Retail Value Transformation

Category management survey

North American retailers

C O N F I D E N T I A L | www.oliverwyman.com
Category Management Survey

Oliver Wyman is conducting an ongoing, international study of retail

Category Management. The goal is to uncover the processes, tools, and
techniques that distinguish the market leaders from their peers.
This document summarizes the first results of our North American study in
which we compare a set of twenty major retailers operating in seven retail
sectors on the dimensions most relevant to merchandisers.
In the near future we intend to provide a more comprehensive view of the
results and their implications in a White Paper.

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Contents

Executive summary 3

Survey methodology 7

Benchmarking results 12

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 Executive summary

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Current category management processes are hindering retail progress
Most companies have processes in place to review each category periodically, but
weaknesses in these processes are acting as a barrier to better category management

Complaints about the traditional approach Selected interview responses

As % of total

Planning processes are tedious, rigid, and too “Is your company strategy… “Does the planning process…
narrowly focused on the previous year
… given in … interfere … involve mid-

One retailer spends 20 weeks per category … clearly … tied to your
actionable with strategic year review or re-
articulated?” KPI’s?”
gathering data used to populate templates terms?” thinking?” forecasting?”

50% of firms thought the planning process 100

inhibited strategic thinking
90
35
The current approach offers poor support for 80

Percent of companies
50
decision making 70
55
65

60% of firms surveyed did not track competitors’ 60 80
prices and 90% lacked data on their promotions No
50
Yes

Most CMs have no analytical support to inform 40
strategies and lack time to do analysis 65
themselves 30
50
45
20 35
Category management seldom ties into the
overall company strategy 10 20

Category KPI’s rarely reflect strategic metrics 0

Process does not provide a way to sort out

conflicts between strategic and financial goals

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Leading retailers have overcome many of these problems
Certain retailers have developed an increased level of sophistication that is evident
across all category management levers

Sophistication levels at three different retailers

Process Data Vendors Pricing Promotions Assortment Private label

10
Increasing sophistication

Each color represents a different retailer

This level of sophistication is typically a cultural trait of the organization

which cuts across all of the category management levers

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The benefits are substantial
Leading retailers derive many benefits from their approach to category management, not
least better financial performance

Benefits for leading retailers Value at stake

OW benchmark value per $1bn of revenue

The leaders have simpler and more The leaders’ higher level of
effective category management sophistication drives significant
processes margin upside

A lower-effort and higher quality
Optimal pricing decisions $5-10m

category planning process

Optimized promotions $8-12m

A more direct link between the
company strategy and category-level
Better assortment and $5-15m
decisions space allocation

Less reliance on vendors for strategic
Supplier negotiations $5-30m*

decision-making and sourcing

Higher quality decision making across
Total value at stake $23-67m

(per $1bn of revenue)
all of the category management levers

* Potential margin gains from vendor negotiations vary significantly across retail sectors

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 Survey methodology

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Scope of the first round of interviews
We cast our net widely in our interviews in order to get a broad perspective across
several major retail sectors

Interview summary Areas of focus in conducting the

By retail sector interviews
12
11
Interviews
Our interviews covered 20 of the largest
retail operators in North America across
10 Companies
various retail sectors
8
In sectors where individual firms can
have internal variations in category
6
6 management processes (e.g. grocery),
5
we have conducted multiple interviews
4 4 4 4
4
We have chosen to speak directly to
3 3
2 2 2 2 category managers so as to get the
2
1 clearest view of the category
management processes
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management

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A few words on methodology
Our interviews have focused on the four major areas where we see clear, practical
differences in the execution of Category Management

Link to overall company strategy

Assess the strength of the connection between category plans and overall
company strategy
– Is the direction ‘top-down,’ ‘bottom-up’, mixed, or unclear?

Data availability
Category management organization
and usage
Understand strengths and limitations of varied Appraise the organization’s relative
team configurations sophistication in terms of data capture,
– e.g. skill-centered expertise vs. product- usage and deployment
centered expertise – Does analysis play a fundamental or
auxiliary role in decision making?

Category management levers

Main focus of the
Compare approaches to:
interviews
– Pricing, promotions, visual merchandising, assortment, private label,
and vendor management

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Details of category management ‘levers’
Our interviews focused on the business levers that merchants use to drive their
categories

What we cover

Strategy and category
How company strategy is translated into specific category targets and plans
management process
What infrastructure / processes govern the category planning process; what are its outputs

Data quality / availability and
Which data sources tend to be the most widely used or available
tools
What decision support tools exist and how extensive are their capabilities

Pricing
How pricing decisions are made, and who makes them

What tools and support is available to inform these decisions

Promotions
How promotions are planned, and which stakeholders are involved

How the effectiveness of a given promotion is evaluated

Assortment, space & visual
On what basis items are added to or deleted from the range, and how space is allocated
merchandising
To what extent assortment varies locally

