How to Reinvent Category Management in AI Times

How can you improve the value your Category Management brings to the retail game in a data overloaded, fast-changing world? AI is sweeping the retail scene, while the recession is knock, knock, knocking on the door.

Physical, brick-and-mortar, retailing is here to stay. But the seismic market shifts are dealing cards on the retail market anew.

For the traditional retailers,  brought up in a pre-digital and especially pre-AI world, it means they will have to revitalize, reinvent, reengineer the processes, and tune them to new conditions. The article discusses how retail category management – a fundamental retail function bringing together the purchase and the selling side of the retail business  – might be a burden but also an instigator of change.

This is an initiative text. A startup document. First in a series of articles on the topic of retail transformation in AI times, focusing on the point of view of traditional retailers.

Every transformation needs some coordinates, and some temporary charts that help our orientation. Here are some initial questions that will help us navigate along our discovery route:

• Ideal: Remarkable. Why should we start from the ideal of »remarkable stores« – the ones that stand out from the crowd, satisfy customer needs (and sometimes exceed expectations!) so that the customers return to the stores?
• Impact of transformative forces on professionals. How does the looming change brought by AI and other transformative forces look from the perspective of current workforce, professionals, yes, people employed in category management departments?
• Champions of remarkable. What can we learn from the champions of remarkable physical retailing in the pre-AI age, e.g. Ikea, discounters, H&M, ICA, Body Shop, The Flying Tiger, etc?
• Developed vs Developing. What does it mean to be future-proof for developed countries and what to  developing countries where retail is still struggling?
• Sourcing or Selling? Is category management – as we know it – more a sourcing than selling function (and therefore isn’t meant to seek creative solutions)?

But before we start to pursue the answers let’s examine the current situation of Category management. Let’s dive straight into the fundamental problem: the more traditional retailers press traditional category management efforts, the more they follow the golden 8-step rules, the less the return it brings. A fact: during the past years the average margin of European retailers has decreased by 3 percentage points. That’s huge, massive. The current physical retailing sea is red from the competition but short on the innovation that leads to the blue seas.

OCTOBER 2019: WHY RETAIL CATEGORY MANAGEMENT DOESN’T WORK ANYMORE?

We’ll start back in 2019. Just a few, huh, two!, months before the little virus turned the world upside down – I was invited as a speaker at the leading CPG and retail event in Slovenia.

The economy was growing. Sure, the discounters were gaining market shares but the expanding household consumption pie seemed big enough to please everyone. The top executives of regional retailers also mostly waved away the threat of online commerce. Online retailing was not the breaking news anymore, after a decade of the “online hype” the market shares around 3 – 4% looked crummy. Some of the retailers even canceled their home delivery efforts.

In these circumstances, chosen topic, which had been brewing in me for years was kind of off-beat:

Retail category management, as we have known it for the past thirty years resembles antibiotics. Due to excessive use (often for the wrong problems), its efficiency diminished. Especially in a fast-changing world that calls for increasingly flexible responses.

Back then, Finance newspaper took the opportunity to ask me a few questions that served as an introduction to the lecture.

Now, after at least 100 years have passed since the fall of 2019, it might be interesting to revisit some predictions from that long-ago time when Corona was still a somewhat forgotten Mexican beer and AI was the interest of detached computer geeks.

Finance: Why do you claim that category management as we knew it in the 1990s no longer works today, and what approach will retailers need to start using in the coming decade?

SH: For the answer, it may be a good idea to look back at the starting point. Category management is a concept developed in the Western world in the early 1990s – that was a time of mass enthusiasm for large format stores and the dominance of powerful retail chains, reinforced by the increasing use of early computer technology. Customers seemed to want more and more choice, they were fascinated by varieties of new products – and production followed suit. Category management was a useful tool for retailers, as it enabled the efficient classification and management of an increasing number of products and services. This, of course, influenced the reduction of costs, the standardization of the point of sale, and more efficient use of the sales space.

