INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

Retail Management

A REPORT ON

“Category Management Practices in Retailing”

Submitted by:

VISHAL ALLURI RAJU

PGP/FW/07-09/B2
 Roll NO : 69

Category Management Practices in Retailing

INTRODUCTION

• Category Management is a retailing concept in which the total range of products sold by
a retailer is broken down into discrete groups of similar or related products; these groups
are known as product categories. Examples of grocery categories may be: tinned fish,
washing detergent, toothpastes, etc.

• Category Management is a process that involves managing product categories as

business units and customising them [on a store by store basis] to satisfy customer needs.

Category management, which is based on sound business principles, has heightened awareness
of the importance of category level planning, and it has changed, for the better, behavior
throughout the industry. It is producing favorable results with a vast majority of those retailers
who are implementing the concept. There are countless examples of how category management
has contributed to sales and share growth, reduced costs, improved profits as well as how it has
influenced customer count, transaction size and market basket composition.

Despite the many successes, the concept is receiving mixed reviews from both retailers and
suppliers. Retailers are concerned about the exhaustive resources required to implement the
textbook version of the concept, and the apparent inability of suppliers to remove brand biases
and truly focus on total category performance. Suppliers are questioning the return-on-
investment for resources deployed to support category management initiatives. Whatever the
case, there is a growing consensus that while the concept is producing favorable results, it is
falling far short of achieving its fullest potential. When category management is not measuring
up to expectations, the causes can usually be found in one or more areas related to the
implementation practices being pursued: the retailer has not been able to translate the “Best
Practices” textbook to practical application; there is no formal retailer/supplier collaborative
relationship strategy, plan or commitment across the organization; the focus is more on internal
measures than on the consumer, and category plans are poorly executed at store level.

It appears that category management may be moving forward like a rudderless ship in the
sea… with a dire need for course correction. The direction must shift toward practical
application with specific guidelines to tailor the concept to fit individual retailer situations.

Establishing collaborative relationships between trading partners is an essential component of

category management. Collaboration aligns strategies, systems, processes and people for the sole
purpose of reducing the cost of conducting business while better serving the consumer. There has
been good progress in this area driven primarily by technology and logistics initiatives. Overall,
relationships between trading partners have definitely improved. But not to the extent required to
support the evolution of category management.

A very small percentage of retailers are doing it right. A large number of retailers do not believe
collaboration is an important part of the category management process; some believe in
collaboration only when it is self-serving; few have formalized collaborative relationship
strategies and plans; and investment in upgrading collaborative skills is limited to a handful of
retailers. This situation is compounded further by behaviors such as charging slotting allowances,
charging for category captaincies and diversion of product. In many instances, supplier behavior
is also undermining the concept. This includes marketing programs and policy decisions that
erode retailer profits, inconsistent business practices across markets, channels and retailers, as
well as quarter-end-load programs designed to shift inventories instead of building consumption.
The inability to put brand biases aside and focus with the retailer on total category performance
is also an issue. Over 80% of retailers surveyed say suppliers are too brand biased when
participating in joint category planning.

Most relationships between trading partners have only moved to a more sophisticated level of the
traditional buyer/seller relationship. A few have reached the level of true collaboration. There is
still a long way to go to achieve the levels of collaboration necessary for both parties to achieve
the full benefits of category management.

As I look to the future, I am very encouraged by an apparent shift in focus toward the consumer.
A growing number of retailers are investing more on consumer research, upgrading marketing
competencies, taking advantage of supplier consumer knowledge and encouraging suppliers to
invest in retailer specific consumer research at the category level. A few progressive retailers are
routinely analyzing the composition of the market basket and incorporating consumer loyalty
program data into the category planning process. Several retailers are moving away from their
traditional category management structures to more advanced concepts that better position them
to “touch the consumer.”

Encouraging developments that will continue.

· The ability to execute category plans at store level is a real dilemma and the potential Achilles
heel of category management. Most retailers are spending an exorbitant amount of time
preparing category plans, but not enough time on store execution. Consequently, new item speed
to market plans, planograms, promotions and other initiatives are executed poorly, and
sometimes not at all. “Don’t allocate resources to developing category plans unless you can
execute at store level. It will be a waste of time and money.” We are now at a stage in the
industry when there are many questions regarding whether the retailer, supplier, broker or other
third party is responsible for store level execution… and who pays?

