What category management – or fact-based selling – can do for you.
It and its components go by many names: category management, fact-based selling, shelf management, micro-marketing, schematic development, space management.
But just what is category management?
“Category management is good business practice,” declared Joe Patti, vice president of retail planning and category management for Anheuser-Busch. “It is understanding the consumer/shopper and developing strategies and tactical plans to meet their needs, while also meeting your business objectives.”
Category management is when a retail operation, most often in partnership with a supplier or suppliers, gathers information pertaining to a type, or category, of product, such as vodka, and uses that information to make business decisions. Category management, or as it is often called, fact-based selling, can affect a retailer’s decisions about what products to sell, how many and which brands of those products to carry, how many of each brand to keep in stock, where to put those products in the store and how to arrange them on the shelf.
Creating optimum shelf
“Category management applies an analytical discipline to making decisions about the category. It is about what is best for the consumer and the category,” said Jeff Schouten, group director of category management for Miller. “Prior to category management, the business process or model was all about the deal. Negotiation was king; success was based on negotiating the best deal.”
However, the analysis that goes into fact-based selling can be quite complex.
“Category management is a process in which manufacturers and retailers combine efforts and information to determine the changes needed to a category for maximum returns to the retailer while providing the most efficient assortment for the consumer. The process includes analysis of assortment based on sales and dollars, fair share of shelf to dollar returns, shelf inventory, SKU placement, consumer loyalty, pricing analysis as well as promotional planning for a category,” explained Kristy DeGuisto, category management manager for Allied Domecq Spirits, North America. “The end result would provide a retailer with an easily shopped, consumer-friendly category that is organized with a methodology that a consumer can follow, yet provide price, flavor [and] size options for a consumer to maximize category purchases.”
The starting point for a retail operation looking at a category would be its own sales history for that category. But that — and the sales taking place now — is just the beginning, experts say.
Category management also looks at demographic information about consumers in the store’s area and at the sales history of the category in nearby markets and competing stores. This is traditionally where suppliers come in. They are able to provide retailers with such information, using general consumer data purchased from marketing information companies, such as ACNielsen, IRI [Information Resources, Inc.] and Spectra. These companies collect and analyze vast amounts of information, including point-of-sale data from hundreds and thousands of stores and consumer panel and consumer survey information. This information can help determine what the potential sales of a category could be for the retailer.
“Suppliers can add value by providing [an understanding of] category dynamics and consumer/shopper behavior,” said Patti. “Information on how consumers shop the category in channel (consumer decision trees) and their behavior once they are in the store are valuable for retailers to understand.”
Other suppliers agree.
“Generally speaking, what you are looking to do is simply understand consumer purchasing. How do they buy the product? Why? From where? When? What is their trip frequency? What are the other items in their shopping basket?” said Sam Anderson, a strategic account leader at Brown-Forman.
And the continuing enhancement of computer technology has enabled suppliers and retailers to collect and analyze such information. “Category management is not anything new,” said Anderson, “but technology has enabled us to understand the consumer a little more. When scan data was first collected, we had it, but we didn’t know what to do with it. Now, using technology, we can mine through it and really understand the consumer. The biggest change in category management, for both retailers and manufacturers, has been the technology.”
This technology allows retailers and suppliers to efficiently and effectively use the huge amount of information available to them. The industry has been able to “leverage technology and computer processing advances to automate processes that used to be done in a much more data-intensive fashion,” said Anheuser-Busch’s Patti. “Technology combined with the greater breadth and depth of information (for example, store-level scan data, shopper behavior) has improved our productivity and ability to deliver plans quickly with more targeted insights.”
But what can category management realistically do for a retailer?
When it comes to category management, “an increase in business is the least of expectations,” said Allied Domecq’s DeGuisto. “Implementation of a category management plan will do the following: remove items not selling well in the category, increasing shelf space for exceptionally moving items that may be losing sales to out-of-stocks, it will bring in hot items in the market not currently being sold [by] the retailer and, lastly, it will organize the shelf to place items on the best shelves for their positioning to maximize sales. When done properly, accurately and without manufacturer bias, category management is simply the right product at the right price at the right location.”
Still, retailers do wonder about bias. Here, after all, is a supplier, with products in a category, offering them free advice and support. Who wouldn’t wonder about the advice being given? Is it really meant to grow the category as a whole or is it aimed more at increasing sales of the supplier’s own brands?
Traditionally, a retail operation works with one supplier, called the “category captain,” on a category. Increasingly, retail operations are also designating a second supplier as the category’s “validator.” Allowing the validator to see the information and advice being presented to the retailer is meant to ensure against bias.
Suppliers are also concerned with the perception of bias but say that the proof is in the pudding, so to speak. A retailer can see, soon enough, what kinds of sales increases occur when a supplier’s program is followed.
“The key to a good working relationship is trust,” said Anheuser-Busch’s Patti. “The retailer must trust the supplier to provide objective, information-based insights that will benefit the category. The supplier earns this trust by providing solutions that meet the retailer’s overall category objectives, not by focusing just on doing things that will grow sales for the supplier’s products.”
