KamLibrary - The Future Of Category Management

· Category level planning is essential to the ability of a retailer to effectively manage all components of the retail value chain. It has already proven to be a process that can positively influence retailer performance. Therefore, it is logical to assume that category level planning is the way most retailers will conduct business in the future.

· We expect to see a broad range of applications. Some will call it Category Management, others won’t. Whatever the case, the basic principles of Category Management as currently defined will guide implementation choices. Many will move beyond the theoretical ECR guidelines and downloaded versions of these guidelines to less cumbersome, more practical approaches. The desire by some companies to simplify the process through standardization will produce only marginal results. Most will realize that "one size does not fit all."

· As the focus of category level planning shifts more toward the consumer, and as the process continues to evolve, a growing number of retailers will recognize the need to modify organizational structures and planning processes. This will be necessary to address the increasing complexities of the Category Manager’s job and to support the integration of category level and Marketplace Planning.

· In the future, the ability of most trading partners to establish sustainable partnering relationships is questionable. To do so will require a major overhaul in how retailers and manufacturers approach partnering. Some relationships will successfully transition to a much higher level; unfortunately, many will backslide to traditional, but more sophisticated buyer/seller relationships. This will affect the role of both parties in activities related to joint category planning.

· Manufacturers must continue to reengineer or reinvent the way they conduct business in response to changing retailer/supplier dynamics. Based on ROI, it is quite clear that while all retailers may be given an equal opportunity, all cannot be treated equally. It will be necessary to reallocate more resources toward those retailers who are most efficient and where a desirable ROI can be achieved, and away from inefficient or nonperforming retailers. Organizational structures implemented just a few years ago may require fine tuning or major surgery.

The Current Situation:

· Approximately 90% of all retailers say they are at various stages of implementation, however, only a few are doing it right. Most are compromising the definition of Category Management with broad ranging applications. The end result will be that most retailers will fall short in return on investments in technology, people, systems and processes which are required to support the concept.

· Despite a general consensus that Category Management is producing favorable results, the term Category Management has a negative connotation with a growing number of retailers and manufacturers. This is because the concept is being compromised by so many retailers, and in many instances manufacturers are not getting an acceptable return on resources deployed to support the concept.

· Retailers are focusing more on internal measures than on the consumer. It appears the best intentions of Efficient Consumer Response (ECR) have unfortunately been interpreted by many as "efficient cost reduction." Driven by retailers and certain manufacturers, the emphasis has been more on stripping waste out of the system than on satisfying the needs of consumers. This has had significant implications on the ability of retailers to optimize ROI on Category Management initiatives. In most cases, internally focused performance measures result in decisions based solely on cost. This encourages short term decisions and shifts the focus away from the consumer.

· Retailer behavior, in many instances, is undermining the concept, e.g. focusing on internal measures at the expense of consumer orientation; charging slotting allowances; product diversion; charging for category captaincies; charging for Category Management training to pay consultant fees.

· Manufacturer behavior, in many instances, is also undermining the concept, e.g. carrying brand biases into the category planning process; special quarter end and year end promotional offers resulting in lower weighted pricing to certain high-low markets than in more efficient EDLP markets; inconsistent business practices across markets and retailers.

· Most retailers are struggling for a number of reasons . . . still focusing on the supply side vs. consumer demand; inability or unwillingness to change culture; implementing without skills; inaccessibility of information; unwilling to share information; not understanding the importance of partnering; performance measures not properly aligned; poor execution at store level; simply not having the resources required to support the concept.

· Many manufacturers are also struggling . . . they don’t trust the true intentions of retailers; they question whether the result will be incremental benefit or added cost; they are still coping with brand as well as category focus; overcoming traditional barriers between sales and marketing is still a problem; the skills and resources to support Category Management initiatives are not in place; they don’t understand retailer requirements and expectations.

What We Have Learned

· The ECR Category Management "Best Practices" Guidelines have proven to be too theoretical, complicated and template oriented. The problem with a by-the-book, one size fits all approach is that retailer situations vary widely, as do categories. There are some in the industry, however, who believe in a standardized approach as evidenced by a recent quote in a trade publication, "The advantage to be had from Category Management lies in common process, superbly executed as opposed to a proprietary process." In theory this sounds great. However, standardization has proven not to be practical with most retailers and some manufacturers. Many will continue to employ proprietary processes to maintain or gain competitive advantage. We conclude "one size does not fit all."