Many store execution issues are directly related to business process and activity ownership. The
category management concept has never been presented to most store managers, so they do not
know its value relative to their specific stores or the company, and they are not aware of the
plans for signature and priority categories. Thus they seldom accept ownership of the execution
of category plans. In addition, there is often a misalignment of key performance measures and
business processes between category management and store operations. Merchandising standards
are often poorly defined and compliance disciplines are not in place.

Only a few retailers are positioned to execute category plans effectively. For most, this is a major
problem that must be addressed. Having said all of this, I believe the road ahead is very
encouraging, and the direction is quite clear. Category management will continue to evolve as a
way of conducting business, but more as a part of a total business process. The charted course
will not be any easier than the journey to its current state… there will be speed bumps and land
mines along the way. Here’s how the future is:

· Category management will evolve to where it will simply be referred to as category planning,
an essential component of total business planning, by retailers in its advanced stages of
implementation. The emphasis will be on a fully integrated business planning process. Beginners
will continue to call it category management.

· Category management will evolve from the “Best Practices” guidelines to a value-based
opportunity focus that puts much greater emphasis on the business question to be addressed, the
need to know information, better allocation of resources and simplification of the planning
process. It will deliver a much higher return on resources deployed by both retailers and
suppliers.

· Retailers will focus their category planning processes more on the consumer, with a significant
increase in the utilization of consumer information for strategic value and tactical application.

· Retailers in advanced stages of implementation will internalize the annual category planning
process. Suppliers will be used as a resource to provide consumer data and gather market level
information to support the planning process. Suppliers will be involved in joint category
planning only when the retailer needs to address major opportunities. Suppliers will continue to
be actively involved in joint planning with retailers at the beginning and mid stages of
implementation, and with retailers who do not have sufficient resources to “go it alone.”

· Retailers in advanced stages will integrate the chainwide advantages of category management
with a market focused process designed to align category planning with store cluster and store
specific planning. In other words, planning will move closer to the consumer. This will require
the evolution of organizational structures, roles and responsibilities beyond the current textbook
guidelines. The alignment of category planning with local market and store specific planning will
heighten the importance of timely and efficient execution at store level.

· The rules of collaboration will be redefined and will more clearly align expectations between
trading partners. The level and type of collaboration will depend, for the most part, on who most
directly influences consumer behavior… the retailer or the supplier. In addition, activity based
costing will become a more important component of the collaborative equation.

· The evolution of category management will place new demands on suppliers and brokers. The
changing roles and responsibilities of multifunctional teams will lead to organizational
restructuring. The store execution dilemma may necessitate a major reallocation of retail
resources. And, the role of brokers has yet to be defined. There will be much greater emphasis on
maximizing efficiencies, allocation of resources, and return on investment.

If retailers and suppliers pay attention to our learnings to-date, with an eye on the road ahead,
category management can measure up to initial expectations. This means moving beyond current
implementation practices and making those changes required as the concept evolves to where it
is an essential component of a retailer’s total business planning process.

Rationale for Category Management

One key reason for the introduction of Category Management was the retailers' desire for
suppliers to add value to their (ie the retailer's) business rather than just the supplier's own. For
example, in a category containing brands A and B, the situation could arise such that every time
brand A promoted its products, the sales of brand B would go down by the amount that brand A
would increase, resulting in no net gain for the retailer. The introduction of Category
Management imposed the condition that all actions undertaken, such new promotions, new
products, re-vamped planogram, introduction of Point of Sale advertising etc. were beneficial to
the retailer and the shopper in the store.
A second reason was the realization that only a finite amount of profit could be milked from
price negotiations and that there was more profit to be made in increasing the total level of sales.

A third reason was that the collaboration with the supplier meant that supplier's expertise about
the market could be drawn upon, and also that a considerable amount of workload in developing
the category could be delegated to the supplier.