Allied Domecq’s DeGuisto agreed.
“Suppliers and retailers can take years to develop a partnering relationship to the category captain level, and from there, it could take several more years to perfect,” she said. “A mutual trust must exist between the two for the objective to be completely successful.”
And, of course, suppliers do benefit when retailers employ category management practices and increase sales. Indeed, suppliers have very good reasons to jump at the chance to help the retailers of their products. According to a recent report about beer, wine and spirits produced by IRI Information Resources, Inc., “the single greatest opportunity [for] increasing merchandising effectiveness . . . appears to be improving retailer execution.”
Clearly, by using better technology and focusing more intently on relevant demographic, sales and consumer-based data, suppliers and retailers are making strides in their approach to successful category management, or fact-based selling, or category optimization, or…
No matter what you call it, it’s all good. *
It’s all a matter of degree, according to Herb Sorensen, president of Sorensen Associates, an in-store research company based in Troutdale, OR.
“Many years ago, the focus was on specific brands. Then the retailer took a broader perspective and looked at the whole category,” he said. “Then, the newest idea, in the last year or so, was to expand beyond the category and look at aisle management.”[Aisle management considers how categories interact and how they should be placed in relationship to each other in a store. If data shows, for example, that vodka consumers are also likely to purchase rum, it might be beneficial to place those two categories near each other.]
Now, Sorensen Associates has developed a tool with an even wider focus. Called the PathTracker, this tool is meant to analyze and manage the performance of all the aisles and displays in a store.
The idea is ingeniously simple. PathTracker uses radio frequency tags on a store’s shopping carts and baskets. These tags emit a uniquely coded signal every four seconds which is picked up by antennae located throughout the store. The PathTracker system is able to “triangulate” the position of the tags as people wheel their carts through the store. This information is then integrated with information on what these customers actually buy at the check-out.
Basically, the system records how customers shop: how long their shopping trip lasted, which aisles they went into and in what order, how long they stayed in front of particular displays, how fast they moved and what they ended up buying.
So far, Sorensen has used PathTracker in six supermarkets around the country. And the resulting information has showed some interesting trends. Most shoppers the system tracked, for instance, traveled through only one-quarter of their supermarket. In fact, a large percentage of shoppers only traveled into the first 10 to 15 feet of a store aisle. Also, the system’s reports indicate that people prefer to travel in a counterclockwise direction while shopping and, on average, spent $2 more when in a store with a layout that allowed them to move in that direction.
“People also shopped faster near the end of the trip than they did at the beginning,” said Sorensen. “We called that effect ‘the check-out magnet.'”
How can information like this be used?
Most broadly, it helps suppliers and retailers to better understand customers and their shopping experience. Do customers linger for a long time in the beer aisle? Or do they quickly pick up their purchase and go?
It can help a retailer make decisions about the layout of the store. Can the entrance be placed to allow counterclockwise shopping? Can items requiring a lot of thought to purchase be placed near the entrance of the store when customers are naturally taking more time? Are there aisles and categories where shoppers spend a lot of time, but don’t make many purchases? Are there others that aren’t getting the foot traffic but could be a good source of sales?
Sorensen thinks that his system could even become an integral part of the daily operations of a store. “Certainly, right now, it is intended to be a research tool,” he said. “But maybe in 10 years, every store with scanners will have a cart tracking system.”
A cart tracking system could, for instance, keep the retailer informed about where people are in their shopping trips. “It could alert store managers to open another check-out lane because X number of shoppers are going to be coming — five minutes before they actually arrive,” said Sorensen.
With ever-increasing sophistication, it’s almost as if retailers and suppliers can know how consumers are going to shop, even before the consumers do.
GETTING TO THE CORE OF THE MATTER
Diageo is currently testing a category shelf management tool for spirits in California that retailers can use themselves. Called CORE Store (CORE standing for “Category Optimized Retailer Executed”), it is designed to provide smaller retail operations with a fact-based approach to category management by laying out spirits categories on shelf in the way that consumers like to shop them.
“We know the cognitive associations consumers make and what consumer motivations and occasions influence their purchasing behavior when it comes to spirits,” explained Stuart Barker, Diageo’s director of category management. “In addition, we have a good handle on brand interaction and know how consumers look at the shelf and what cues help them make purchase decisions.”
The support materials for CORE Store include basic spirits category shelving principles, as well as laminated schematics pages. The support materials are created based on statewide and regional category sales data, from companies and institutions such as IRI, DISCUS and Adams Beverage Group, along with Diageo’s own in-house research, and the latest best practices in category management.
“Depending on how much category management work has already been executed,” said Barker, “retail operations can sometimes see business growth of an estimated 1% to 5% by using a CORE Store type approach to optimizing the shelf.”
Arguably, category management is the attempt, using all the available information, to run a retail business in the best way possible.
“A key word in our industry is optimization — specifically category optimization,” said Barker. “Diageo firmly believes in fact-based selling. At the end of the day, Core Store can help increase category sales, improve consumer shopability and reduce out-of-stocks.”