Category Management

Category management has been described as one of the most scientific

approaches to decision-making in retailing because of its reliance on data.
Grocery retailers across the world were the earliest to adopt it, but over the
last few years retailers in all categories have looked at it as a tool for seeking
sustainable competitive differentiation and advantage. Retailer striving to
bring greater focus to the store and improve its management and
measurement processes, category management is most often the answer.
So, just what is category management? Quite simply category
management involves organising and managing promotions,
merchandising and distribution activity around the way consumers
view and buy a product.

A more formal definition would be ‘Category management is a retailer-

supplier process of managing categories as strategic business units
(SBUs), producing enhanced results by focusing on delivering
consumer value’. Which, then brings us to the question – what is a
category?

A ‘category’ is a distinct, manageable group of products or services

that consumers perceive to be inter-related and\or substitutable. It
must be noted here that the focus of both the category and
category management is the consumer and providing him/her with a
range of products and services that offer more value.

Category management must not be run contrary to the will and interests of
the consumer and should favour the consumer if need be:
Thus, the aims of category management are to:
• Satisfy the consumer
• Grow the category

Category management can most simply be explained as follows: Under the

leadership of a category manager, using cross-functional teams to identify
product categories and drive category performance improvements through
the application of categories as strategic business units.

The goal of category management is to improve the operating

results of a retailer and its associate partners – including
manufacturers, distributors and brokers – by focusing on the
consumer. Products are more than just goods being sold; they play an
important strategic role as a category or part of a category.

Through the category management approach, a group of specific products

are treated as a strategic business unit. A category is a distinct and
manageable grouping of products that consumers perceive as interrelated
and possibly interchangeable in meeting their needs.

Under this premise, category management has some key assumptions:

• The process involves many interrelated activities
• The process must be flexible in order to fit particular companies
and situations
• The process reaches beyond the retailer to include its partner
manufacturers, distributors, wholesalers and brokers
• Reducing costs is not the end goal – goals should focus on the
consumer while improving results and simultaneously improving the
relationships between trading and servicing partners
• A solid infrastructure – including people, process, information
systems and
measurement tools – is necessary to attain goals
PEOPLE

PROCE CATEGORY MEASUREMENT

MANAGEMENT TOOLS

INFORMATION
SYSTEM
Figure 1

Figure 1
Category management has several key focus areas:
• Efficient product introduction
• Efficient product promotion
• Efficient store assortment
UPS
Efficient Product Introduction
Efficient product introduction focuses on efficient and effective launches of
new products based on the needs of consumers. Manufacturers primarily
concentrate on reducing the number of failures in new-product introductions
and associated costs. A secondary goal is to react more dynamically with
better data and information related to the supply chain. Only value-added
products are placed on the shelf based on consumer demand.
Efficient Product Promotion
Efficient product promotion deals with the efficient and effective execution of
promotion strategies, which can have a tremendous impact on the supply
chain. Product promotion takes the form of trade promotion, consumer
promotion and consumer advertising. Promotion is focused on a particular
category and involves:
• Consumer advertising – radio, TV, newspaper, magazine, Internet
advertising, etc.
• Consumer promotion – special offers and premiums through gifts and
coupons
• Trade promotion – between the manufacturer and retailer involving
deals,
offers, special discounts, etc.
Efficient Store Assortment
Efficient store assortment targets the development of various groupings of
products and services that are profitable and satisfy consumer needs. The
goal is to utilize store shelf space more efficiently, appeal to the consumer
and eliminate stockouts. POS data is critical to efficient store assortment;
real-time consumer preferences are gathered at the cash register and fed
back to the
category and assortment analysis in order to select and optimally place
products on store shelves.

The Consumer
Category management begins with the consumer. Companies must
determine:
• Who the consumer is – age, economic status, residence, etc.
• What the consumer buys – products, brands, colors, flavors, etc.
• What kind of shopping trip is typical – in/out, convenience,
destination trip, etc.
• How the consumer buys – by promotion, price, product, etc.
• How often the consumer buys – daily, weekly or monthly
UPS
The process
Category management looks at answering a series of questions. Issues that
need to be addressed
include –
• what items should be carried,
• in what quantities,
• at what prices,
• in which stores,
• where in the store,
• how much shelf space should be allocated,
• what level of advertising is required and so on.
The actual category management process can be broken up into several
steps, that are outlined below. (The box accompanying presents a snapshot
of how a lifestyle retailer views this process.)

