Probably the most effective innovation in the history of applied marketing, category management had come a long way in fifteen years…
As ‘marketing done properly’ category management was a breakthrough in that it acknowledged that the competitor was not necessarily inferior, and private label was perhaps not all ‘downmarket and common’. Instead of positioning the brand as if it were the only available choice, the category approach placed the brand in a real world context of equal or better quality products available to the shopper, unique within their chosen store environment.
Having solved the ‘objectivity’ issue whereby both management and the customer had to be convinced that replacing an ‘our brand is best’ attitude with an outsider’s perspective, the key problem lay in purchasing and analysing the vast amount of data required, without having the ability to demonstrate an appropriate level of return on investment in the business. Thus for a long time, the jury remained out on category management. In fifteen years the process has gained more acceptance on both sides of the supplier-retailer partnership.
The current recession represents a new threat in that with all budgets being challenged on a cost-effectiveness basis, the costs associated with category management are now being related to demonstrable returns on that investment, and the results compared with alternative uses of the company’s money.
In order to survive, category management needs to be placed in a real-world recessionary context and re-sold to management and the customers as a means of improving the profitability of each party, cost-effectively. Apart from re-engineering the brand offering to reflect the fundamental changes now taking place in the consumer-shopper’s buying criteria, it is vital that the category manager understands the financial pressures building up in the retail sector as the recession develops.
As every KAM knows, the major multiples are in a position to concentrate or dilute the brand message, depending upon whether they perceive the category recommendations as a means of improving or reducing retail profitability. Demonstrating financial impact of the category has thus become a core skill in effective management of the category in a recessionary environment.
Essentially, in order to maintain viability and remain independent, all retailers need to generate a Return on Capital Employed of at least 15%, a Net Margin of 5%, and Stockturns of 25 times per annum, with gearing levels of 30% or less. In practice, the major multiples are currently generating ROCE performances of 12% or less, with some retailers generating a Net Margin of 2.5%, with stockturns too low to compensate for inadequate margins and excessive gearing.
For major retailers, category management represents a cost-effective outsourcing of a crucial function, the only ‘cost’ for a retailer being the effort required to ensure the objectivity of the recommendations that will generate incremental growth of the category. In the current climate, apart from objectivity, suppliers also need to demonstrate the financial results of their recommendations on the retailer’s profitability, or suffer possible loss of the category captaincy role.
As most of the retailer’s exposure on category management tends to be restricted to possible opportunity-cost arising from making the wrong supplier captain of the category, category managers need to focus upon their financial impact on the customer’s business, relying upon the fact that this financial approach is relatively unique, in many categories. In practice, this means being able to show the impact on incremental sales, gross margin and where possible, net profit, and stockturn, for both brand and category, in order to demonstrate the optimisation of retailer assets used in the process.
However, even more importantly in the current economic climate, a pro-active category manager needs to then concentrate upon justifying all category investment to the supplier’s senior management, the ultimate risk-takers in terms of funding category management. This means being able to map out all category investment in terms of cost and incremental sales arising from that investment. In other words, for a supplier making a net profit of 10%, a category investment of £10k requires an incremental sales increase of £100k to break even, whilst allowing a competitive brand to retain its fair share of the incremental growth of the category. Anything less will simply dilute overall company performance, and increase the temptation to sacrifice objectivity by abusing the category captaincy role to drive brand growth at the expense of the competition within the category. This cannibalisation will in turn dilute the retailer’s confidence in the supplier’s objectivity, and jeopardise profitability in the process.
A real pity if recessionary fire-fighting causes category management to lose momentum, or suffer outright rejection, when applied finance could ensure its rightful place in terms of effective profit building based upon meeting consumer need.
All else is detail…
