Private Label Profit

CATEGORY MANAGEMENT
&
PRIVATE LABEL
PROFITABILITY
W. Frank Dell II, CMC
DELLMART & Company
May, 2001
Agenda
 Category Management
– Introduction
– Distributor Program
– Supplier Program
 Private Label Profitability
– Introduction
– Activity Based Costing
– Net Profit Applications
DELLMART & COMPANY 2

INTRODUCTION
Objectives
 Provide an overview of category management and
its process
 Identify strengths and weaknesses
 Outline a supplier’s approach

INTRODUCTION
Definitions
 Category
A distinct, manageable group of products/services
that consumers perceive to be interrelated and/or
substitutable in meeting a consumer’s needs.
 Category Management
The distributor/supplier process of managing
categories as strategic business units, producing
enhanced business results by focusing on delivering
consumer value.

INTRODUCTION
Charter for Change
From To
Push Pull
Salesperson Business Team
Buyer/Seller Account Management
Cost Averaging Cost to Serve
Deals Pay for Performance
Sales Drivers Profit Drivers

INTRODUCTION
Charter for Change
From To
Data Protection Data Sharing
Data Knowledge
Shelf Management Assortment Management
Win/Lose Win/Win
Fast Fastest

Does Category Management
INTRODUCTION
Work?
Copps Corporation - Wisconsin, USA
 Snack Category 3 year increase 87%

– Year 1 33%
– Year 2 22%
– Year 3 15%
 Candy Category 2 year increase 111%
– Year 1 60%
– Year 2 32%

INTRODUCTION
Brand Management
Product
Development Advertising
 Started in the 50’s & 60’s
 Brand General Manager Brand
Management
Profit & Loss

Promotions Responsibility

INTRODUCTION
Supplier Migration
Brand Management Category Management
Snap, Crackle & Pop Kellogg

Vs Vs
Tony The Tiger General Mills
Vs &
General Mills Breakfast Alternatives

DISTRIBUTOR
Components
Collaborative Trading
Scorecard
Partner Relationships
Strategy
Business Process
Information Organization
Technology Capabilities

DISTRIBUTOR
Elements
 Manage the category as a strategic business unit
 Develop strategic category plans based on category
goals, competitors and market conditions
 Determine price, merchandising, promotion and
product mix
 Collaborate with suppliers

DISTRIBUTOR
Process Activities
Category Definition
Category Role
Category Review
Category Assessment
Category Scorecard
Category Strategies
Category Tactics
Plan Implementation

DISTRIBUTOR
Definition
 What products are in a category?
 How will categories be grouped?
Sub-Segment
Segment Sub-Segment
Sub-Category Sub-Segment
Segment Sub-Segment
Category
Sub-Segment
Segment Sub-Segment
Sub-Category Sub-Segment
Segment
Sub-Segment
Source: ECR Category Management

DISTRIBUTOR
Category Role
Destination
To be the primary category provider and help define the retailer as the store of
choice by delivering consistent, superior target consumer value.
Routine
To be one of the preferred category providers and help develop the retailer as
the store of choice by delivering consistent, competitive target consumer value.
Occasional/Seasonal
To be a major category provider, help reinforce the retailer as the store of
choice by delivering frequent, competitive target consumer value.
Convenience
To be a category provider and help reinforce the retailer as the store of choice
by delivering good target consumer value.

DISTRIBUTOR
Assessment
Market
Market Share
&
Benchmarks
Category
Distributor Sub-Category Consumer
Contribution Segment Buyer Profile
& Brand &
Productivity SKU Purchase Behavior
Supplier
Share
&
Efficiently

