The Future of Category Management

Creating value in the current market conditions

JERRY SINGH
www.categorymanagement.com
281-242-7098
Presentation Objectives
Category Management Concepts & Evolution
Barriers To Successful Implementation
Current Market Conditions & Trends
Implications for Industry Participants
2
Category Management Concepts & Evolution
4
Category and Brands:
Needs Vs. Wants
Consumer Needs
?
?
Consumer Wants
CATEGORY BRAND
Definition of a Category
5
A category is a distinct, Manageable group of
Products/Services that consumers Perceive to
be Interrelated and/or Substitutable in meeting a
Consumer Need
ECR Committee
6
The Anatomy Of A Brand
Brand Soul
Or
Essence
Positioning
Attributes Benefits
Equity
Category Management Enablers:
Bar Code Scanning and Information & Communications Technologies
Bar code scanning led to faster and more accurate product movement
data across the supply chain. Shelf Space management emerged to
take advantage of the store level sales data to allocate space in line
with consumer demand.
Quick Response/Efficient Consumer Response were industry
initiatives to improve supply chain efficiency. Initial pilots showed
Sales and Inventory turns could be improved and out of stocks and
reordering lead time reduced with Retailer/Suppler cooperation.
Innovative retailers and suppliers built technical and organizational
infrastructures to take advantage of the opportunities arising from the
new technologies.
7
Category Management
& Efficient Consumer Response
Industry initiatives identified opportunities for major improvement
through distributor supplier cooperation with Category Management
focusing on the top line, and Supply Chain Management focusing
on reducing costs.
8
Assortments,
Promotions,
New Product
Introductions
Category
Management
Demand Side:
Replenishment
Sales &
Profit
Purchase
Frequency
Shopping
Basket
Category
Reach
What is Category Management?
9
The following Committee Definitions have been used
US & Europe ECR Committees
Category Management is a distributor-supplier process of managing
categories as Strategic Business Units, producing enhanced business
results by focusing on delivering superior Consumer Value
FMI-Kellogg School of Management
"The process of managing items in a product category as a strategic
business unit by jointly determining with the suppliers pricing,
merchandising, promotions and product mix based on category goals,
the competitive environment and consumer behavior
Developing and Monitoring a Category Plan
10
Market/Retailer Assessment
How is the category currently performing?
Market share
Market growth
By channel and competitor
Is the current position and trend acceptable given category role?
Is there an opportunity gap (the category share of the market less
than the total retailers share of the market)?
11
Opportunity Gap Analysis
Category Assessment:
Analysis from Four Perspectives
12
Retailer
Contribution
&
Productivity
Consumer
Buyer Profile
&
Purchase Behavior
Supplier
Share & Efficiency
Market
Market Share &
Trends/Gaps
Category
Sub-Category
Segment
Brand
SKU
Quadrant Analysis - Market Share Gap
13
Market Share
Market
Growth
Starters/
Alternators
Motor Oil
Brakes
Exterior
Appearance
Battery
Truck Accessories
Suspension / Struts
Interior Appearance
Wiper Systems
Ignition
SLEEPERS
WINNERS
OPPORTUNITIES
QUESTIONABLES
21%
18%
17%
19%
23%
22%
Midpoints
Mkt Share = 20%
Mkt Growth% = 2.5%
Category Marketing Strategies
14
Traffic Building
Transaction Building
Profit Generating
Turf Protecting
Cash Generating
Excitement Creating
Image Enhancing
Consumer Draw
Increase Register Ring
Increase Category Profits
Defend Sales & Shares
Increase Cash Flow
Generate Sense of Opportunity
Reinforce Retailer Image
Category Marketing Stratogram:
Coffee Category
15
Mild & decaf. coffee
- all sizes
Instant traditional
Private label
Substitutes
Category Role Strategies Products
Preferred
Traffic
Building
Transaction
Building
Profit
Generating
Premium Regular Coffee
- Top 3 brands
- 500 gram sizes
Instant specialties
Mid to premium priced
regular coffee
Coffee filters