In Slovenia and the region, the full implementation of category management occurred with a delay of about 10 years, at the same time as the collapse of small private shops and the concentration of trade in large chains, which today in the grocery industry are called “traditional” retailers.

In stable growth conditions, category management thus became an increasingly effective practice. Using analytical tools and specialized software, large retailers took care of the organization of their points of sale and financial results. Which in this gradually fell away or has been pushed more and more into the background is the creative, developmental function.

But with digitalization, the transfer of part of sales online – Amazon is already the largest retailer in the world – and changed customer habits, the weaknesses of category management came to light. Complicated practices, reflected in a large amount of past sales data, can deaden initiative and thus make a retailer immobile in a world that demands flexibility and innovation.

It became clear that such category management is more of a burden than a source of vitality for retailers. Changes are needed in the direction of the simultaneous “smart” use of data and the revival and strengthening of the creative, development function. Ikea predicted this trend long ago, as development and design functions have always been an integral part of category management.

By the way, Slovenian companies, which have barely implemented category management, naturally find it difficult to accept the above.

Finance: How has the onset of the digital age affected retailers and consumers? How much have they changed in the last ten years?

SH: Digitalization has changed the entire society. In the book The Shallows, technological publicist Carr shows how under the influence of the Internet, our brains have experienced literal physiological changes. So the perception changes, and of course it affects everyone. Price perception, supply, role of brands etc.

Retail commerce has largely moved online, Amazon has become the largest retailer – on the other hand, the physical world is dominated by new business models based on the acceleration of production cycles (in the textile industry, e.g. Zara, H&M). Of course, new generations of customers entered the market, who no longer remember a world without mobile phones. Thus, for them there is no longer an offline and online world, but only one world where offline and online are part of the same equation. The open questions of the impact of consumption on the environment are increasingly influencing the perception of customers.

Since the store is a kind of mirror of society and its desires, all of the above is reflected in it extremely quickly.

POST-COVID: SEISMIC RETAIL SHIFTS

Despite all the upheavals of 2020, from today’s perspective, the trends described above have not reversed. At most, they received a new boost.

We can just repeat them here:

Changed shopper habits

Increasing appeal of private labels

Less is more in physical stores.

Themes over categories.

• Categories are more and more sold in combination with other categories, often solving the shopper’s goal (“eat something for breakfast”, “on-the-go”, …)
• Themes, such as “back to school,” “summer is coming,” and “spring revival,” increasingly boost shopper interest, even in groceries

IKEA turned furniture retailing upside down. You can see how traditional retailers sold rows, and rows, and rows of items from the same category, couches, chairs, tables. IKEA? Theme-based. Furniture is lifestyle. Interior design ideas are sold. In 1980s IKEA became a synonim for remarkable retailing. Once innovative business model continues to pull customer traffic into physical stores, while the digital channels are less developed.

Planet & Society

• Sustainability or commitment to green practices like “net zero commitments” become a key competitive advantage  and often a differentiator in customers eyes; research from the institutions like HBR suggest that green practices increase customer loyalty and their retention
• Reducing waste and adopting eco-friendly practices are complemented by changed business models and innovative technologies.

Increased time pressures.

• In the overabundance of shopping channels, product options, and life pressures, shoppers are running out of time
• The value of “time solutions” is increasing
• Convenience elements should be in-built in the solutions retailers provide.

Remarkable retailing.

• New competition, including discounters, specialists, e-tailers, and startups, is entering traditional retail markets.
  How about this? In the twelve weeks ending October 1, 2023, Aldi’s sales increased by 14.9 percent when compared to the corresponding period a year earlier (statista)
• Profitability and once-stable market shares are under constant attack.
  How about this? Between 2019 and 2022, the average margin of European grocers decreased by three percentage points (McKinsey, 2023)
• And How about this? Only retailers that differentiate themselves by providing value to customers and simultaneously renovate will survive

Explosive Expansion of Data. 