DISTRIBUTOR
Distributor Scorecard
Consumer Current Target
Retention Level _______________
_______________
Purchase Incidence _______________
_______________
Satisfaction Rating _______________
_______________
Share
Category of Department _______________
_______________
Category of Market _______________
_______________
Sales
Category $ _______________
_______________
Growth _______________
_______________
Sales/Sq. Ft/Week _______________ ______________
Profit
Gross Profit $ _______________
_______________
Gross Margin _______________
_______________
Gross Profit Sq. Ft/Week _______________
_______________
Private Label
Sales _______________
_______________
% of Gross Profit _______________
_______________
Gross Margin _______________
_______________
Product Supply
Days of Supply _______________
DISTRIBUTOR
Consumer Strategies
Category
Category Category Strategies
Roles
Roles In-Store Service
Procurement Distribution Marketing
Acquisition Strategy DC/Store Receiving Attract Strategy Full Service
- Best Quality/Reliability - Auto Replenishment - Traffic Building - (If Necessary)
- Best Cost & Terms Transportation - Image Enhancing
Destination - DSD, Backhaul Build Loyalty Strategy Differentiated
Transaction Strategy DC/Store Handling - Transaction Building - (From Competition)
- All EDI & EFT - Cross Dock - Turf Protector
- Sale-Ready Packaging Micro marketing
Acquisition Strategy DC/Store Receiving Build Loyalty Strategy Semi-Service
- Best Quality/Reliability - Auto Replenishment - Transaction Building - (If Necessary)
- Best Cost & Terms Transportation - Turf Protecting
Routine - DSD, Backhaul Non-Differentiated
Transaction Strategy DC/Store Handling Cluster Marketing - (From Competition)
- Majority EDI & EFT - Minimize Handling
- Reduce Shrink
Acquisition Strategy Transportation Attract Strategy Self Service

- Best Quality/Reliability - Reduce Transit Time - Traffic Building - (If Necessary)
Occasional/ - Best Cost & Terms DC/Store Handling - Excitement Creating
Non-Differentiated
- Reduce Shrink
Seasonal Transaction Strategy - Sale-Ready Packaging Cluster Marketing - (From Competition)
- Some EDI & EFT
Acquisition Strategy DC/Store Receiving Build Loyalty Strategy Self-Service

- Low Cost - Auto Replenishment - Transaction Building
Convenience DC/Store Handling Uniform Marketing Non-Differentiated

- Minimize Handling - (From Competition)
- Reduce Shrink

DISTRIBUTOR
Distributor Strategies
Category Strategies Category Strategies Characteristics
Traffic Building High Share, Frequently Purchased, High % of Sales

Transaction Building Higher Ring-up, Impulse Purchasing
Profit Contribution Higher Gross Margin, Higher Turns
Cash Generating Higher Turns, Frequently Purchased
Excitement Creating Impulse, Lifestyle-Oriented, Seasonal
Image Creating Frequently Purchased, Highly Promoted, Impulse,
Unique Items, Seasonal
Turf Defending Used by Retailers to Draw Traditional Customer Base

DISTRIBUTOR
Distributor Tactics
Category Category Tactics
Roles Assortment Pricing Shelf Promotion
Presentation
Complete Variety Leadership Prime Store Location High Level of Activity
- Sub-Categories - Best Value - High Traffic (If Necessary)
- Segments (Per Unit or Use) - High Exposure Time - High Frequency
Destination - Brands - Entire Category High Cube Allocation - Long Duration
- SKUs (Cube to Time Supply) - Multiple Vehicles
Broad Variety Competitive/Consistent Average Store Location Average Level of Activity

- Sub-Categories - Equal to Competition - High Frequency (If Necessary)
- Segments (Per Unit or Use) - Average Frequency
Routine - Major Brands - Sub-Categories High Cube Allocation - Average Duration
- Major SKUs - Segments (Cube to Time Supply) - Multiple Vehicles
- Major Brands/SKU
- Reduce Shrink
Timely Variety Competitive/Seasonally Good Store Location Seasonal/Timely Activity

- Sub-Categories - Close to Competition - High Traffic (If Necessary)
Occasional/ - Segments (Per Unit or Use) - Multiple Vehicles
- Sub-Categories Average Cube Allocation
Seasonal - Segments (Cube to Time Supply)
Select Variety Non-Inflammatory Available Store Location Low Level of Activity

- Major Brands/SKUs - Within Reach to - Multiple Vehicles
Competition
Convenience (Per Unit or Use) Low Cube Allocation
- Major Brands/SKUs (Cube to Time Supply)

DISTRIBUTOR
Retail Category Portfolio
High Sales Dollars Low
High
Flagship Cash Machine Maintain/Grow
Gross
Margin
Percent
Core Traffic Under Fire Rehab
Low

DISTRIBUTOR
Retail Category Portfolio
Low Market Growth High
High
Sleeper Winners
Retailer
Share of
Market
Questionable Opportunity Gaps
Low