Visual merchandising
What criteria are used to configure planograms

How far stores are allowed to deviate from standard planograms

Vendor management
How negotiations are handled and who is involved

What information can be leveraged to get the most favorable cost position

Private label
How great a role private label plays in the overall merchandising strategy

How developed are stores’ own-label brands

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Staircases of sophistication
We can picture these levels of sophistication as representing different positions on a
staircase, which progresses from basic competence to advanced capability

A ‘Staircase’ model of sophistication Advanced

capability

10
9
8
Relatively
6 advanced
Basic 5
retailer
competence Average or
3 typical
retailer
2
1

What the staircase represents How progress is made

Each step describes a certain level of development or
Gradually, over time:

sophistication for a given category management capability

The staircase summarizes the current range of
sophistication observed in the global retail marketplace

Retailers extract greater value by moving further up the
staircase
– Most retailers tend to climb up the staircase slowly, as
their existing processes evolve and improve

With bursts of concentrated effort:
– “Step-change” improvements can be achieved by
investing to radically improve a given capability

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 Benchmarking results

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 Process and strategy
A subset of retailers have created processes that link strategy to execution in a way that
classic category performance reviews fail to do

Levels of sophistication

Relatively advanced example

10

Annual category reviews focus on setting the strategy for the business
9 - Discussion of one and five year plans
- Preparation includes templates, but with focus on category tactics and financial impact
8 - Process involves establishing and codifying category roles
- Output is a set of tactics to reach strategic goals
7
Category managers continuously update this strategy
- Quarterly reviews track progress and redirect strategy as necessary
6 - Monthly re-forecasts to reflect changes in the market/strategy
- Category roles change to reflect shifts in underlying market conditions
5
Basic example
4

Each category is reviewed once annually
3 - Standard, 40 slide template used for all presentations
- Months of preparation go into populating these templates, often with granular, raw data
2
Goal of the presentation is to think strategically about the category
- CM “the brain behind the category strategy”
1 - Templates meant to stimulate strategic thinking by ensuring nothing is ‘missed’

End result is that more time goes into data collection than into analysis and interpretation
- Amassing the data is laborious
- Little discussion of strategies & tactics and no predictive component to strategy
Legend
Mass Category Apparel Convenience
merchant killers
Grocery DIY Department

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 Data and tools
A large fraction of the retailers we interviewed still rely on detailed weekly sales reports,
but the leaders take a far more proactive approach to mining their data

Levels of sophistication

Relatively advanced example

10

Separate support groups for each key category management lever
9 - Groups provide category managers with concise answers to analytical questions
- Because groups have narrow focus, they develop expert analytical capabilities
8
Analysis is forward-looking and strategic
- Scenario modeling capabilities
7 - Focus on providing well-supported assessments of a range of strategic options

Insight is rooted in detailed customer, competitor and performance data, including:
6 - Credit card, shopping basket or transactional data
- Competitor price tracking, surveys and demographic profiling
5
Basic example
4

Merchants are responsible for conducting most of their own analysis
3 - Pricing support group provides competitive data but no predictive insights or scenarios

Merchants have access to performance data, including sales, margin, costs, and inventory
2 at a very granular levels of detail

Where loyalty programs exist, card data collected but not used in category mgmt decisions
1
Competitor data only on key item prices

Analysis not forward looking on long-term
- Focus on weekly performance vs. same period last year
- No scenario modeling capability
Legend
Mass Category Apparel Convenience
merchant killers
Grocery DIY Department

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 Pricing
Most of the retailers in our study used basic, ‘rule-of-thumb’ pricing approaches that do
not leverage detailed knowledge of customer preferences or sensitivities

Levels of sophistication

Relatively advanced example

10

Pricing support group provides expert guidance to merchants
9 - Item set classification is based on price elasticity
- Merchants can request more detailed scenario models to make specific decisions
8
Competitive monitoring is key to the price strategy
- Major emphasis on competitive entry price point
7 - Competitors’ prices are tracked centrally
- Merchants spend time in competitor stores to better understand relative pricing strategies
6
Pricing decisions are based both on short-term goals and long-term strategy
- Analytics used to optimize prices on non-key items
- Focus on 5-year strategy and competitors ensures long-term implications are considered
5

4 Basic example

3
Item pricing decisions are made exclusively by merchants

Process is driven by very simple rules
2 - Pricing decisions are based on a margin target for all products
- No pricing zones, so prices do not vary across stores
1
Prices are not optimized according to customer or competitor intelligence
- No consistent competitive price monitoring, though some key item prices are tracked
- No insight on the relative price sensitivities of different product groups
- No knowledge of customer implications of price moves
Legend
Mass Category Apparel Convenience
merchant killers
Grocery DIY Department

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 Promotions
Many retailers run the same promotions every year – profitable or otherwise – to smooth
out year-on-year sales comparisons

