Category Management Framework Under Test

A Proper Test For Category Management 2.0
November 29, 2018 Omnibus

Imagine tens of thousands of elements with different features. How do you manage and organize them? Especially, when the sets are dynamic, constantly changing by ingoing and outgoing elements?

Large retail formats could be seen as containers of such sets of elements and ever since they came into the existence this was one of the key problems that have to be solved in order to successfully manage retail operations.

Product categories ordered by size (sales).

A proper tool or framework might help enormously in this daunting task.  Of course, in the retail environment, “elements” are named products or more accurately stock keeping units (SKUs) and groups were actually product categories that shoppers buy in a similar way, eg. diapers, oils, chocolates etc.

Category Management v1.0

At the beginning of the 1990s, the process gained momentum with the establishment of the category management framework. The core of the idea was to put the categorization within clearly laid out 8-step framework where the categories would be run like strategic business units with own KPI’s. The rising computer-aided analytical tools should also support the process. Additionally, one of the category management ideas had the game-changing potential: turning the relationship between manufacturers and retailers from antagonist to collaborative mode.

The impact of the category management on retail management was considerate. Some retailers reorganized its retail management operations around the category management, making category managers responsible for purchasing – marketing – data analysis – pricing – tactical merchandising – sales of the particular categories. The initiative also served as a springboard for collaborations between retailers and category captains – with the presupposition of a win-win situation. The most prominent suppliers established category management departments that in many cases actually provided retailers with “free” planogramming service.

Well, all didn’t go as planned. 

In theory, the services category captains provided should bring a win-win situation. Increasing sales of Brand A should bring additional sales of a category X. But in reality what happened was many times this:

Although Cat Man collaboration increased sales of Brand A, the sales was equally undermined for Brand B and C. The overall sales of category X didn’t change. The reason behind the happening was inelasticity of a category X which is common for all FMCG categories. The above chart shows a very realistic situation, though for reasons of data privacy a bit camouflaged. Stephen Needel from Advanced Simulations analyzed more situations and shed additional light in his piece What’s The Future of Category Management.

Also, during the years, the rules of the retail game have been thoroughly changed.

The obscure network used by nerds suddenly became Internet, the data exploded into big data, offline & online converged, omnichannel prevailed, shopping habits changed, also with the millennials entering the scene – all the factors that have drawn a new retail map that called for modification, yes, even overhaul of the initial category management framework.

Further, the concept was undermined by Aldi (Hofer), Lidl and similar “discounters” who – though themselves exercising category management – have exposed the vulnerabilities of the “systematic approaches to managing product categories”. Yes, category management suddenly stood for unflexible, too complicated, self-important approach to retail.

Cat Man 2.0

Initiative for Category Management 2.0 should provide a response to the retail challenges of the new era.

Adjusting to the digital environment, opening up for the “why” of the shopping behaviour and integrating shopper marketing Cat Man 2.0. should bring up the revitalization of the concept.

All well. But some flaws of the category management concept might remain. Regarding the changes of the recent year, the vulnerabilities might be even further exposed. Let’s consider three of them:

1 – Categories combine into missions

Category management is – uhm – management of discrete categories, right? “Category thinking” is at the core of the category management concept, and as such, this point has silently been transferred to Cat Man 2.0.  If Cat Man 2.0 is considered a “discipline of determining optimal assortments” as Tom McDonald of CMA stated recently, Cat Man 2.0 shouldn’t overlook the basic stuff. Which is what?

People rarely visit stores to buy a particular category – on the basic level even most simple store visits usually end with the purchase of more than one item.

Just check scraps of paper with your shopping ideas scribbled. After examinations of these sets of written and mostly unwritten ideas, we can find significant patterns -> shopping missions.

“Quick meal”

“Something for family dinner”

“Indulge me”

“Guests are almost knocking!”

Those are some of the shopping missions that bring customers into the stores and strongly determine how the shoppers buy. You can notice that those motives exceed the individual category. Even the most simple one like “Quick meal” consists of the following categories: Fruit & Vegetables, Dairy products, Bakery, Drinks, Chocolate Bars or Chewing Gum. A proper understanding of categories and the right assortment is simply not possible without considering shopping missions.

Seeking assortment answers solely on the level of a particular category might heavily miss the target!

Omnibus’s latest research using RFID technology to track shopping carts provides more evidence for this (also see this blog article). If you’d like to discuss the findings or you need help in determining the optimal assortment regarding shopping missions – we at Omnibus will be glad to accept the challenge!

 2 – Experience matters

In the time where online becomes a serious contender for offline, brick and mortar stores and the buying of packaged grocery goods becomes more and more habitual (another name for not giving any satisfaction to shoppers / or even more directly another name for being perceived as boring to the shoppers), the experience becomes the main differentiator. Italian Eataly is already showing that categories will lose importance against experience which is more concept-based. For little expansion see this article on a blog.

3 – New opportunities

Within the category management, the main emphasis is still put on historical transaction category data and incremental innovation based on that.

But the new combination of data sources and more agile way of retail thinking should open up the paths for not only trying to constantly revitalize past categories but also for getting completely new categories into the game (many digital services, like ticketing, betting, etc, that demand almost no physical space have been introduced with huge success).

Also, discounters like Aldi and Lidl are very successfully bringing new categories into something that was once seen as grocery format – see only the non-food assortment like stationery, digital equipment, sports and leisure equipment, car & bike add-ons etc. For some products, even Ikea seems too far away from today’s customers. Rigidly holding to category management rules might be seen as anchoring when your ship should actually be sailing towards new shores and experiments.

We might further expand the list of issues. But let the trio above serve the purpose. I don’t want to say that category management is not valid – until machine learning gets fully involved in retail, category management might still be the best tool for organizing huge sets of elements – but more to emphasize that it is valid with its set of KPIs and tools within the limited scope.
Putting category management at the core of the retail management – as it is still recommended by many practitioners – might miss the target heavily!
Agree or not? Any comments appreciated – as always!

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