Internet bandwidth has grown 57x over 10 years (Nielsen Norman Group) -> Data rate is proportional to the available bandwidth (Quora)

• Rapid explosion in volume and variety of data
• Tracking possibilities across the path to purchase where individual consumers have become walking data generators that leave a data trail each time they make a purchase with credit card, loyalty card, send a text message or search the web (International Journal of Research in Marketing)
• Omnichannel Data Integration – hm, a little fact: the term “omnichannel” was first used in 2003, when early category management was already past the golden years

AI and Machine Learning.   

On top and closely linked to the forces already mentioned above, AI and machine learning will plough through the retail environment. No one will escape the changes, but those that will ride them will be better off than others who will leave everything to chance. But there is an enabler. Those that have excellent processes already at place will have a better starting position. Those who seek a magical AI shortcut will fail.

And finally, the 10th trend, not actually a trend but an economic situation that is going to have huge impact (especially with giants like Germany having household consumption broke off to -1,2% in Q1 2023 vs 2022) … Economic Downturn Looming. Perhaps, someone might see this economic trend too far-reaching for “poor old” category management to deal with, but the trends will certainly have impact directly on shopping habits, also in-store behavior (not to mention all the critical variables of retail success).

NOW: HOW CAN CATEGORY MANAGEMENT ANSWER?

One thing is clear. Surely not by stepping up the current category management efforts.

Category managers are already highly stressed in most known cases. While there might be some room for increased efficiency, the answer lies in understanding fundamental changes, ideating the image of future success and creating a roadmap for the revitalized, reinvented, and reorganized processes. Then, start with experiments to gain momentum for change.

Only thus will category management pinpoint the future-proof retail companies that will sucessfully cope with the megatrends.

The purpose of this article is to sketch initial lines for the transformation, the detailed outline will follow in a series of articles on the topic.

Using old tools (traditional category management) in changed market reality resembles a cyclist who pushes and pushes instead of shifting the gear.

Pivot 1: No Retail withot AI Category management. AI as a transformative power.

No. AI’s miracle algorithms that solve retailer’s fundamental problems are Hype. HYPE.

Yes. AI will revolutionize both our attitude to what knowledge is, as well as the entire retail landscape. Memorizing facts becomes irrelevant, repeating the tasks that bring to category analysis each quarter also. But the knowledge of extracting useful insights will gain prominency. So will the roles of data scientists and systems administrators.

No doubt, AI will plough through retail environment to the extent that nothing will remain the same.

Yes. AI will overhaul the yesterday’s roles. Some skills linked to Category management will become obsolete. Automated activities will be taken over by computers, and the human energy thus released will have to be redirected towards new competitive advantages.

No. Seeing AI as a prime cutter of the human costs is getting AI completely wrong. Rather, let’s turn it around: in the right hands, AI can become a lever for differentiation and a whole new generation of customer value. Human input coupled with continuous knowledge renewal will increase the difference between successful and unsuccessful traders.

Yes. There are promises. Through transformation, Cat Man 2.0 might help take off the iron shirt of old habits and bring it closer to the promise of fulfilling customer expectations.

Pivot 2: Responsive Category Management. Swift, flexible, agile.

Category management, with its engineering mindset built into 8-step process has improved the management practices revolved around huge number of products. It enabled their management, defined KPIs for measurement. But with all these engineering elements, Cat man increasingly pushed away the need for quick response, boldness, and experimentation.

Yes, the traditional rational, engineering approach worked pretty well within the paradigm of continous growth and stable consumer conditions.

Until filled with self-importance Category management went too far!

More and more it took customer behaviour for granted. Building the power of mainstream brands,  hardly recognizing startup players, it became clad into the iron shirt of old habits. It often misunderstood the meaning of market changes – former discount competitors like Hofer (Aldi) and Lidl were much more agile in that respect. The attitude brought to some spectacular failures of traditonal grocery retailers, for example.

The engineering approach failed when in changed environment it became necessary to innovate.  New times expose the need for responsive Category Management.