Coffee Cream
Specialized coffee sweeteners
Category Tactics
16
Specific Tactical Plans for:
Assortment
Pricing
Shelf
Presentation
Promotion
Category Tactics
Barriers To Successful Implementation
Of Category Management
Barriers
To Successful Implementation Of Category Management
1. Category definitions vary across the industry
2. Data needed for Category Management comes from diverse
sources
3. Retailer-Supplier strategies must align & agree on information
sharing between partners
4. Organization structures and processes must facilitate Category
Management
5. Information Infrastructure must enable easy access to data and
analysis
6. Critical mass needed to realize full benefits as total system
synergies are greater than individual categories
18
Category Definition Process
19
Define the consumer need...
All products that
meet the need
Interrelated
Operationally
Feasible
Measurable
Substitutable
Manageable
The CATEGORY
(SKU Grouping)
SKU
SKU SKU
SKU
SKU SKU
SKU
SKU SKU
SKU
SKU SKU
Category Definition:
Consumer View
20
Most Retailers Category definitions are
based on format strategy and store
design & layout
Most Manufacturers Category
definitions are based on product scope
and operating units
A Cornell University survey found that Retailers tracked 191 Categories,
Wholesalers 184, and Nielsen 292!
Defining the
Category with a
Consumer focus
is essential
How should the category and its structure be defined?
21
From the consumers perspective...
But the target consumer can vary
22
The Retailers Dilemma
Broad
Narrow
Tooth
Paste
Tooth
Powder
Tooth
Brush
Mouth
Wash
Floss
Denture
Adhesive
Toothache
Relief
How should the
Oral Care Category
be defined?
23
Category Assessment data comes from diverse sources
requiring information sharing.
Information
Manufacturer
Store
Market Research Companies
ACNielsen, IRI, GfK,...
Consumer knowledge
Market insights
Creative marketing approaches
Category POS-information
Store based measures
Supply Chain costs
DATA DATA
24
And better information is needed
Category Management leads to:
Consumer driven category definitions
Need for down-to-SKU data
Different category segmentation
Need for store level detailed data
(for in-store execution of category plans)
Need for customized category and market data
Strategic Alignment
25
Before Category Management can be implemented
Retailer & Manufacturer Strategies must be aligned.
What is the Mission of our Company?
Who is the Target Customer?
What are the Format/Channel strategies?
What is the basis of competitive positioning?
What are the financial, marketing and product supply strategies?
What is our relationship with our trading partners?
26
Alignment of well defined, complete corporate strategies leads to
a common vision for the category that guide key decisions
Manufacturer
Retailer
Strategic Alignment
Senior management involvement is needed to force internal
strategy linkages, strategic decision-making, and resource
allocation needed to reveal mutual value chain opportunities
Reengineering Of Customer-Supplier Interface
Sales Customer Teams
Buying/Merchandising Category Teams
27
This restructuring and acquisition of new skills and
Infrastructure to support the reorganization takes time
Category Management has resulted in reengineering of sales & marketing
functions of major manufacturers and buying & merchandising functions of
major retailers world wide.
Customer Interface Design
PreCM
Sales
Manufacturer
Retailer
Buying
PostCM
Customer Team
Category Team
Logistics
Marketing
Customer Team Manager
Retail Operations
Finance & Systems
Logistics
Merchandising
Category Manager
Store Operations
Finance & Systems
Logistics
Marketing
Retail Operations
Finance & Systems
Logistics
Merchandising
Store Operations
Finance & Systems
Organizational Factors
Affecting Category Management Execution
29
People Structure
Rewards &
Recognition
Information Sharing Decision Making
Skills
Execution
Category Management Information Infrastructure
30
Supplier
Headquarters
Customer Teams
Syndicated P.O.S
Warehouse
Retail HQ
*Category Teams
*Purchasing/Merchandising
DATA
S
C
A
N