· As Category Management evolves, Category Manager responsibilities become more complex . . . it is increasingly difficult to focus and manage priorities. We have learned that in more advanced situations the "textbook" organizational structure will not support the concept over time. In order to maintain a sharp focus on the consumer, sales, profits, cost and supplier relationships, most day to day tasks and administrative responsibilities must be moved from the Category Manager’s desk to various support functions.

· Many Category Managers are so tied to the internal data that technology generates at their desks that they are losing touch with what’s happening in stores . . . interacting less and less with store personnel and consumers. There is a growing concern among retailers that Category Management creates a risk of losing the merchandising component of retailing, that "instinctive feel for the business." This is influencing how we are advising our clients to evolve organizational structures and processes.

· One of the keys to the successful implementation of Category Management is an organizational structure with business processes that integrate the advantages of centralized activities with store response capability. We have learned that due to the complexity of their jobs, and despite the availability of information which enables analysis down to the store level, Category Managers tend to have a chainwide or store cluster focus. They are not in a position to understand the subtle variations between stores. Therefore, they are not as sensitive as they should be to those opportunities which can better position a single store to meet the needs of its customers. We conclude that in certain categories, there should be room for field merchandisers or store operations to make tactical adjustments to category plans within predetermined guidelines.

· We have learned through working with our retailer clients that following the ECR Efficient Assortment Guidelines can alienate loyal customers, which will have a negative effect on longer term revenues. Based on consumer research, we know that if a retailer does not have a clear understanding of customer attitude toward the banner and categories that there is a high probability of creating customer dissatisfaction. For example, a customer who expects a one-stop shopping experience will not be satisfied if assortment is reduced. Based on these learnings, our clients are now expanding assortment in some categories and focusing more on space management and inventory planning.

· In 1993 we introduced the "Destination" and "Routine" category role designations as part of the category planning process at one of our retailer clients. In the 1995 Category Management "Best Practices Report," these roles were incorporated into the recommended category planning process. Since then, we have concluded there is too wide a characteristic gap between the Destination and Routine definitions. These roles have always been difficult to illustrate, resulting in an area of vagueness in the minds of retailers and manufacturers.

We conclude there is a need to more clearly define roles from both a retailer and consumer perspective and move category role definitions toward how retailers should think about allocating resources and marketing to the needs of their customers.

· Many retailers and manufacturers have moved well beyond the traditional buyer/seller relationships of the past. This transformation has been driven primarily by collaborative initiatives to drive costs out of the supply chain and to a lesser degree by marketing collaboration. As the outcomes from supply chain initiatives become the standard for conducting business, marketing collaboration will become a more important component of the partnering process.

We have learned over time that marketing collaboration alone can result in very fragile relationships as trading partners tend to measure success by short term incremental gain. As incremental gain diminishes for one or both parties, these relationships begin to deteriorate.

In order to establish sustainable partnering relationships, driven primarily by marketing initiatives, the issue of incremental gain is an important consideration. This means that both parties must agree to a longer term vision before entering into a partnering relationship and both recognize the "rules of engagement" must evolve to reflect changing dynamics in the relationship.

Where We Are Heading

· The term Category Management will continue to be used by some retailers while others will call it something else, e.g. Category Marketing, Category Management II, Category Optimization, Value Marketing. Whatever the case, we believe that eventually it will simply be referred to as category level planning, a constantly evolving process that is an essential component of business planning.

· Category level planning will be practiced by most major retailers who have accessible data. We can expect a broad range of applications from category budgets only to beyond today’s textbook definition for those retailers who continually strive to maximize competitive advantage and ROI, and truly focus on the consumer.

· A growing number of retailers will focus their planning processes more on the customer than what we are experiencing today. Retailer investment in consumer research will increase, the expansion of frequent shopper programs will provide a wealth of new customer information and more manufacturers will provide retailer or market specific consumer research at the category level. It should also be noted that more marketing executives will be recruited by retailers from manufacturers to build core competencies in this area.