Levels of sophistication

Relatively advanced example

10

Promotional analysis is done by a separate group
9 - Full understanding of customer effects of promotions, including lift, switching, stockpiling,
traffic and perceptual impacts
8 - Ability to forecast expected incremental sales and margin contributions
- Scenario modeling for discount optimization
7
Promotional strategy is viewed as part of the overall category strategy
- The company’s overall strategic direction is a key driver of the ad planning process
6 - Promotions viewed as one element of a total customer value proposition
- Vendor funding does not drive promotional decisions

Planning is done well in advance, ensuring buys are appropriate
5

4 Basic example

3
Promotion performance economics incomplete, based mainly on item’s sales uplift

Critical effects of promotions, such as brand switching, impact on total footfall, stockpiling or
2 “pantry-loading” effects, often go un-measured

Promotional decisions are not customer driven
1 - Heavy focus on repeats of previous promotions to ensure comparable sales spikes
- Vendors often drive promotional programs by offering funding

Promotional planning process is disorganized
- Ad space allocated quarterly by category, but subject to constant shifts
Legend
- Last minute changes in strategy lead to accumulation of unneeded inventory
Mass Category Apparel Convenience
merchant killers
Grocery DIY Department

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 Assortment
None of our respondents scored especially highly on assortment management, due in
part to a consistent gap in understanding item-level switching

Levels of sophistication

Relatively advanced example

10

Assortment decisions firmly tied to category roles
9 - SKU breadth
- Private label share of the range
8 - Range of price points / overall architecture

Quality of the range is reviewed regularly during the year and roles are modified as
7 necessary

SKU performance is evaluated using up-to-the-week data on space productivity
6 - Sales and margin per square foot are key assortment metrics
- “Customer decision trees” used as a simple proxy for switching estimates
5
Basic example
4

Assortment is based on offering ~85% of SKUs available in the market
3 - The overall degree of SKU coverage varies slightly between categories
- Decisions on new items based primarily on quality of vendor presentations
2 - No independent research to validate customer priorities

Since merchants lack insightful analysis, vendors often win using a ‘veil of sophistication’
1 - Item removal is based primarily on sales

Some thought is given to substitutability, but no measure for this is used

Legend
Mass Category Apparel Convenience
merchant killers
Grocery DIY Department

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 Vendors
Leading retailers show a mastery of their vendors’ funding programs, and leverage this
information for better negotiating outcomes

Levels of sophistication

Relatively advanced example

10

Most negotiations with vendors handled by central support organization, with input from
9 category managers
- Focus on getting lowest costs across a portfolio of items
8 - Clear understanding of funding programs
- Private label sourcing issues are addressed centrally
7
Category managers meet to discuss trends, new items, potential deletions or other
assortment changes
6 - Category managers views of trends are anchored in their own customer / sales data
- Vendor analysis is used in addition to, not in place of, the retailer’s own view
5
Basic example
4

Category managers rely heavily on vendors for information as
3 - The main source for competitive pricing and promotions
- The source of information regarding market trends and product innovation
2
Negotiations are a significant focus of the category organization
- Their preparation is the responsibility of individual merchants
1 - No central or shared support

Category managers have insufficient data to build a correct view of items’ net costs
- Funding for promotions or markdowns is stored or evaluated separately from list costs

Legend
Mass Category Apparel Convenience
merchant killers
Grocery DIY Department

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 Private Label
Increasingly, retailers are pursuing tiered private label offerings, but only a subset spend
significantly to create distinct or vivid PL brand identities

Levels of sophistication

Relatively advanced example

10

Private label brands act as a store differentiator
9 - Aim of PL is to foster an image of exclusivity
- Strong store brand identity leveraged across all private label lines
8
Internal design capabilities are strong
- Customer research groups identify key product trends and feed this to category managers
7 - Internal design teams create and source products to capitalize on trends

Private label development is viewed as a core organizational priority
6 - Development efforts command significant resources and executive attention

5
Basic example
4
Private label brands organized into tiers or hierarchies
- Value tier (typically an entry price point item)
3 - National brand equivalent tier
- Premium tier
2 - Increasing emphasis on specialty lines, such as natural / organic

No internal product design facilities
1 - Majority of private label items imitate established national brand products

Some marketing support given to private label brands
- Often have blocks allocated in the circular
- Some categories given promotional funds to support discounting
Legend
Mass Category Apparel Convenience
merchant killers
Grocery DIY Department

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Contact details

About Oliver Wyman

Oliver Wyman’s Retail Practice has more than 20 year’s track record in
helping clients deliver high-impact performance improvements using
proprietary, state-of-the-art analytical tools and techniques. We help
retailers deal with the full range of their challenges, including pricing and
promotions strategies, space and assortment optimization, improved
sourcing, store and supply chain cost reduction, inventory management,
and capital efficiency.

For more information

To learn more about this survey or to find out more about Oliver Wyman’s
capabilities in Retail Value Transformation, please contact:

Paul Beswick Matthew Isotta

+ 1 617 424 3259 + 44 20 7 915 9241
paul.beswick@oliverwyman.com matthew.isotta@oliverwyman.com

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