THE BUSINESS PROCESS of CATEGORY MANAGEMENT

SAP for Retail solutions cover the key processes in category management, including:

• Strategic planning – SAP for Retail helps you develop your rolling three-year strategic
plans by providing historic data analysis capabilities as the basis of forward projections,
and enabling you to build financial models of various potential plan scenarios. With SAP
 solutions, you can analyze prior financial performance, customer trends, and your
competition, and develop alternative forward plans.
• Category business planning and management – With SAP for Retail, you can plan the
selection you will carry for the next season or year (private-label goods, seasonal, or
basic items), determine financial targets for that selection, and then manage the
achievement of those targets. SAP solutions support key tasks, such as category planning,
product hierarchy definition, initial product order placement, initial allocations for new
articles, performance tracking, and new product development.
• Price and revenue management – SAP for Retail helps you optimize and manage prices
throughout the product life cycle, including initial pricing as well as promotional,
markdown, or clearance pricing. Once prices are optimized to be consistent with your
unique customer demand, you can change prices individually or via automatic mass
maintenance based on pre-specified dates, by item, store, zone, or region. Prices can be
downloaded to stores with start and end dates and times for automatic management of the
complete pricing cycle.
• Promotion planning and management – SAP for Retail solutions enable you to plan,
execute, and evaluate the success of promotions. With SAP solutions, you can plan
individual promotions, determine promotional order quantities, place promotional orders
based on historical information, allocate promotional inventory, and evaluate the success
of your promotions.

Category management is enabled with SAP applications such as SAP Customer Relationship
Management and SAP ERP.

A Three Step Process

In work with manufacturers, focus first on the level of data that is most difficult to see and
analyze using current GIS and BI solutions, store level transactions as they change and grow
through time. Visualize and understand store level transactions, higher levels of predictive
analytics are added in levels 2 and 3.
Table below shows the three-level concept as applied to a manufacturer of consumer durables.
The table shows typical users at each level, the types of inquiries they make, example questions,
data required, purpose of analysis outputs, and benefits to be derived.
Note that while user types, analysis purpose and benefit statements are presented from a
manufacturer’s viewpoint, they coincide directly with retailer category management objectives as
expressed in this article’s introduction.

Level/User Type of Example questions Data Analysis Business Benefits

Inquiry Employed Purpose
Level 1 Visualize What are store level Geography, Present sales Increase sales
what, POS dynamics? Store data
Sales Put the right
when, How do sales vary Locations, animation to
Manager/ product/ Right
where by Pos Data customer in
Sales Analyst place/ Right time
category/item/store? support of
Demonstrate
new item or
Retail
innovation
expanded
Analyst
shelf space
Level 2 Visualize Why does category Geography, Identify Increase sales and
what, “A” surpass “B”, Store opportunities profits
Marketing
when, what are consumer Locations, for new
Mnaager/ More focused and
where influences? POS Data, products or
Analyst effective marketing
and why Demographic marketing
category
Data programs
Manager
Level 3 Visualize How do stores Geography Maximize Increase efficiency
analyze cluster and correlate store shelf space and effectiveness of
POS/
and to market or localities, and sales operations drive
Forecast
predict consumer POS data, velocity profits
Analyst
what, Landscape ? Demography,
Allocate
 when, Market
What will new store production
where Factors (e.g,
sales be by item, and logistics
and why weather )
which POG is best? resources
What is store level
fcast vs “top
down”?

Managing non-strategic categories, strategically

Category management support from ICG Commerce delivers year-after-year cost improvements
to help you maximize savings opportunities across all categories while focusing your internal
efforts on larger, more strategic savings initiatives. This support includes:

• Validation and management of pricing in the years after the initial supplier agreement
• Comprehensive spend and savings reporting to identify and address maverick buying
• Identification and implementation of additional savings opportunities such as product
substitution and OEM price support
• Operational improvements such as optimizing order size and reducing the number of
supplier invoices
• Reduction in time and effort driving supplier performance improvements and resolving
supplier issues

Ongoing Category Management that Delivers Ongoing Savings

Achieving cost reductions is one thing. Continuously building upon those savings and driving
additional performance improvements is another matter. It requires continuous monitoring of the
market and supplier performance by experts who know the category and the supply base.
Unfortunately, few companies have the resources to apply this level of attention to the majority
of their categories. ICG Commerce, on the other hand, addresses this challenge by providing
seasoned professionals with deep category experience and proactive category management
support that produces incremental savings and performance improvements year after year.