Consumer Based Category
DISTRIBUTOR
Roles
High Reach Low
High
Staples Niches
Frequency
Necessities Fill-ins
Low

DISTRIBUTOR
Before Organization
VP Merchandising
Buyer Buyer Buyer Administration
Retail Pricing Space Advertising

DISTRIBUTOR
After Organization
Product Supply
Marketing Services Space Allocation
Category
Price/Data Integrity Management Retail Merchandising
Advertising Coordination Category Analysis
Retail Pricing Allowance/Cost Control

DISTRIBUTOR
Responsibilities
Responsibilities Retailers Wholesalers
Negotiation with suppliers 86.4% 84.6%

Determine investment buys 83.1% 76.9%
Determine promotions- items/schedule 71.2$ 73.1%
Sales/profit/market share goals 69.5% 57.7%
Develop strategic alliances 66.1% 53.8%
Budget development 64.4% 50.0%
Strategic category planning 61.0% 46.2%
Competitive store analysis 61.0% 34.6%
Optimize by store clusters 44.1% 26.9%
Develop shelf plan-o-gram 42.4% 26.9%

DISTRIBUTOR
Category Definitions
NUMBER OF CATEGORIES RETAILERS WHOLESALERS
1 TO 99 20.0% 16.7%
100 TO 199 30.0% 16.7%
200 OR MORE 27.5% 25.0%
Average Number 191 148

DISTRIBUTOR
Review Frequency
Retailer Wholesaler
Sporadic
Annually
Semi-annually
Quarterly
Monthly
Weekly
0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

DISTRIBUTOR
What’s Really Happening?
1. Official approach leaves out consumer 2. Wide gap between results and expectations
 Merchandisers see CM to lift sales  Cornell study ranged from 3 to 8 point lift in
 Executives see CM to raise margins EBIT
 Neither see it for what it was intended:  73% of CM practitioners rate experience
framework for understanding the “somewhat” or “not at all” successful
consumer  Many of the few that claim success can’t
support it with metrics
3. Official approach is too complicated 4.“One-size-fits-all” is not working

 Only 15% claim to be following the  40% don’t even see need to assign roles
guidelines  Half do not employ Activity-Based-Costing
 CEO at large chain: “We’d have to hire 14  Industry current-state is too diverse. Take
full-time people just to fill out and maintain merchandising approaches: high/low, every-
the templates.” day low, premium, limited selection, semi-
 Personnel talent a problem warehouse, superstore, etc..

SUPPLIER
Scope
Ca n
teg i o
o ry uct
Le ed
R
ad
er o st
C
Alliance r Re
i e Su spec
p pl pp te
d Su lie d
r e r
ef er
P r

SUPPLIER
Sales Evolution
Available Sales Share
Category
Management D.P.P. Gross Margin

SUPPLIER
Perspective
Differences Check your bias at the
Supplier door
Retailer
Store
Brands
Bring your knowledge

SUPPLIER
Principles
 Consumer is the common focus
 Mutually agreed objectives, strategies, tactics and
scorecard measures
 Rewards support collaborative goals
 Relationships and trust are earned, not given
 Information sharing is essential
 Win/win is critical for success
 Multifunctional access and communication
 Openness to change traditional attitudes and
relationships

SUPPLIER
Supplier Steps
Preparation Coordination Execution
 Create team  Target customers  Share information

 Develop plan  Present plan  Perform analysis
 Collect information  Establish goals  Develop plan
 Develop tools  Organize team  Implement plan
 Package program  Develop scorecard  Monitor results
 Establish schedule  Modify plan

INTRODUCTION
Objectives
 Provide introduction to Activity Based Costing (ABC)
 Identify Net Profit Applications

INTRODUCTION
Why Net Profit?
 Gross Margin ineffective management tool
 Simple relationship - cost Vs retail price
 Not a predictor of profit

INTRODUCTION
What is Net Profit?
Sales
- Cost of Goods Sold
= Gross Margin
+ Direct Revenue
- ABC Costs
= Net Profit

ABC
Definition
 ABC is a cost allocation or assignment methodology
 Cost assignment based on:
– Activities - Tasks within a process
– Drivers - Factors creating costs