D
A
T
A
Store
*POS/Scanning
Shipper
Warehouse
DSD
Wal-Mart technology
provides real time
feedback and
item level control
31
Achieving Critical Mass Key To Realizing Benefits
To build internal
awareness/enrollment
To develop a plan to
achieve capability
To develop basic
capability
To understand /
experience Category
Management
To achieve early results
Operationalization:
Rollout
Integration:
Ongoing
Foundation: Pilots
To operationalize
Category Management
To design necessary
organization enablers
Systems
Organizations
Performance Metrics
Rewards
To begin organization
transition
To begin achieving initial
results
To develop advanced
capabilities
Micromarketing
Activity Based
Costing
To establish routine on-
going process
To create sustainable
organization change
To achieve full potential
benefits
Current Market Conditions
and Technology Trends
Current Market Conditions
1. Retailers cutting costs, luxury in real trouble
2. Risk mitigation across the board
3. Retailers focusing on shopper experience
4. Human Resource Management emphasis
5. Multi-Channel approach
6. Smaller express or high frequency stores
7. Think Global, act localGlocalization
8. Branding emphasis
33
Top 250 retailers had $3.62 trillion in 2008 sales (+11.4%) and 3.7% margin, but this
years global crisis has seen flat sales, bankruptcies, and private label growth
34
Retailers cutting costs
as the only way to maintain profitability:
Consumer spending is down with their net worth
Retailers focusing on core business
Retailers evaluating most effective formats
For the future
Retailers consolidating support functions
Retailers negotiating leases and better deals
with suppliers
35
Risk Mitigation across the board
due to financial markets disruptions:
Currency market volatility
Supply Chain disruption
Diversification of sourcing
Natural/man-made disasters
Need to reduce leverage
36
Retailers focusing on shopper experience
Better store layout or design
Better Customer service
Improved/greater product assortment & information
Increased focus on shopper insights
37
Better management of human resources
Training and selection
Ways to motivate
Reduce turnover
Raise productivity to compensate for cuts
to the payroll
To reduce expatriate deployment
38
Multi-channel approach
Consumers increasing cross channel shopping
Internet and store retailing coming together
Manufacturers increasingly turning to the internet
Need to integrate consumer offers across channels
39
Smaller or express stores
To serve niches
Address consumer need for shopping convenience
Manufactures recognizing potential for high frequency stores
Better suited to emerging markets as
Retailers globalize
40
Think global, act local or Glocalization
Retailers have been slower than manufacturers
to Globalize but:
Top retailers have about 25% in sales
outside their home markets
Eight of the top ten operate in at least
seven countries
The top 250 retailers account for $3.62 trillion
in sales in 2008
Margins have remained stable at 3.5%
Format diversification and supply chain
Strength has been key to success
41
Branding ever more important
Only two ways to succeed in todays market conditions:
Lower costs and prices due to most efficient supply chains
or economies of scale
Focus on managing brands and the consumer experience
(Least successful are those with uncompetitive prices and
undifferentiated shopping experience)
42
Walmarts Sales Growth--$ Billion
401
2006 2005
281
309
2007 2008 2009
Current years flat sales
should not blind us to
long-term trends
345
374
CAGR 9.3%
Mega-retailers
will Dominate Consumer Product Retailing
43
Winds of Change
in the Consumer Products/Retail Industry
44
Competitive Spectrum Targeted Mass
G
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w
t
h