By analyzing detailed spend, transactional and pricing data, and continuously monitoring the
supply markets, our dedicated category experts routinely identify and implement solutions to
further reduce maverick purchasing and drive incremental unit-cost reductions through additional
sourcing, appropriate specification changes, substitution, better demand management, and
actively target cost-avoidance opportunities in appropriate commodities.

• Price Management -Monitoring of category indices and analytics on impending price

changes
• Supply-Market Monitoring and Reporting -Continuous analysis of spend, market data,
and benchmarks to identify additional improvement opportunities
• Continuous Cost Improvements -Implementation of additional savings through
substitutions, better compliance, or additional sourcing
• Supplier Performance Management -Monitoring supplier performance and driving quality
and service improvements

To further improve supplier compliance and performance, our seasoned category managers
constantly monitor a number of key metrics and produce quarterly supplier scorecards to ensure
your suppliers are performing at the highest level. The scorecards include spend, savings,
transaction volume, and quality metrics such as:

• Calculating spend vs. plan (compliance)

• Quantifying realized savings vs. plan
• Tracking electronic transaction (PO, POA, ASN, Invoice, Credit, Return) accuracy and
timeliness
• Recording order fill rate, fill-cycle times, and freight-term compliance
• Identifying exceptions by type (damaged, incorrect items, overage)
 Enabling Category Management with Space-Time Intelligence

Category management is the process of identifying and managing product categories as strategic
business units, rather than simply viewing a retailer’s offering as a collection of individual
products. The category management approach delivers enhanced business results by focusing on
delivering consumer value. It is often a shared process between a retailer and its vendors. This
description comes from Category Killers (2005) by Robert Spector:

For the past couple of years, the term “category management” has entered the retail lexicon in
virtually every merchandise category. Category management began in the supermarket business,
where big retailers of packaged goods learned that they could improve sales and profits if they
could more efficiently administer all their different product classifications. The idea was to
oversee the store not as an aggregation of products, but rather as an amalgam of categories,
with each category unique in how it is priced and how it is expected to perform over time.

One vendor is designated as “category captain” and charged with helping the retailer define the
category; determine its place within the store; evaluate its performance by setting goals; identify
the target consumer; divine the best way to merchandise, stock, and display the category; and
then influence the implementation of the plan. Becoming a captain is obviously an important
position because it offers that supplier an opportunity to sway a retailer’s buying decisions.

This article introduces the concept of “space-time intelligence” as a basis for building excellence
in category management and provides an overview to a three-tier approach for building a space-
time intelligence-enabled management process. It will also provide detail in an example of the
essential first tier: visualization and analysis to drive understanding of store level transaction
data. (Author’s note: Two more articles are planned on this topic, which will expand the
discussion of steps 2 and 3 in the process, including examples of demographic and market
landscape predictive analytics.)

Space-Time Intelligence

Among other measures, retailers need to look at sales and traffic counts by store, by region and
by time period. Restaurateurs and convenience retailers talk about “dayparts”; radio
programming and outdoor advertising placements are designed to catch the morning and evening
“drivetimes.” In government, census data are gathered periodically and analyzed to reveal trends
over time and geography. Time, from season of the year to time of day, is an essential component
in understanding the context that drives real world phenomena, from demographic trends to retail
business results.

Unfortunately, the tools we use to visualize and analyze marketplace data do not deal with time
in a fluid and graphic manner. GISs are designed for the visualization of spatial data and are not
well suited for space-time data. For example, if you want to look at data over multiple time
periods in a GIS, you generate individual maps for each time frame (even of the same
geography) and look at each separately; or go outside the GIS to build a “flip chart” using
Microsoft PowerPoint or a .gif “animator” to view them in sequence. The business world,
however, is dynamic. Consumer purchases occur at various points in geographic space and time,
captured at the store register as POS (point of sale) data. GIS maps and standard spreadsheet-
style analysis tools are static, so they cannot easily reflect the dynamic nature of retail data.

The answer to the problem of GIS not incorporating time is to develop a new type of information
system. The TerraSeer Space-Time Intelligence System, or STIS, is an analysis platform
developed specifically to address this need. STIS is not a GIS, nor is it based on GIS technology
- it is a proprietary technology in which time is native to the data structure, creating a
spatiotemporal (space-time) data construct. As a result, we can represent and analyze a dynamic
marketplace with a tool that is similarly dynamic. In addition to its space-time data structure for
animated data visualizations, STIS links multiple data views (maps, graphs, tables, etc.) so that
features highlighted in one view are simultaneously highlighted in all others, allowing intuitive
data exploration.