Process of category management

 Category Definition

Category Role

Category Assessment

Category Scorecard

Category Strategy

Category Tactics

Implementation

Review

Figure 2

Category definition: Is the first step in category management, where the

retailer assigns products to various categories based on factors such as
consumer usage and packaging.
So while one possible category definition could be soft drinks, another
definition could be soft drinks in cartons. (Most often, though, this will be a
sub-category)
Category role: The next phase is to decide each category’s role and where
it figures in the retailer’s category mix. Traditionally four category roles have
been identified.
1. Destination categories: Are those that the retailer uses to help define
itself as the store of choice to the consumers by simply offering better value
to the consumer. An example would be fresh vegetables at a food retailer
such as FoodWorld that is known for its pick of fresh vegetables.
2. Routine category: Are those that the consumer purchases as matter of
routine and would include things such as toothpaste, toilet soap and so on.
3. Convenience categories: Are those that the consumer finds convenient
to pick up at a neighbourhood retailer rather than visit another retailer who
may offer a wider selection or better prices. Stationery products would be a
good example.
4. Seasonal \ Occasional categories: Are those that are purchased
infrequently or follow cyclical patterns. Interestingly, some seasonal
categories could become destination categories,
which the retailer is known for during the season. Say, mangoes sold by a
particular food retailer during the mango season.
Though most retailers choose to follow this system, some do use other
names for these category roles. Some others also define categories based on
their functionality. For example, consumer durables retailer’s creates
categories based on the type of products it retails, and has four such
categories:
Brown goods: Which include products such as TVs, audio systems and so
on.
White goods: Which include products like refrigerators, washing machines
and so on.
Domestic & lifestyle appliances: Which include items such as fans,
grinders and so on.
IT and computer-related products

Category assessment: At this stage a detailed assessment of the sales,

profit and return on assets opportunities is done based on an analysis of the
categories’ components including elements such as sub-categories, brands
and SKUs (stock keeping units). This process is carried out
using consumer, retailer, supplier and market-data.

Category scorecard: Is used to establish the baseline and the targets for
measuring category performance. The category role matrix is used here
along with other parameters such as sales volume and all-time favourite
GMROI (Gross Margin Return on Investment).

Category strategies: Involves the development of marketing strategies for

the category. Category marketing strategies can be classified into the
demand-chain and supply-chain strategies. The demand-chain strategies are
targeted at traffic, profit, transaction, image, turf, cash and excitement,
while the supply-chain ones focus on merchandise flow and transaction
costs.

Category tactics: Once the strategies for the category have been selected,
the next step is to determine the assortment, pricing, promotion, shelving
and supply-chain tactics required to ensure that the strategies work.
Implementation: This is the stage where the action actually happens. In
fact, store level execution of the category management process is perhaps
the most vital link in the entire chain.
Review: As the term indicates this phase involves monitoring the category
and taking any action required to ensure that the category management
process delivers maximum value.
A partnership
Perhaps the most crucial element for the success of category management is
the partnership between the retailer and the supplier\ manufacturer. And for
category management to really work this partnership must be just that – a
partnership that focuses on the consumer and providing
her with value. In order to make this happen, the measures outlined below
may be of some use:
l Agree on just how the partnership is supposed to work, including details of
the level and degree of the relationship.

On the front line

The fundamentals of the vital aspects of retailing are -
accountability, discipline and urgency.
• Establish a match between the strategies of the retailer and the
manufacturer.
• Set priorities for the category.
• Create a mechanism for measurement and monitoring.

Another useful method, and one often used in markets such as the US, is for
the retailer to identify and work with a ‘category captain’ to develop the
category. The category captain is a supplier who will form an alliance
with the retailer to enable the latter to develop consumer insight,
satisfy consumers and improve performance and profit across the
entire category.
The category caption is most often the leading manufacturer in the category.
Yet, the category captain must also be ‘mature’ and objective enough to look
beyond its own products and brands and look at promoting the entire
category, even the products\ brands of its competitors. For this altruism will
lead to the growth of the entire category and thus boost the category
captain’s sales too. For instance, the Food World chain of food and grocery
stores is working on a joint category management programme with some
manufacturers. The bottom line in such an arrangement is that the category
captain must have an understanding of the core consumers for the category
as
well as an understanding of the core consumers for the retailer.

Does it work?
Though category management sounds very exciting and useful, the question
is does it deliver any tangible results? Equally important is the issue of the
ease of implementation of the process.
Category management, can be put in as: “Category management leads
to better customer focus and system profit focus, resulting in
efficient assortment, efficient replenishment, efficient promos and
efficient new product introduction.” The corollary to this being that
category management leads to improved consumer satisfaction,
category growth and thus better sales and profits for all involved.
However, this is easier said than done. There are several implementation
issues that need to be ironed out before the system can deliver substantial
results. Some of the hitches
that can arise in the process are outlined below:
The differing organisational structures and processes of the partners can be
a major roadblock in the implementation of the process.
An effective category management strategy is for the retailer to
work with a ‘category captain’, who is usually the leading supplier
in the category.

