New Formula: Develop Categories,
Don’t Just Manage Them

By John Karolefski

Traditional category management is falling short of expectations. The path forward is “developing” categories rather than “managing” them. 

That, in a nutshell, is the theme of a new book by Inez Blackburn and Matthew Deeter called Pride Passion Profit: 7 Steps to Category Development.

According to Blackburn, category development is not about exercising control through authority, persuasion, or permission. It improves category performance by focusing on consumer-driven solutions.

“Why focus on consumer solutions rather than product categories?” she said in an exclusive interview with CPGmatters. “There’s a simple answer: Consumers don’t shop categories; they shop for solutions to the everyday problems and challenges they face. Consumers today want you to solve their problems about dinner, what to wear, how to furnish their house, how to communicate more effectively with their families, how to spend more time with their families, and how to do more with less in tough economic times.”

Blackburn believes that too much emphasis has been placed on controlling through category management and not enough on advancing through category development. For example: 
  • How many hours are spent during the calendar year ensuring that the category and its offerings meet the changing needs of the consumer?
  • How many hours are spent during the calendar year focusing on weekly operational metrics, product shipments, and operational hiccups?

“When you develop categories, you must look at your products and services from the perspective of consumers and the problems they are trying to solve,” she said. “You must also look at the factors that influence their decision-making process and really understand what makes solving the problem easy or hard.

“For example,” she went on to say, “if the problem is preparing a nutritious meal for their family and you are a major supermarket, do you offer a solution for dinner or do you merely sell individual products? Do you show your target consumers how to use the product in the intended situation?”

The original eight-step model for category management has been around since the early 70s, she explained. There was an explosion in new products as vendors jockeyed for a greater market share, and consumers were overwhelmed by the over-abundance of choice. Categories were treated like separate business units that competed with each other for more space and consumer awareness.

“Each category was a profit center – a virtual island with limited understanding of or interaction with other categories,” she said. “Category management did not always put in the best products in the best positions on the shelf, but reserved those prime spaces for poorer performing products to help [vendors] survive.”

Times have changed, she said, and the old model no longer delivers anticipated results. She is not recommending abandoning category management altogether; rather, Blackburn advocates growing categories more effectively by learning how to develop them.

“Retailers and vendors must evolve just like their customers are evolving,” she said. “We must understand how to change and what to change into.”

Here are her seven steps to category development:  
  • Reconcile Category Plans with Current Operations
  • Improve Your Situational Awareness
  • Identify Your Best Development Opportunities
  • Set Your Category Objectives, Goals, and Strategies
  • Identify Your Category Solutions Mix
  • Position for Profit
  • Complete Your Category Development Plan

“If you’re not solving customers’ problems, you’re creating them,” she said. “Beyond metrics and managing categories, for your business to thrive you need to create stronger ties with your customers. If the retail wars and chaos on the floor have taught us anything, it’s that we need to focus on creating solutions for people rather than on selling products to customers.

“If you learn to let your customers determine how, what, and where they buy,” she summed up, “you’ll move beyond category management to category development, and it is there – and only there – that sustainable profitability awaits.”

The book is available on Amazon and via www.markettechniques.com.


FEBRUARY 2010

Putting the Consumer into Retail Assortment Decisions

By Paul Thompson

Many retailers like Wal-Mart, CVS, and Walgreen’s are rethinking the notion of carrying massive amounts of SKUs on their retail shelves. They are redefining the roles of individual categories in their stores and what that means relative to how they think about depth and breadth of assortment choices.

For example, if the retailer does not consider the category a significant profit builder
and it is somewhat ancillary to the needs of their customer base, that category becomes
a prime candidate for reduced shelf space and significant SKU reductions along with
brand rationalization.

In some categories, retailers are figuring out that national brands are not always the drivers of the category. They are looking to eliminate or significantly reduce the number of national brands on the shelf while expanding their more profitable store brand presence. In April, it was reported that Wal-Mart was reducing the amount of space it provided branded manufacturers like Coke and Pepsi for their Dasani and Aqua Fina bottled water brands. Margins in the bottled water category are very low, and leveraging Wal-Mart’s private label brand would enhance category margins. We have seen this same phenomena play out across other categories within Wal-Mart. The major drug chains that historically have carried a vast array of OTC products now recognize that this has created a sea of consumer confusion at the shelf.

The premise of reducing consumer confusion at the shelf and reducing non-productive SKUs makes an incredible amount of sense, but carries considerable risk if not managed correctly. We know from previous assortment studies that there are certain categories where consumers will travel greater distances for better selection, while convenience may be more critical in
other categories.*

If the SKU and/or brand rationalization process is not managed appropriately, retailers could lose shoppers and significantly reduce category volume.  Conversely, retailers could grow category volume and lose shoppers loyal to specific brands. For manufactures, the risk is that every retailer picks a different approach to manage their retail portfolio. As a result, they lose control of their internal portfolio rationalization process which causes their supply chains and manufacturing efficiencies to spiral out of control.

