Category Management is a retailing concept in which the 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 Duty Free/Travel Retail categories might be: Beers, Wines & Spirits).
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Each category is run as a ‘mini business’ (Business Unit) in its own right, with its own set of turnover and/or profitability targets and strategies. Introduction of Category Management in a business tends to alter the relationship between retailer and supplier: instead of the traditional adversarial relationship, the relationship moves to one of collaboration, exchange of information and data and joint business building.
The focus of all supplier negotiations is the effect on turnover of the category as whole, not just the sales of individual products. Suppliers are expected, indeed in many cases, mandated to only suggest new product introductions, a new planogram or promotional activity if it is expected to have a beneficial effect on the turnover or profit of the total category and be beneficial to the shoppers of that category.
The concept originated in Grocery (Mass merchandising) retailing, but has expanded to other retail sectors such as DIY, Cash and Carry,Pharmacy/Chemist and Book retailing.
Definition of Category Management
Category Management lacks a single definition thus leading to some ambiguity even among industry professionals as to its exact function. Three comparative mainstream definitions are as follows:
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. (Nielsen)
The strategic management of product groups through trade partnerships which aims to maximise sales and profit by satisfying consumer and shopper needs (Institute of Grocery Distribution) [a] .. marketing strategy in which a full line of products (instead of the individual products or brands) is managed as a strategic business unit (SBU). (Business Dictionary)
The Nielsen definition, published in 1992, was a little ahead of its time in that customising product offerings on a store by store basis is logistically difficult and is now not considered a necessary part of Category Management; it is a concept now referred to as micromarketing. Nevertheless, most grocery retailers will segment stores at least by size, and select product assortments accordingly. Walmart’s Store of the Community, implemented in North America is one of the few examples of where product offerings are tailored right down to the specific store.
Rationale for Category Management
One key reason for the introduction of Category Management was the retailers’ desire for suppliers to add value to their (i.e. 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 realisation 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.
Definition of a Category
The Nielsen definition of a category, used as the basic definition across the industry is that the products should meet a similar consumer need, or that the products should be inter-related or substitutable. The Nielsen definition also includes a provision that products placed together in the same category should be logistically manageable in store (for example there may be issues in having room-temperature and chilled products together in the same category even though the initial two conditions are met). However, this definition does not explain how the process often works in practical retailing situationism, where demographic or marketing considerations take precedence.
The Category Management 8 Step Process
The industry standard model for Category Management is the 8-step process, or 8-step cycle developed by the Partnering Group. The eight steps are :
1. Define the Category (i.e. what products are included/excluded).
2. Define the role of the category within the retailer.
3. Assess the current performance.
4. Set objectives and targets for the category.
5. Devise an overall Strategy.
6. Devise specific tactics.
8. The eighth step is one of review which takes us back to step 1.
The 8-step process, whilst being very comprehensive and thorough has been criticized for being rather too unwieldy and time-consuming in today’s fast-moving sales environment; in one survey only 9% of supplier companies stated they used the full 8-step process. The current industry trend is for supplier companies to use the standard process as a basis to develop their own more streamlined processes, tailored to their own particular products Market Research company Nielsen has a similar process based on only 5 steps : Reviewing the Category, Targeting consumers, Planning merchandising, Implementing strategy, Evaluating results.
It is commonplace for one particular supplier into a category to be nominated by the retailer as a Category Captain. The Category Captain will be expected to have the closest and most regular contact with the retailer and will also be expected to invest time, effort, and often financial investment into the strategic development of the category within the retailer.
In return, the supplier will gain a more influential voice with the retailer. The Category Captain is often the supplier with the largest turnover in the category. Traditionally the job of Category Captain is given to a brand supplier, but in recent times the role has also gone to particularly switched-on Private label suppliers.In order to do the job effectively, the supplier may be granted access to a greater wealth of data-sharing, e.g. more access to an internal sales database.
Once a retailer decides what to buy from vendors and how much of it to allocate to specific stores, someone needs to decide where in the stores the products will sit. This is a very important step in retail since store layouts are crucial to the shopping experience. Products need to be easy to locate, near related products, and have the correct facings. Should this product be on the endcap? Should it be at eye level? Should it have 8 facings or 10? Space management is about maximizing every inch of the selling floor.
Traditionally, headquarters creates a limited number of planograms (PoG) that define where products go for a particular store format. Unfortunately, not all stores are the same. Not only do their formats vary, but there’s usually a degree of localization that makes them even more unique. So often the corporate PoG is treated as advice only and compliance is low. The answer is more collaboration between headquarters and the store. An increase of 10% in compliance can decrease stock-outs by 1%, and that leads to higher sales.