ABC
ABC Vs DPP
ABC DPP
Sales Yes Yes
Cost of Goods Yes Yes
Direct Revenue Yes Yes
Headquarters Yes No
Warehouse Yes Yes
Transportation Yes Yes
Store Yes Yes

ABC
Allocates All Costs
 Headquarters  Transportation
– Management – Labor
– Merchandising – Equipment
– Finance & Accounting – Supplies
– Human Resources
 Warehouse  Stores
– Management – Management
– Labor – Labor
– Benefits – Benefits
– Space – Space
– Utilities – Utilities

ABC
Primary Processes
Produc t-In Produc t-Out
Store
Buying Distribution Administration
Operations

ABC
Costs Follow Product Flow
Distrib utio n Dire c t Sto re

Dro p Ship W ho le sa le r
C e nte r De live ry
Sto re

Greatest cost is Display
ABC
Space

ABC
Sales By Department
All Other Edible Edible

31% 29% Non-Edible
Frozen
Dairy
Bakery
Gen. Merch. HBC
1% Non-Edible Gen. Merch.
Frozen 9% All Other
HBC Dairy
4% 15% 7%
Bakery
4%

ABC
Gross Margin By Department
Edible
20% Edible
All Other Non-Edible
40% Non-Edible Frozen
7% Dairy
Bakery
Frozen HBC
Gen. Merch. 7% Gen. Merch.
1% Dairy All Other
HBC 18%
3%
Bakery
4%

ABC
Net Profit By Department
All Other
11%
Gen. Merch.
2%
HBC
3% Edible Edible
Bakery 29% Non-Edible
5% Frozen
Dairy
Bakery
HBC
Non-Edible Gen. Merch.
Dairy
Frozen 10% All Other
30%
10%

Superior Private Label ABC
Categories
Private Label products achieved results superior to branded in
the following categories:
B a b y F o o d & F o rm Bu la le a c h R fg D ip s H a ir C o n d it io n e r
B a k in g C u p s /P a p e rC h a rc o a l R fg S o u r C re a m H a ir S p ra y / S p ritz
B a k in g N e e d s D ia p e rs E n g lis h M u ffin s H o m e H e a lt h D ia g n o s t ic
B o t t le d W a t e r P e t S u p p lie rs A d u lt In c o n t in e n c e In t e rn a l A n a lg e s ic s
Candy To b a c c o P ro d u c ts C o ld / A lle rg y / S in u s M L iqo u t h w a s h
C o ffe e C re a m e r F z F ru it C o ld / A lle rg y / S in u s STahba vin g C re a m
P as ta F z P o t a t o e s / O n io n sC o s m e t ic s - N a il W e ig h t C o n t ro l L iq / P w d
P o w d e re d M ilk F z P re p a re d V e g e taEb ylees C a re P ro d u c t s A u to F lu id s / A n t ifre e z e
S p ic e s / S e a s o n in g sO t h e r F ro z e n F o o d sF irs t A id Tre a t m e n t Fs ilm
S ugar R fg B u t te r F o o d C a re P ro d u c tsP la s t ic B o t t le s
V e g e t a b le s R fg C o t ta g e C h e e s e

APPLICATIONS
PLMA Model

APPLICATIONS
Success Factors
 Logical presentation
 Reasonable assumptions
 Demonstrate knowledge of business
 Promote benefits
– Consumer sales
– Customer profits

APPLICATIONS
New Products
 Life blood for retailers and
suppliers
 Primary driver of growth
 Replacement Vs
Cannibalization Strategy

APPLICATIONS
Approach
 Select items for replacement
– Low sales
– Matching consumer target markets
 Collect customer and competitive data
 Run model
 Present
– Current sales and net profit
– Projected sales and net profit

APPLICATIONS
Retail Space
 Most coveted merchandise
element
 Interacts with pricing
 Shelf space is greatest item
cost

APPLICATIONS
Balance Space
Too Little Too Much
 Consumer can’t find  Lower profits
 Reduced sales
 Lost sales

APPLICATIONS
Diminishing Returns
$10.00
$5.00
$-
1 2 3 4 5 6 7 8
Facings
 Excess space does not increase sales
 Minimum - Case plus order cycle
– Minimizes stocking labor

APPLICATIONS
Approach
 Determine minimum units and facings
 Identify net profit
 Test & evaluate alternatives
– Increase unit sales
– Increase facings
 Present