We mentioned explosion of consumer life styles, in western countries pushed further with growing segments of older people. The tecnological gap between the segments has widened, expectations are more and more dispersed. Localization of the assortment is often taken for granted.

Responsive, swift, flexible, agile, Category Management is the future-proof solution.

It is necessary to understand seasonal adjustments, follow new trends, prepare space for cross-category megatrends such as a respectful attitude towards the environment.

To this end, it is necessary to equip the old “strategic” thinking with a culture of experimentation.

Lean methodology tested and verified in an innovative start-up environment is a suitable framework.

Complemented by knowledge and direct business experience, openness to experiments, pilot projects and the rapid transfer of findings to daily activities will change tomorrow’s trade.

Pivot 3: Actionable Insights as Dynamo of Fresh Growth

In times of oceans of data for retail success, finding and creating actionable insights becomes even more crucial. One key issue remains gaining valuable customer insight where siloses between departments are still preventing the flow of data and a wholesome view on customer.

Category Management in time of data abundance, machine learning algorithms and AI, will need to close the gap between highly trained data scientists and business users. We’ll discuss the ideas and practices in a follow-up article.

Pivot 4: Sustainable & Innovative Category Management

Here’s the image. Future-proof category management as a great integrator:

• upgrading analytical computer algorithms with bold creative hypothesis
• putting together Data Science and Innovation
• sound process engineering fostering efficiency will be consciously put to test with experimental pilot projects
• the long-term profit comes only through sustainable practices

The category manager 2.0 will need new new skills to assume a changed role in such a system. In the new form, Cat Man might look more like a cross-functional team than a department.

Cat Man will turn into Cat WoMan. It’s time for it, all around the society, time for that old role of women who take care for the future. Piles of surplus goods, 40% of world food thrown away, plastic packaging stiffing the oceans, embarassing self-centredeness call for it. Cat WoMan should solve not only commercial issues, but also contribute to the sustainability of solutions through experiments.

ROADMAP FOR FUTURE-PROOF CATEGORY MANAGEMENT

“Change is hard because people overestimate the value of what they have — and underestimate the value of what they may gain by giving that up.” – James Belasco & Ralph Stayer

The transformative, nimble, swift Cat Man (yes, Cat WoMan, why not?) should help retailers sail out of the red oceans of low profitability. Cat WoMan brought up in AI times, aims to support remarkable stores, ones that stand out from the crowd by generating value for dynamic customer styles with new set of expectations while at the same time emphasize respect for the planet and human beings.

Impossible? It always is. Long-term goals will always change on the way. Besides, things always seem impossible until they’re done. Words of “the” Nelson Mandela. Who should know some things about what’s impossible.

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To illuminate the road towards future-proof (means: flexible, loving the insights, open for experiments) category management, I started preparing a series of articles. It’s going to be mostly free content on Omnibus blog pages published in the next 6 months.

I’ll try to gather insights and direct you to resources that will provide you with complete set of tools to tackle future-proof category management challenges, lead you on the road of reengineering, and bring new customer value aligned with changed times.

Questions will be set to experienced practitioners, new horizons opened by out-of-the-box professors, and also solution providers. All that to help the ships of category management transformation carry the retail organization from the bloody red oceans, where profitability is decreasing more and more, towards the blue seas – or better, blue bays – around which opportunities for undiscovered blue oceans will open up.

All combined and enhanced will be published in a longer piece, an e-book, currently under a working title Neverending Quest For Precious Category Management.

The aim is to show how retailers and CPG companies might response to the situation impacted by the mega forces described above. Also, to provide a roadmap for the future-proof generation of Category management – lean, flexible, and open for innovation in digital age.

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Of course, the path to a new value will also require perseverance, good feedback loops and a lot of corporate energy.

But if this will bring us closer to remarkable retailing, outstandingly catering for human needs, and conscious about planetary & human issues, that’s an adventure worth taking.

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