amount of time preparing category plans, but not enough time on store execution. Consequently, new item speed to market plans, planograms, promotions and other initiatives are executed poorly, and sometimes not at all. As we tell many clients, “Don’t allocate resources to developing category plans unless you can execute at store level. It will be a waste of time and money.” We are now at a stage in the industry when there are many questions regarding whether the retailer, supplier, broker or other third party is responsible for store level execution… and who pays?

We find that many store execution issues are directly related to business process and activity ownership. The category management concept has never been presented to most store managers, so they do not know its value relative to their specific stores or the company, and they are not aware of the plans for signature and priority categories. Thus they seldom accept ownership of the execution of category plans. In addition, there is often a misalignment of key performance measures and business processes between category management and store operations. Merchandising standards are often poorly defined and compliance disciplines are not in place.

Only a few retailers are positioned to execute category plans effectively. For most, this is a major problem that must be addressed.

Having said all of this, we believe the road ahead is very encouraging, and the direction is quite clear. Category management will continue to evolve as a way of conducting business, but more as a part of a total business process. The charted course will not be any easier than the journey to its current state… there will be speed bumps and land mines along the way. Here’s how we see the future:

· Category management will evolve to where it will simply be referred to as category planning, an essential component of total business planning, by retailers in its advanced stages of implementation. The emphasis will be on a fully integrated business planning process. Beginners will continue to call it category management.

· Category management will evolve from the “Best Practices” guidelines to a value-based opportunity focus that puts much greater emphasis on the business question to be addressed, the need to know information, better allocation of resources and simplification of the planning process. It will deliver a much higher return on resources deployed by both retailers and suppliers.

· Retailers will focus their category planning processes more on the consumer, with a significant increase in the utilization of consumer information for strategic value and tactical application.

· Retailers in advanced stages of implementation will internalize the annual category planning process. Suppliers will be used as a resource to provide consumer data and gather market level information to support the planning process. Suppliers will be involved in joint category planning only when the retailer needs to address major opportunities. Suppliers will continue to be actively involved in joint planning with retailers at the beginning and mid stages of implementation, and with retailers who do not have sufficient resources to “go it alone.”

· Retailers in advanced stages will integrate the chainwide advantages of category management with a market focused process designed to align category planning with store cluster and store specific planning. In other words, planning will move closer to the consumer. This will require the evolution of organizational structures, roles and responsibilities beyond the current textbook guidelines.

The alignment of category planning with local market and store specific planning will heighten the importance of timely and efficient execution at store level.

· The rules of collaboration will be redefined and will more clearly align expectations between trading partners. The level and type of collaboration will depend, for the most part, on who most directly influences consumer behavior… the retailer or the supplier. In addition, activity based costing will become a more important component of the collaborative equation.

· The evolution of category management will place new demands on suppliers and brokers. The changing roles and responsibilities of multifunctional teams will lead to organizational restructuring. The store execution dilemma may necessitate a major reallocation of retail resources. And, the role of brokers has yet to be defined. There will be much greater emphasis on maximizing efficiencies, allocation of resources, and return on investment.

If retailers and suppliers pay attention to our learnings to-date, with an eye on the road ahead, category management can measure up to initial expectations. This means moving beyond current implementation practices and making those changes required as the concept evolves to where it is an essential component of a retailers total business planning process.

ABOUT WINSTON WEBER & ASSOCIATES, INC.

Winston Weber & Associates, Inc. (WWA) is recognized worldwide as a leading architect of category management and the one consulting firm that knows how to translate the concept from theory to practical application. The two retailers in the U.S. that industry surveys identify as the best practitioners of the concept are WWA clients. Clients also include a select list of retailers across trade channels, manufacturers, brokers and industry associations. WWA is a global management consulting firm with current clients in the U.S., Canada, Latin America, Asia, and Australia. For further insight into Win Weber’s leading edge thinking, please contact us in one of the following ways:

Phone (901) 763-0263
Fax (901) 767-4157
Emai: winweber@winstonweber.com
Website: http://www.winstonweber.com

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