a
n
d

p
e
r
c
e
i
v
e
d

c
o
n
s
u
m
e
r

v
a
l
u
e
Consumers seek low
cost for basic goods
with low emotional
investment
Megaplayers
capture market
share by delivering
good enough
value at very low
prices
Consumers seek
greater personal
value when
purchasing goods
with high emotional
importance
Differentiated
specialists build
profitable niches by
delivering relevant
value to targeted
groups of consumers
Undifferentiated
competitors fade
into irrelevance
Technology Trends
Data Warehouse Appliances replacing Corporate Data
Warehouses
Integration of Category Management with Customer Relationship
Marketing
Collaborative Planning & Forecasting
45
46
Retailer Data Warehouses
Manufacturer Data Warehouses
47
Japan
Japan
Japan
Data Appliances
Replacing Corporate Data Warehouse
48
Cost per Terabyte is 1/10
th
compared to Older MPP technology
Examples are Netezza, DATAllegro, Kickfirenew technologies
That have emerged in recent years to compete with Teradata
Category
Data
Appliance
Category Management Focus
49
Portfolio Management Strategies
Customer Segments
Category Roles
Destination
Destination
$
$
$
$
Preferred/
Routine
Preferred/
Routine
Occasional
Seasonal
Occasional
Seasonal
Convenience
Convenience
$
$
$
$
$
$
$
$
$
$
$
$
Loyal Customers
Split Customers
Infrequent Customers
New Customers
Marketing Strategies Driven by Category Roles
Optimizes Category profitability and GMROI
Balanced Scorecard critical to build customer equity.
Customer Management Focus
50
Consumer Segmentation Strategies
Customer Segments
Loyal Customers
Split Customers
Infrequent Customers
New Customers
Marketing Strategies Driven by Customer Segment Goals
Differentiates customer value proposition to maximize customer equity
Balanced scorecard needed to optimize profitability
Category Roles
Destination
Destination
Preferred/
Routine
Preferred/
Routine
Occasional
Seasonal
Occasional
Seasonal
Convenience
Convenience
$ $ $ $
$ $ $ $
$ $ $ $
$ $ $ $
Collaborative Planning & Forecasting
51
Weekly
Orders &
Forecast Updates
Store/SKU
Sales Forecast
Supplier
Generated
CRP
Suppliers WH
Retailers DC Retail Store Consumer
Full EDI of
invoices,
billbacks,
coupons, funds
transfers
Electronic
POS based
Consumer
Promotion
& Joint New
Product
Introduction
Frequent
Shopper
Database
Implications For Industry Participants
Implications for industry participants
1. Differentiate from competition
2. Offer customer experience that excites
3. Improve Infrastructure for collaboration
4. Focus on building strong brand equity
5. Build direct links with the consumer
53
The current crisis should be turned into an opportunity!
54
Differentiate From Competition
Critical for long term survival:
Retailer strategy should be low price or differentiation based
on product, quality, or service
Retailers should manage private label without diluting
stores brand image
Manufacturers should focus on product innovation and
quality/price gap vs. private label
Manufacturers should build sustainable
Partnerships with leading retailers
55
Improve Shopper Experience
Examples are Walmarts Project Impact or Walgreens
Customer Centric Retailing:
In-store merchandising is key to winning the First moment
of truth
The practice of Category Management should focus on in-
store merchandising
Retailers should redesign store layout & visual
Merchandising
56
Improve Collaboration
as the market/technology trends are making it critical:
Protecting margins through cost cutting is essential for
success
Category & Supply Chain management can take costs out
of the value chain
Information & Communication technology cost continue to
decrease
Glocalization is facilitated through collaboration
57
Build Brand Equity
is key to both retailers and manufacturers
to sustain consumer loyalty:
Cross channel shopping behavior is on the increase
Product innovation continues to be the best way to avoid
commoditization
Shopper insights to win the purchasing decision builds
brand equity
58
Build Direct Links With The Consumer
Through internet shopping and mobile couponing:
Internet shopping continues to grow faster than store
retailing ($178 billion in 2008 versus $87.5 billion in
2004doubled in 4 years)
Major retailers integrating internet offering with in-store
shopping
Major manufacturers offering coupons through their
websites and links through retailers
Manufacturers developing direct to consumer Ecommerce
capabilities
Implications for Category Management
Retailers must focus much more on store level Category management
to influence consumer channel selection and in-store purchase
behavior.
Manufacturers must improve in-store merchandising and
understanding of shopper insights in their Category Management
practices
Syndicated Data providers should increase trading area and store level
market research offerings
Category Management is ever more important in todays crisis as
collaboration to improve topline is critical to long term survival
59
Thank You!
60