What is the right approach to SKU, line (forms and sizes) and brand rationalization that reduces the risk of lost shoppers, reduces consumer confusion at the shelf and maximizes returns?

The right approach starts with understanding how the consumer organizes the category into distinct segments based on usage and purchase behaviors. In the case of adult analgesics,
for example, consumers may think about usage based on whether they have a headache or body muscle pain.  From that starting point, how do consumers make their purchase decisions? What are more important: brands, forms (liquid or pills) or sizes? Are there any other organizing benefits to the category that are important to consumers like convenience
or flavors? 

Once it has been defined how the consumer uses the product and how they make purchase decisions, the process can then begin setting the organizing principles for  SKU, line  and/or brand rationalization. It must be determined which approach has the optimal impact to the category and the consumer. Eliminating the bottom 20% of SKUs may not necessarily reduce consumer confusion and potentially could result in low velocity SKUs with high consumer loyalty being discontinued. That would cause those shoppers to choose an alternate store to fulfill their needs. 

Organic products are a good example of products that tend to have lower retail movement, but high loyalty among its shopper base. Eliminating the bottom 20% of SKUs does not always reduce shelf confusion because all the sizes, forms, flavors that may be redundant tend to be retained and continue to create consumer confusion. However, eliminating the bottom 20% may identify the brands that are least incremental to the category and provide a good start to brand rationalization.

The approach and tools chosen for SKU reduction must be able to discern which products are truly incremental to the category and which are redundant based on actual consumer choices. Those SKUs that are redundant will reallocate their volume to similar SKUs when deleted and will not hurt the category volume. It is also important to understand the overall productivity of each of the consumer segments by comparing the dollar sales to unit volume, and then you see which segments are candidates for growth and which may need SKU rationalization.

As retailers begin to rationalize SKUs and make “add and delete” decisions, it is critically important to understand where the product volume flows when items are added or deleted. Clearly, not all volume falls away when an item is deleted and not all volume is incremental to the category when new items are added. 

Given that it is important to understand how the consumer makes choices when the item they had previously purchased is no longer available, it is equally important to understand where new items will source their volume when added to the product mix. In some cases, the new product may be filling an unmet need and provide an incremental purchase to the category. Understanding consumer switching behavior and the transferable volume flow is done through usage and purchase-based market structures along with tools that provide detailed switching behaviors based on alternative SKU choices.

When it comes to brand rationalization, retailers must look at the number of brands that truly satisfy consumer needs. For example, when looking at a category like dry packaged desserts, which includes iconic brands with dominant market share like Jello, you have to believe that most likely there are no more than two or three brands that satisfy the consumer needs for
that category. 

In more complex categories like upper respiratory and allergy medication with many ailment symptoms, there are most likely a distinct set of brands in each segment of the category that satisfy consumer needs. These needs dictate that a somewhat broader set of brands are required, but maybe not as many as are represented on the shelf today.  

As products are examined for deletion, it is important to understand consumer loyalty and which brands, forms, sizes and SKUs would cause consumers to leave the store if they were not readily available. The range of assortment depth can vary by channel based on how shoppers value the depth of assortment. In the grocery channel, allergy products may be
more of a convenience purchase and depth of assortment may not be critical. In the drug channel, however, allergy is a destination category where depth of assortment is valued and expected. Even when depth of assortment is valued, there is still considerable room for brand and SKU rationalization. Great care must be taken to understand SKU/brand incremental value and loyalty.

The act of SKU, line and brand rationalization should not be a onetime event, but an ongoing process to capture the latest segment trends. The benefits, if done correctly, are improved retail shopability, improved distribution on core power SKUs, improved category volumes with fewer SKUs which leads to improved gross margin return on inventory investment (GMROI) for retailers. This process needs to be collaborative between retailer and manufacturer to ensure that all low performing SKUs are viewed equally, including private label. This collaboration also works best when real margin and profit data for that category are incorporated as part of the output results.

The end game is reducing consumer confusion at the shelf, improving category metrics like revenue and GMROI, and satisfying consumer choices at the category-segment level. This is not a onetime event. It is an ongoing, evolutionary process that requires a consumer lens on the category and the appropriate tools to discern item effectiveness and incrementality.

Paul Thompson is Managing Director of Henry Rak Consulting Partners, a Chicago-based consultancy. To learn more about HRCP and its services, visit www.hrcpinsights.com, or call Paul at 817-416-1759

*Source: How Does Assortment Affect Grocery Store Choice? January 2008 Richard Briesch SMU, Pradeep Chintagunta University of Chicago, Edward Fox SMU

CATEGORY MANAGEMENT

New Formula: Develop Categories, Don't Just Manage Them

Putting the Consumer into Retail Assortment Decisions

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March 2010
               
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