· The Category Management process will move well beyond the theoretical ECR guidelines as retailers and manufacturers strive for simplification. There will be two schools of thought. One approach to simplification, which will be endorsed by those who want to leverage the process for competitive advantage, recognizes that each retailer is sufficiently unique to require customization. In this scenario, the process is aligned with resources and capabilities on an individual retailer basis. This approach to simplification, as demonstrated by several of our retailer clients, has proven to be more efficient and much more effective in producing the desired results.

A second approach, which will be endorsed by some manufacturers, industry associations and third party information providers, suggests that Category Management can only be simplified through industry standardization. While some components may be able to be standardized, this approach assumes one size fits all and appears insensitive to the true drivers of Category Management. Similar to the ECR guidelines, this is based more on theory than practical application. The ability to maximize ROI with this approach is questionable.

· Retailers will move away from the strict interpretation of the ECR Efficient Assortment Guidelines and focus more on offering the variety consumers want at the lowest possible cost. This will lead to an expansion of SKUs in some categories. There will be a need for retailers to place greater emphasis on how to maximize store assets and learn how to deal with what appear to be two diametrically opposing propositions . . . handling the variety consumers want while optimizing retail space productivity.

· While the importance of category roles far outweighs what they are called, retailers will move beyond ECR category role definitions to Signature, Priority, Basic, Occasional/Seasonal and Fill-In roles. These new role definitions more clearly define category roles from a retailer and consumer perspective and move category role definitions toward how retailers should think about allocating resources and marketing to the needs of their consumers. Response to these definitions from WWA clients and others has been excellent to date.

· Category Management will be closely aligned with a concept called Marketplace Planning, both of which are essential components of strategic business planning. This will integrate the chainwide advantages of Category Management as defined today with a market focused process designed to align category plans with the needs of store clusters, stores and consumer segments. We are currently implementing Marketplace Planning with several clients.

The evolution of Category Management, which will add complexity to Category Manager work requirements as well as the integration of Category Management with Marketplace Planning will result in the need for retailers in more advanced stages of Category Management to modify existing organizational structures. The current "textbook" approach to organizational design will not support future requirements.

· The alignment of Category Management with Marketplace Planning will heighten the importance of timely, efficient execution of category plans at store level. Consequently, retailers will place pressure on manufacturers and brokers to reallocate retail resources to support more efficient, unbiased, speed-to-market initiatives, e.g. third party merchandising services, manufacturer/broker store specific merchandising teams managed by the retailer, in-house merchandising services funded by manufacturers and brokers.

· Collaboration between trading partners will continue to be an essential component of category level planning. Some retailers and manufacturers will redefine the rules for working together and successfully shift the focus of existing partnering relationships to initiatives such as activity based costing and consumer need satisfaction. However, in many partnering relationships, there is a high probability of backsliding to traditional buyer/seller relationships, but at a more sophisticated level than in the past. The ability to sustain these relationships is questionable.

· Activity Based Costing and inventory ownership are two issues which will ultimately lead to a major restructuring of the financial relationship between trading partners. These are going to be the most complex and challenging issues for retailers and manufacturers during the next three to five years, and will undoubtedly be factors to consider when establishing or maintaining partnering relationships.

· Manufacturers will continue to reengineer or reinvent the way they conduct business in response to changing dynamics, but with greater emphasis on maximizing efficiencies, resource allocation and ROI. This suggests a need to reallocate financial and human resources more toward those retailers where there is the highest probability of achieving a desirable ROI on category level planning or other customer initiatives, and away from inefficient or non-performing retailers. Multifunctional team structures, resources allocated to multifunctional teams and allocation of retail service related resources will come under close scrutiny. Many manufacturers will have to fine tune or conduct major surgery on organizational structures that were implemented just a few years ago.

Key Conclusions

· Category Management will evolve to where it will simply be called category level planning, an integral part of business planning.

· In order to maximize ROI, retailers must focus more on the consumer and align category level planning with resources and capabilities. In most cases, standardization will not produce the desired results.

· In this environment, manufacturers must place greater emphasis on maximizing efficiencies, resource allocation and ROI in their relationships with retailers.

website: www.winstonweber.com

Date article published: 06/06/2000

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