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MANAGEMENT
Retail Category Management
Chapter 1
Introduction to Category Management
Chapter Outline:
• Store as a mall
• Category management
• Category management defined
• Reasons for change to category management
• Benefits of category management
• Merchandisers vs. buyers
• Category captains and validators
• Good category management vs. bad category management
• Philosophy of category management
• Alignment with retail strategy
• Hi-Low pricing
• Productivity loop vs. the experiential loop
Learning Outcomes:
Upon completion of this chapter, the student will be able to:
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Retail Category Management
Store as a Mall
The next time you walk in a grocery store, pet store, book store, or a
mass merchandiser, think of the store as a mall. Instead of seeing the obvious,
consumers seek when entering the store, is no longer in the traditional location
of the perimeter of the store, but instead at the center of the aisle. This way
the consumer must walk the entire aisle to find the merchandise they seek. If
a customer walks to the center of an aisle, they are more likely to walk the
length of the aisle. Thereby walking by and hopefully purchasing other items
on the aisle besides their intended purchase. As you visualize the aisles as
units like stores, you will begin to realize they are actually categories of
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Now begin to apply consumer behavior to the way people shop. The
elbow and eye. For merchandise marketed to the children, the favored
locating is buggy height, for example, children’s cereals. Adult cereals are
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placed at adult sight level, whereas the children’s cereals are placed on lower
placed together, for example peanut butter and jelly or cake mix and frosting.
The next attribute of the shelving you will notice is ribboning or color
blocking. Many people look for the color or graphic of an item, rather than
the name, for instance the orange color of the Tide bottle. When
thereby forming a ribbon of color or a color block. This ribbon is easy for the
beverage may choose a soft drink to satisfy the need of thirst. The customer
will choose among all of the available brands and the packaging such as a can,
a bottle, or a carton. For instance the pet aisles represent the pet category.
The pet category in a mass merchandiser may include pet food, pet snacks, pet
toys, pet bedding, pet shampoo, etc. However, in a category killer such as
pet store, the category will be define differently, the category may be defined
as dog food, including dry and canned dog food only. A category killer is a
store, convenience store, and, category killer, assists in defining the categories
within the retail store. Categories are then divided into sub-categories, for
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instance the category may be soft drinks, the sub-categories by be regular and
diet soft drinks, then segments, then brands, and finally stock keeping units
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category were a store, independent of all of the other categories within the
store. All of the performance goals are determined by the retailer, in effect the
mall manager. The person ultimately responsible for the category is the
manager of the category. The category manager must achieve the goals,
retailer. This role combines the responsibilities of both the buyer and the
buyer and the merchandisers work independently of each other and sometimes
responsibility for the success or failure rests upon a single individual or group
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Category Management
In the past we often thought of the “by the seat of the pants” decision
their decisions based on instinct. Today’s retailers make their decisions based
financial performance is tracked not at the department level, but instead at the
category level.
product mix with the analysis of consumer data, point of sale data (POS), and
consumer behavior research. POS data includes the sales data for each store
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of all products within a category. Market data includes data related to the
may include loyalty data collected by the retailer. There are several sources of
One of the major changes for the retailer and their suppliers is the
products retailers sell. Retailers and their suppliers become partners in a once
adversarial relationship where in the past they each tried to seek the most
advantages position in the relationship. For example, the supplier would say
“we’ll drop the price, if you will include us in your advertisement.” Now the
$100,000 to category sales during the Super Bowl.” In the past suppliers
would ask the retailer to minimize their competitor’s space on a shelf in order
to have more space for themselves, now despite the brand, the retailer and
supplier work together to cut excess inventory. The retailers and suppliers
work together to achieve the best results for the category, not to achieve the
best results for a single supplier. This is one of the most important aspects of
category management, ensuring the best results for the retailer through
retailer.
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1980’s by retailers, the concept is not new. If we think about the original
Mom and Pop grocery store serving a small community we see the
based upon the wants and needs of their clientele. Their records of purchases
were often seen as a result of the tab the consumer ran until payday. The
With the advent of self-service grocery stores, retailers began to rely on their,
Unfortunately, the micromarketing aspect of the Mom and Pop store was lost
with this transition. In the 1980’s retailers began to realize the importance of
(ECR), simply meeting the needs of the consumer efficiently. The efficient
part of the definition came to mean, having the right product in the right place
partners, operating on a very small profit margin, began to realize there had to
be a better and more efficient way to conduct business. Both grocers and
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adversaries, the grocers and their vendors, distributors, and brokers became
One of the first initiatives was the Universal Product Code (UPC).