The implications for business decision making are clear. Maximizing value delivery to
consumers is the key to category management and that depends first on in-depth understanding
of how product and category purchases occur at store level, through time, and the relationships
between those purchase patterns and the dynamic consumer and competitive landscape.

Category Management: The Road Ahead

Category management, which is based on sound business principles, has heightened awareness
of the importance of category level planning, and it has changed, for the better, behavior
throughout the industry. It is producing favorable results with a vast majority of those retailers
who are implementing the concept. There are countless examples of how category management
has contributed to sales and share growth, reduced costs, improved profits as well as how it has
influenced customer count, transaction size and market basket composition.

Despite the many successes, the concept is receiving mixed reviews from both retailers and
suppliers. Retailers are concerned about the exhaustive resources required to implement the
textbook version of the concept, and the apparent inability of suppliers to remove brand biases
and truly focus on total category performance. Suppliers are questioning the return-on-
investment for resources deployed to support category management initiatives. Whatever the
case, there is a growing consensus that while the concept is producing favorable results, it is
falling far short of achieving its fullest potential.

When category management is not measuring up to expectations, the causes can usually be found
in one or more areas related to the implementation practices being pursued: the retailer has not
been able to translate the “Best Practices” textbook to practical application; there is no formal
retailer/supplier collaborative relationship strategy, plan or commitment across the organization;
the focus is more on internal measures than on the consumer, and category plans are poorly
executed at store level.

Our perspective regarding each of these areas follows:

· The publication of industry “Best Practices” four years ago established a common
understanding of category management as well as standardized practices. A good “starter kit”
that is must reading for all beginners. But over time this textbook has proven to be too
theoretical, too comprehensive and template driven. It does not provide adequate guidance on
how to translate theory from the classroom to practical application in the marketplace.
Consequently, those retailers who are trying to follow the “Best Practices” guidelines are having
difficulty doing so within existing resources and capabilities. Several leading retailers have flatly
rejected the guidelines. This has led to broad ranging applications and considerable compromise
of the concept. We have learned, beyond a doubt, that one size does not fit all. In fact, a recent
industry survey indicated that less than ten percent of retailers are following the guidelines.

It appears that category management may be moving forward like a rudderless ship in the sea…
with a dire need for course correction. The direction must shift toward practical application with
specific guidelines to tailor the concept to fit individual retailer situations.

· Establishing collaborative relationships between trading partners is an essential component of

category management. Collaboration aligns strategies, systems, processes and people for the sole
purpose of reducing the cost of conducting business while better serving the consumer. There has
been good progress in this area driven primarily by technology and logistics initiatives. Overall,
relationships between trading partners have definitely improved. But not to the extent required to
support the evolution of category management.

A very small percentage of retailers are doing it right. A large number of retailers do not believe
collaboration is an important part of the category management process; some believe in
collaboration only when it is self-serving; few have formalized collaborative relationship
strategies and plans; and investment in upgrading collaborative skills is limited to a handful of
retailers. This situation is compounded further by behaviors such as charging slotting allowances,
charging for category captaincies and diversion of product.

In many instances, supplier behavior is also undermining the concept. This includes marketing
programs and policy decisions that erode retailer profits, inconsistent business practices across
markets, channels and retailers, as well as quarter-end-load programs designed to shift
inventories instead of building consumption. The inability to put brand biases aside and focus
with the retailer on total category performance is also an issue. Over 80% of retailers surveyed
say suppliers are too brand biased when participating in joint category planning.

Most relationships between trading partners have only moved to a more sophisticated level of the
traditional buyer/seller relationship. A few have reached the level of true collaboration. There is
still a long way to go to achieve the levels of collaboration necessary for both parties to achieve
the full benefits of category management.

· During the past nine years we have stated time and time again that unless the focus is on
consumer satisfaction, category management will not deliver the desired return-on-investment
for retailers or suppliers. Unfortunately, our warnings went unheeded. The emphasis has been on
cost management, not on the consumer. The majority of retailers practicing category
management have been focusing on internal measures instead of using balanced scorecards that
include consumer based measures. The pressure on category managers to manage margin
percentages and achieve buying income goals has resulted in short term decisions based solely
on cost… at the expense of good consumer based decisions that deliver quality sales and profits.

