by Andrzej Gorecki
[As published in Retail Directions, Issue 9, 1996]
Category management has been talked of for many years, and practically
every person in the retail industry is familiar with the term. Some retailers
have already embraced Category Management, some are thinking about it,
whilst others dismiss it as just another management fad. What is the truth
? If your organisation hasn't yet considered Category Management, should
it do so?
Category management
Let's start by looking at how Category Management differs from the traditional
way of running a retail business. Category Management is based on the
premise that each major product category is a business in itself, hence
it shifts the traditional, function-oriented business structure toward
more vertical arrangements. Under this philosophy, the business is managed
as an integrated cluster of business units, each built around a product
category.
Category management also means reaching forwards and backwards within
the supply chain. Forwards, toward customers, to understand their preferences
and needs, and to align categories with market and customer expectations.
It also means targeted promotional programs aimed at improving the performance
of individual categories.
And backwards, toward closer relationships with suppliers, to help them
align their activities with the needs of customers, and to assist the
retailer in the minimisation of costs within the supply chain. Retailer
and suppliers can now cooperate on the basis of category plans, rather
than on a short term, deal-by-deal and product-by-product basis.
The benefits
The main benefit of Category Management is the clear focus on category
performance within the business, and product performance within categories.
It brings home the elementary truth that ultimately retailing is all about
product performance. If enough products can be sold, with the right margin,
profitability will be assured. Surely, other factors such as location
are also critical, but after all other fundamentals are attended to, it
is the product which either succeeds or fails.
We all know that in a retail business certain categories carry other
categories and, similarly, some products within a category carry other
products. Category Management, through its computerised tools and product
performance analysis models, can ensure rational decisions regarding product
ranging, merchandising, and promotions. It replaces opinion-based merchandising
decisions, with a fact-based, methodical approach. It looks at products
and categories in terms of performance against retail space, fixtures,
wages and net product cost. It relies extensively on Quadrant Analysis,
to identify relative performance in more than one dimension — e.g.
gross profit percentage and sales.
Another benefit of Category Management is the pre-planned involvement
of suppliers in the marketing, merchandising and selling of stock. Suppliers
are focused more on selling to the end customer rather than the retailer,
who is only a middle man.
Potential pitfalls
Unfortunately, Category Management is not easy. It requires new thinking,
new skills, new priorities, new software tools, and it can be counterproductive
if overdone. If you are contemplating the implementation of Category Management,
therefore, prepare yourself adequately and be aware of the potential pitfalls.
Firstly, the introduction of Category Management means a major organisational
change. Traditional staff roles need to be redefined as new positions
are created, with the power to influence all aspects within their categories,
including in-store merchandising and store staff training. Those currently
involved in these functions are likely to resist such incursions into
'their territory'.
The second issue is closely related. It is difficult to avoid the temptation
to train in Category Management and then simply re-title the existing
merchandising staff. One day there are no more buyers — enter Category
Managers. Unfortunately, this rarely works. A Category Manager needs to
have a totally different approach; a successful Category Manager has to
be an entrepreneur. Some of your existing staff may find such a transition
difficult.
Another issue is that all products must be reviewed, and most likely
reclassified. Many retailers have classification systems which are incoherent,
'contaminated' over the years by other parts of the business who use the
classification for their own purposes. For Category Management to work
well, the product range must be classified into well-designed categories,
groups and sub- groups. If you think that this is you are likely to be
surprised. Usually, there many issues that need to be resolved in order
to reclassify your stock.
As previously mentioned, Category Management also opens up opportunities
for more coordinated relationships with suppliers. However, we still need
to remember that in many aspects the interests of the supplier and retailer
remain apart. To the retailer, the supplier appears as a single entity,
but the supplier doesn't see the retailer in the same way. To the supplier,
the retailer is just one of many retailers, and the supplier cannot be
expected to be a partner with all retailers, who usually compete against
each other. Hence, whilst Category Management requires closer cooperation
and data exchange with suppliers, we need to be aware of the necessary
limitations.
Finally, it is important that Category Management is not overdone. The
fact that dry groceries are far less profitable than meat does not mean
that supermarkets should get rid of their grocery departments. Cheap groceries
attract people who then buy the profitable meat. It is important to remember
that Category Management is about treating categories as if they were
independent businesses. The key words here are as if they were,
because at the end of the day they are still dependent on each other.
They are a part of the same business, and it is the overall business result
which needs to be optimised, not only the individual categories in isolation.
As you can see, the transition from traditional retail philosophy to
Category Management is not easy. It has to be well planned and it needs
time.
How to start
There is little doubt that Category Management can benefit many retailers,
especially medium to large organisations. It can also benefit suppliers,
but one needs to proceed with caution. Here are some tips on how to get
started.
To begin with, it is necessary to prepare a strategic plan for Category Management, in order to assess the scope, of,changes required within the
business and their likely implications.
Next, existing staff need to be evaluated to determine whether they have
the necessary entrepreneurial flair. Once one has taken stock of human
assets, it is then possible to move on to train the staff, but this must
not be limited to the principles of Category Management. Training in Quality
Management and the principles of the enterprise are also essential.
Once the strategic plan is in place and people are ready, it is possible
to start the process of restructuring and at the same time acquire the
necessary tools and software systems. These systems are essential in order
to equip the freshly-trained team with the necessary information. Data
such as various forms of stock turn, return on inventory investment, price
elasticity, wages and space performance — are all critical for correct
decisions. Also, category-level expense information is needed from accounting
systems to assess net category profitability.
When the above infrastructure is in place, it is possible to start developing
the new supplier relationships, focusing on an optimum bottom line result.
This is also the time to develop specific category plans.
The final tip is to use external assistance. It is a fact that organisations
find it difficult to change from within, and a change agent is usually
required to facilitate the transition.
Andrzej Gorecki is a Director and principal
consultant with Melbourne-based Retail Directions Group, which develops
and supplies state-of-the-art software solutions for retailers worldwide.
Copyright
(c) 1996 Andrzej Gorecki
Top
| 