The UPC was a bar and numeric code enabled retailers and their partners to
use technology to maintain and assess inventories. The UPC code also
allowed the retailers to begin to scan the code rather than having the retail
associates, then called clerks, to manually key in the price of each product.
The UPC code not only improved the ability to track stocks, but also increased
the speed of the grocery check-out procedure. During the late 1980’s and
early 1990’s a recession combined with the growth of private label products,
and a proliferation of new retail formats such as the warehouse club and
supercenter, gave the grocery industry incentive to make changes in the way
they had conducted business. This change was led by a group of industry
leaders who formed the Efficient Consumer Response Working Group in mid-
industry could save tens of billions of dollars. There were four basic subject
areas:
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way from the assembly line to the checkout line. By jointly managing
distribution costs.
since the implementation of the UPC code. The ECR group known as the
Joint Industry Project began to analyze each link in the supply system and
2. Improvement of products
3. Better assortment
5. Convenience
6. Lower cost
by the commission. One of the benefits of the study was the development of
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management.
retailers was the rigorous analysis of data necessary to maintain the best
merchandise mix. Retailers, through the use of POS data, were able to
determine the sales of each given product within a category. Then they could
make valid decisions about the merchandise they needed to carry and
determine the optimal quantities of the product. Retailers began to realize all
grocery stores were not the same, because their consumers were different.
the country in which they lived, their racial/ethnic identity, their religious
preferences, and their family sizes. Retailers could now tailor the
merchandise mix to meet the needs to the demographics and lifestyles of the
poorly or rarely. This process is called delisting, removing a product from the
assortment and merchandise mix, lower overall prices, reduce their out-of-
stocks (OOS), and make shopping the store easier for the consumer. There
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merchandise, but one used in the industry is a seven percent increase for a
retailer’s category, a five percent increase for a vendor within the category
and an increase of mark-up or margin of five percent for the retailer, all while
carrying fewer items and reduced space allocation. Categories become profit
centers with space allocation aimed at maximizing the value for the consumer,
allocation of shelf space. Suppliers and retailers have found efficient and
profits, reduce out of stocks, reduce lost sales due to out of stocks, and make it
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used in this book. Some retailers prepare a visual display and then photograph
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Retail Category Management
productivity. Each product is analyzed based upon the projected sales during
the sales period. This includes the number of facings for each product. A
facing is the number of products facing the consumer. For instance a bottle of
catsup may have three facings, three bottles face the consumer at the front of
based on the number of items anticipated to be sold within a given time frame,
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In the past, buyers worked with vendors to determine the appropriate product
mix by unit cost, open to buy, and trends. Unfortunately, this often placed the
two at odds. The merchandiser’s attitude when sales were poor was “if they
bought the correct merchandise, I could sell the merchandise as I design the
best display.” Buyers would also shift the responsibility to the merchandiser
by saying “if you placed the merchandise in the correct place, on the correct
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Retail Category Management
single brand for the entire chain and worked independently of the
merchandiser. After the goods were purchased, the merchandiser designed the
within a store. The lack of communication and coordination between the two
often led to a poor or subpar performance. As one buyer bought from a single
vendor, another buyer may have bought from another vendor—the lack of
competing on the same floor just with a different brand. This hindered the
often do not merchandise products in the same way people buy them—a jean
employ buyers who work closely with category managers. Buyers continue to
purchase from manufacturer’s sales teams, however they are advised by the
within the category—included in the assortment are all goods sold by multiple
vendors. Retailers may have their own category managers, may outsource
Captain arrangement.
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the category leader. The category leader is the vendor with the largest
that category. The category captain has access to all of the data for that
category, including POS data, market data, and syndicated data from sources
such as Nielsen. The Category Captain is responsible for the success of the
category development and growth. They must analyze the data to recommend
competitors.
competitor the role of Category Advisor. The Category Advisor may also be
the same. The Category Advisor provides a second opinion in regard to the
decisions made by the Category Captain. They review the planograms and
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awards to the best Category Captains. In 2006, the criteria were: (1) product
within the category; (7) effectiveness at lifting sales for a brand’s products in
sales results that support the vendor’s claims of excellence. The importance
of the role of both the Category Captains and advisors are evident in the
Because vendors have access to their competitor’s data there are opportunities
regarding Category Captain arrangements are (1) the ability to exclude rival
vendors from the planogram or greatly increase the cost of competing for the
rival and (2) the Category Captain can use the role to facilitate collusion
Captains determine which brands and the sizes within the brands are included
in the planogram. They may limit the amount of shelf space, merchandising
regard to collusion, the Category Captain has access to proprietary data and
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years, the concept and actual utilization vary within retailers and their
management is “doing business as it has always been done, just with a new
management is using the category captain arrangement as a free labor for the
partnership based upon sharing information for the success of the entire
store by analyzing POS data, market data, and consumer data. For the
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about here
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number of retailers outside the grocery arena such as bookstores and petstores.
been around a seven percent increase in sales growth for the retailer and five
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Retail Category Management
including software applications, (5) linkage between the business needs and
sourcing including the Internet and business intranet, and (6) a history of
core features must become part of the retailer’s strategy and business process.
commit to provide funding for the necessary tools and training of personnel.