This internal focus has also been a key barrier in moving collaboration forward to a higher level.

As we look to the future, we are very encouraged by an apparent shift in focus toward the
consumer. A growing number of retailers are investing more on consumer research, upgrading
marketing competencies, taking advantage of supplier consumer knowledge and encouraging
suppliers to invest in retailer specific consumer research at the category level. A few progressive
retailers are routinely analyzing the composition of the market basket and incorporating
consumer loyalty program data into the category planning process.

Several retailers are moving away from their traditional category management structures to more
advanced concepts that better position them to “touch the consumer.”

These are encouraging developments that will continue.

· The ability to execute category plans at store level is a real dilemma and the potential Achilles
heel of category management. Most retailers are spending an exorbitant amount of time
preparing category plans, but not enough time on store execution. Consequently, new item speed
to market plans, planograms, promotions and other initiatives are executed poorly, and
sometimes not at all. As we tell many clients, “Don’t allocate resources to developing category
plans unless you can execute at store level. It will be a waste of time and money.” We are now at
a stage in the industry when there are many questions regarding whether the retailer, supplier,
broker or other third party is responsible for store level execution… and who pays?

We find that many store execution issues are directly related to business process and activity
ownership. The category management concept has never been presented to most store managers,
so they do not know its value relative to their specific stores or the company, and they are not
aware of the plans for signature and priority categories. Thus they seldom accept ownership of
the execution of category plans. In addition, there is often a misalignment of key performance
measures and business processes between category management and store operations.
Merchandising standards are often poorly defined and compliance disciplines are not in place.

Only a few retailers are positioned to execute category plans effectively. For most, this is a major
problem that must be addressed.

Having said all of this, we believe the road ahead is very encouraging, and the direction is quite
clear. Category management will continue to evolve as a way of conducting business, but more
as a part of a total business process. The charted course will not be any easier than the journey to
its current state… there will be speed bumps and land mines along the way. Here’s how we see
the future:

· Category management will evolve to where it will simply be referred to as category planning,
an essential component of total business planning, by retailers in its advanced stages of
implementation. The emphasis will be on a fully integrated business planning process. Beginners
will continue to call it category management.

· Category management will evolve from the “Best Practices” guidelines to a value-based
opportunity focus that puts much greater emphasis on the business question to be addressed, the
need to know information, better allocation of resources and simplification of the planning
process. It will deliver a much higher return on resources deployed by both retailers and
suppliers.

· Retailers will focus their category planning processes more on the consumer, with a significant
increase in the utilization of consumer information for strategic value and tactical application.

· Retailers in advanced stages of implementation will internalize the annual category planning
process. Suppliers will be used as a resource to provide consumer data and gather market level
information to support the planning process. Suppliers will be involved in joint category
planning only when the retailer needs to address major opportunities. Suppliers will continue to
be actively involved in joint planning with retailers at the beginning and mid stages of
implementation, and with retailers who do not have sufficient resources to “go it alone.”

· Retailers in advanced stages will integrate the chainwide advantages of category management
with a market focused process designed to align category planning with store cluster and store
specific planning. In other words, planning will move closer to the consumer. This will require
the evolution of organizational structures, roles and responsibilities beyond the current textbook
guidelines.

The alignment of category planning with local market and store specific planning will heighten
the importance of timely and efficient execution at store level.
· The rules of collaboration will be redefined and will more clearly align expectations between
trading partners. The level and type of collaboration will depend, for the most part, on who most
directly influences consumer behavior… the retailer or the supplier. In addition, activity based
costing will become a more important component of the collaborative equation.

· The evolution of category management will place new demands on suppliers and brokers. The
changing roles and responsibilities of multifunctional teams will lead to organizational
restructuring. The store execution dilemma may necessitate a major reallocation of retail
resources. And, the role of brokers has yet to be defined. There will be much greater emphasis on
maximizing efficiencies, allocation of resources, and return on investment.

If retailers and suppliers pay attention to our learnings to-date, with an eye on the road ahead,
category management can measure up to initial expectations. This means moving beyond current
implementation practices and making those changes required as the concept evolves to where it
is an essential component of a retailers total business planning process.