Can You Afford to Ignore Category Management?
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.