High-Low Pricing
Most retailers choose a retail strategy based either upon every day low
low pricing, retailers seek to price a product for the long-term, negotiating
with vendors for the lowest possible price for a period of time. When
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Retail Category Management
consumers buy the product they assume the price will remain consistent and
retailers a discount for a given product for a limited period of time. The
retailer buys in large quantities and warehouses the goods until they are
needed in stock at the stores. The retailer then offers the consumer a
discounted price on the goods for a short time—for example the “weekly
the high low strategy may become a burden for the retailer. Consumers begin
to expect weekly specials where they buy in bulk causing an increase demand
for shelf space and increased stocking costs to maintain an inventory for that
good. In addition, retailers must invest funds for warehouse space. Just in
time (JIT) inventory is based upon ordering goods and have them delivered
“just in time” to sell the goods, thereby eliminating storage fees and allowing
distribution center and moving the product across the dock to the retailer’s
excess products when they are on sale. This cycle of high and low pricing,
can not maintain sustained and consistent periods of production. When they
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plan to offer lower prices for goods to retailers, they must increase production,
must then incur increased storage costs in distribution centers as most retailers
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experience with the retailer. Grocers in the United States are designing their
grocers like SuperValu, Food City, Wal-Mart, Bi-Lo, Adli, and Food Lion
seek the value oriented consumers in the majority of their formats. Another
strategy is the premium supermarket, like Kroger’s Fresh Fare, Whole Foods
aroma therapy massages, coffee shops, cafés, Wi-Fi access, prepared meals,
sushi bars, and specialized bakeries for the consumer seeking a shopping
experience. The grocery stores seeking the value consumer, must continually
to constantly lower costs thereby lowering prices for the consumer, hoping the
consumer will then purchase more goods. The challenge of this strategy is
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maintaining the cycle within the given market constraints. In order to be truly
effective with this model, the retailer must constantly attract new and more
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store. Whereas the productivity loop seeks to constantly lower costs, the
experiential loop.
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all initiatives will continue to evolve and change. In the following chapters
you will learn more about the specific details of the category management
process.
Review
Retailing has in many ways returned to the principles of the Mom and
Pop retailers. The need to offer the right product at the right time at the right
must utilize point of sale data, consumer data, and consumer behavior. The
category management. The guiding principles (1) focus on the consumer, (2)
(5) convenience, and (6) lower costs. Planograms are the graphic
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Discussion Questions
2. What are Strategic Business Units and how are they related to
Category Management?
Category Management.
Leader.
8. Discuss how Every Day Low Pricing (EDLP) and High-Low Pricing
Management? Why?
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• http://www.ftc.gov/speeches/leary/050328abainterview.pdf
• www.acnielsen.com
• www.cpgcatnet.org
• www.fmi.org
• www.nacsonline.com
• www.progressivegrocer.com
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List of Figures:
1. Store Aisle
3. Planogram
5. Productivity Loop
6. Experiential Loop
List of Tables:
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List of terms:
Consultants Planograms
Distributors Supplier
Facing
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Kitchen Bathroom Laundry Cleaning
Supplies Supplies Supplies Supplies
Figure 1. Store aisles as categories of merchandise Coffee & Sports Bottled Soft
Teas Drinks Water Drinks
Category
Margin
SKU Gross Margin
Figure 2. Efficient Consumer Response Contrast Traditional View Versus Category Management View
Figure 3. Example of a planogram
$35
Sales Go Up $3,500
$30 $3,000
$25 $2,500
PRICES
$20 $2,000
SALES
$15 $1,500
Prices
Go Down
$10 $1,000
$5 $500
$0 $0
Jan Feb Mar Apr May Jun Jul Aug
Lower Cost
Structure
Higher Sales
Lower Prices
Increase
Atmospherics
Higher Sales
Better Experience
The category captain arrangement provides A true partnership between retailers and
free labor for the retailer provided by the their suppliers by sharing information for
supplier. the success of the category.