Classifying SKUs from category scorecard

UNITS

L/H H/H
High
(Volume (Superstars)
Drivers)

H/L
L/L
Value Drivers
Low Discards

Low X High

GROSS MARGIN Rs.

How it works
In category management retailers focus and organize themselves in the way
the consumers buy. For example, sportswear is a category consisting of
items such as sports shoes, exercise gear, T-shirts, shorts and so on. The
consumer buys them for performance and generally buys the shoes and
apparel together. Hence, the thought process of choice runs in a clear way.
This focus leads to the following advantages:
1. Consolidates all functions such as buying, selling and promotion for a
category.
2. Focus all members on delivering customer satisfaction through data
analysis and strategy formulation.
3. Brings vendors into partnership with the company. For instance,
international retail chains make one of the dominant suppliers a
partner in the category management team.

In essence this function involves management of a category like an

independent profit centre in all respects of sourcing, pricing, buying to
selling to deliver customer satisfaction and strategic advantage to the store.
A category manager would have separate team members to handle product
management, buying and merchandising. Such a retailer is able to
successfully differentiate its merchandise based on its consumer’s needs and
wants.
So, just whom does category impact? The point to be borne in mind is that it
affects almost every department of the retailer’s and also its suppliers in
addition to the end consumer.
For instance, a high-fashion leading departmental store realised that the
sportswear category management needed a different style than was adopted
for normal apparel lines. Hence, they brought in a specialized sportswear
retail chain as partners. This chain was able to bring in economies of scale,
lower costs and therefore higher margins and lower markdowns. This also
resulted in wide variety to consumers and therefore satisfied his
requirements.
Categories can also be used to drive either volumes or values. Hence some
stores use categories
described as ‘Category Killers’ or ‘Margin Drivers’. Chains use different terms
to describe these category roles, based on different parameters. Listed here
is one approach based on the volumes and profits each category generates.
Superstars: These drive high traffic as well as profits. A buyer must explore
this assortment.
Value drivers: These generate high margins, but volumes are low.
Volume drivers: These generate high volume, but margins are low. A buyer
keeps only the best performers and drops the others. Every buyer pushes as
many SKUs as possible to become Superstars.
Discards: These SKUs are either dropped or ‘fixed’ for volume or profit.
The other important tool in category management is the category scorecard.
It reflects the performance, against measurable parameters such as sales
per sq.ft. and so on, for periods of one month, a season or a year for one
category in one store. This base can be used to compare against results in
other stores or against other categories. For example the sportswear
category’s performance in the Chandigarh store for December can be
compared to the performance during the previous December as well as
another store in, say, Delhi.
A retailer, with sportswear as a category had problems of low sales and low
profits. A category
manager first studied the customer base and its buying pattern in terms of
shoes vs apparel, choice of brands, margin delivery and stock performance
of various SKUs. Based on this analysis, he reorganized the portfolio by
ensuring the right mix of superstars, volume drivers and value drivers. This
increased the width and depth of offering and ensured consumer satisfaction
and company profitability simultaneously.
Communication issues between the partners can be another issue.
The foundation of the entire category management process is the
partnership between retailer and manufacturer. The fact that in India such
partnerships are almost nonexistent can be another difficulty.
For category management to work properly a great deal of information is
required. Whether all this information is available to Indian retailers is a
debatable point.
The process also calls for a degree of connectivity which is yet to emerge in
India.

What does category management impact?

SALES PLANS PRICING ACHIEVE

S
COST OF GOODS CATEGO
RY
PRODUCT MIX OBJECTI

NEW PRODUCTS

PLANOGRAM SPACE
CONSUMER
PROMOTION SATISFACTI
ON
PROFITABILITY

SERVICE LEVEL

INVENTORY MAXIMI
REPLENISHMENT & SE
FORWARD BUY STORE
ASSETS
 NUMBER & TYPES OF
SUPPLIERS

Developing a Category Management Methodology

Category management is a powerful tool. However, it has traditionally been
very expensive to develop, implement and maintain. Full-blown category
reviews can require hundreds of hours of work. A retailer could have 200
categories and a consumer goods firm could have thousands of retailers,
thus multiplying the overall number of categories that could involve a
manufacturer. The key is to streamline the original eight-step process shown
in Figure 1.
To streamline the process, reduce investment costs and help companies
realize benefits faster, a four-step process supported by a required
infrastructure can be a powerful tool.