APPLICATIONS
Retail Pricing
 Price discussions should not
be taboo
 Price too high
– Lost sales
 Price too low
– Lost sales
– Lost profit

APPLICATIONS
Retailer Goals
High
• Gross Margin
• Quality Ratio
Low
• Price Image

APPLICATIONS
Consumers
 Recall up to 200 item prices
 Frequently purchased items
 High consumables
 Translates to 500 - 1,000
items creating store’s price
image

APPLICATIONS
Value is King
Price
Value =
Quality

APPLICATIONS
Approach
 Compare product quality
 Load model
– Change retail price
– Hold constant and change unit sales
 Present

APPLICATIONS
Promotions
 Most frequently used
promotion tool
– Advertising
– Display
– Price reduction
 Private Label under-
represented
– Accrual funds
– Lack targeted program

APPLICATIONS
Why Promote?
 Create merchandising excitement
 Attract customer
 Foster consumer trial
 Load pantry
 Reward loyal consumers
 Present value proposition

APPLICATIONS
Promotions are Difficult
Selection Price Execution
Competition Profit Stores

Holiday Advertising
Weather Buying
Season
Theme

APPLICATIONS
Many Promotional Factors
Advertising
Price Discount
(ABC)
Display POP Season

APPLICATIONS
Promotion Conclusions
 Low Private Label share
Private Label Natl. Brand
 Moderate Private Label share
Private Label Natl. Brand

APPLICATIONS
Approach
 Research past promotions
 Load model
– Change price
– Change index
 Present

APPLICATIONS
Summary
 Net Profit is the ultimate sales tool
 PLMA Net Profit Model
– Easy to use
– Provides great flexibility
– Great learning tool
 Coach customer to increase profits

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CATEGORY MANAGEMENT

DELLMART & COMPANY 2

DELLMART & COMPANY 3

DELLMART & COMPANY 4

DELLMART & COMPANY 5

DELLMART & COMPANY 6

 Snack Category 3 year increase 87%

DELLMART & COMPANY 7

Profit & Loss

DELLMART & COMPANY 8

Brand Management Category Management

Snap, Crackle & Pop Kellogg

DELLMART & COMPANY 9

DELLMART & COMPANY 10

DELLMART & COMPANY 11

DELLMART & COMPANY 12

Source: ECR Category Management

DELLMART & COMPANY 13

DELLMART & COMPANY 14

DELLMART & COMPANY 15

Acquisition Strategy Transportation Attract Strategy Self Service

Acquisition Strategy DC/Store Receiving Build Loyalty Strategy Self-Service

Convenience DC/Store Handling Uniform Marketing Non-Differentiated

DELLMART & COMPANY 17

Category Strategies Category Strategies Characteristics

Traffic Building High Share, Frequently Purchased, High % of Sales

DELLMART & COMPANY 18

Broad Variety Competitive/Consistent Average Store Location Average Level of Activity

Timely Variety Competitive/Seasonally Good Store Location Seasonal/Timely Activity

Select Variety Non-Inflammatory Available Store Location Low Level of Activity

DELLMART & COMPANY 19

High Sales Dollars Low

Flagship Cash Machine Maintain/Grow

Core Traffic Under Fire Rehab

DELLMART & COMPANY 20

Low Market Growth High

Questionable Opportunity Gaps

DELLMART & COMPANY 21

High Reach Low

DELLMART & COMPANY 22

Buyer Buyer Buyer Administration

Retail Pricing Space Advertising

DELLMART & COMPANY 23

Marketing Services Space Allocation

Advertising Coordination Category Analysis

Retail Pricing Allowance/Cost Control

DELLMART & COMPANY 24

Responsibilities Retailers Wholesalers

Negotiation with suppliers 86.4% 84.6%

DELLMART & COMPANY 25

100 TO 199 30.0% 16.7%

200 OR MORE 27.5% 25.0%

Average Number 191 148

DELLMART & COMPANY 26

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

DELLMART & COMPANY 27

3. Official approach is too complicated 4.“One-size-fits-all” is not working

DELLMART & COMPANY 28

DELLMART & COMPANY 29

Available Sales Share

DELLMART & COMPANY 30

DELLMART & COMPANY 31