Organize
The first step involves the development of a category management strategy
and the organization of resources – people, assets, information, etc.
Companies need to take stock of needs, resources, priorities and overall
business strategy:
• Talk to Sales and Marketing – what are customer needs, what are
consumer needs and what are the roadblocks?
• Communicate with Senior Management – understand the
business strategy, goals, key initiatives, growth plans, strengths,
threats, opportunities and weaknesses
• Examine Current Organization Resources – look for information
in existing areas of the organization (R&D, operations, store
operations, supply chain, fulfillment, manufacturing, etc.)
• Begin Initial Training – develop training materials in a modular
format to introduce the company to category management and then
build upon the initial education with more rigorous analytical training
• Develop the Core Category Management Team – select or
acquire key team
members – who will eventually become category managers, data
warehousing managers, etc. – to manage the initial category
management program
• Develop a Communications Program – develop communications
vehicles (meetings, newsletters, status reports, etc.) to communicate
at all levels from senior management to analyst
 CULTU
ORGANIS RE
MONITOR E
MODE Executive-level Support
L Training & Organisational
Development
Integrated Information
System

DEVELOP

Develop
The second step begins the core category management process after plans
and organization are in place. This step will become the foundation for
ongoing category management.

• Build a Consumer Attributes Map – develop and seek answers to the

fundamental questions associated with how consumers make buying
decisions in categories:
• What is the current shelf configuration/planogram?
• Are category subsegments shelved properly?
• Is a better response to promotions achievable by promoting with
other categories?
• Does the assortment scheme meet consumer needs?
• Do local neighborhoods or regional factors affect categories and
products?
• What are the dynamics of price points and merchandising in
categories?
• What are the purchasing patterns of products and categories?
• What other items are purchased along with specific categories?
• What are the demographics of the customer base?

• Develop an Analysis Capability – large amounts of data will need to be

analyzed, categorized and synthesized:
• Sales/POS data
• Item assortments
• Shelf placements
• Pricing
• Promotions
• Perform Key Analyses – analysis will need to be done at various levels
(category, market, store cluster, individual store and SKU) to develop the
base data for category development

• Develop Categories – by performing the analysis, consulting external

industry
data and comparing competitors’ categories:
• Staples: high penetration/high frequency
• Niches: low penetration/high frequency
• Varieties: high penetration/low frequency
• Fill-ins: low penetration/low frequency

Category Classifications

F
R
DEFINING BUILDING
E
Q
U
E
N MAINTAINING INTEGRATING
C
Y
Monitor
Monitoring can be thoughtPENETRATION
of as “filling in the scorecard.” This step is critical
to maintaining category management, identifying trends, measuring results,
making modifications, reporting to senior management and ensuring long-
term success.
In order to monitor effectively, quantifiable implementation goals and
metrics need to be established. Companies must continually monitor and
measure results against these redetermined metrics. Clear goals and metrics
also enable the administration of incentive programs and mid-course
adjustments throughout the category management product cycle.
Implementation and financial goals for each individual category must be
analyzed to measure category manager performance and ensure category
business plans are being met at all levels:
• Category
• Chain
• Region
• Store

Model
This last step enhances the category review step from the original eight-step
process. The category review process has typically involved perhaps
hundreds of work hours to complete. This step needs to be backed by
decision support and modeling capabilities. Category managers need to be
able to simulate category performance results from changes in various
inputs – category strategies, definitions, roles and tactics.

Benefits
Productivity
Establishing category management with the optimal tools, processes and
information systems will help assemble category plans in a much shorter
time frame.
Resiliency
Category managers possess the tools, processes and information to
accurately develop and manage categories as well as model changes for
ongoing improvement.
Precision
Data integration, collection and warehousing techniques are established to
provide reliable, precise, real-time data to category managers, who can then
model real situations with real data.
Responsibility
Automating the scorecard with application tools and data integration with
ERP, store and manufacturing systems supports the critical requirements of
a scorecard. With a trusted scorecard, incentive programs are easy to
monitor and are trusted at all levels.
Revenue and Performance
Revenue and performance are the critical benefits that senior management
will measure and by which the category management process will be
considered a success or failure. This process focuses on:
 Cost reductions
 Increased sales
 Improved margins
 Improved profits
 Increased market share
 Improved consumer satisfaction
 Improved in-stock conditions
 Improved return on assets

The road ahead

Despite the fact that category management in India is still at a nascent
stage, most retailers are
rather clear that it will gain in importance over the next few years. For one, it
will evolve into an essential component of business planning by virtually all
retailers. It will also be driven by better partnerships between retailer and
suppliers. And finally, there will be greater focus on the consumer.

Conclusion
Category management is a major investment in terms of
dollars, time and assets.
It is also a personal investment on the part of everyone involved to commit
to the
process and implement the required change management.
We have discussed qualitative and quantitative benefits of category
management
throughout this paper. We believe the benefits are quick, substantial and long
term.