COVER STORY: Category Management: Partners in time

11/15/2006
What have you done for your trading partners lately? It's a question that's certainly not off limits in the competitive space that supermarkets and vendors find themselves in today. Industry reports by sources ranging from ACNielsen to Cannondale Associates suggest that genuine retailer/supplier collaboration is vital for growing the supermarket business. A panel of industry experts formed by Progressive Grocer backs up that premise, they also acknowledge that not everyone is doing it.

but they also acknowledge that not everyone is doing it.

Truly strategic relationships in the field are still few and far between, says Jim Hertel, s.v.p. at Willard Bishop Consulting. However, the companies on both sides of the shelf that are making a deeper investment now are reaping the rewards of what he calls "joint business planning."

Category management directors from Kellogg Co. and Unilever admit they're seeing much more interest from retailers in collaboration, and they're excited about the opportunities that lie ahead. Perishables Group e.v.p. Steve Lutz is plenty enthusiastic about the new attention being paid to category management on the fresh side of the store.

But still, many supermarkets either haven't bought into the importance of mutual strategies, or feel too paranoid to share the deep data that will give suppliers more to work with as they try to construct optimal category management strategies. (In perhaps a sign that many retailers are keeping their own cards closer to the vest than ever before, several leading operators that in the past have cooperated with PG on this annual Q&A opted out this time.)

The last question we posed to our panelists is perhaps the most important: Can category management be leveraged to help the supermarket format survive in an era marked by cross-channel competition? Read on to see what the experts predict.

This year's participants are:

--Bill Bishop, David Bishop, and Jim Hertel, Willard Bishop Consulting, Barrington, Ill. (Bill Bishop is president; Hertel is s.v.p.; and David Bishop is v.p.)

--James Dodge, v.p., information consulting services, ACNielsen, Schaumburg, Ill. (Dodge was on the editing review board for the book Consumer-Centric Category Management, which was released last year, and excerpted by PG.)

--John Ferramosca, co-founding partner, Edgewood Consulting Group, Morris Plains, N.J.

--Steve Lutz, e.v.p., Perishables Group, Chicago

--Stacey Ring-Sanders, director of category strategy, Kellogg Co., Battle Creek, Mich.

--Kimberly Senter, director of category management, Unilever U.S., Englewood Cliffs, N.J.

--Ted Taft, managing director, Meridian Consulting Group, Westport, Conn.

--Win Weber, founder of Winston Weber & Associates, Memphis, Tenn.

PG: Industry reports indicate that in today's retailing environment, it's crucial for supermarkets and their suppliers to collaborate more closely to make category management work. Is this happening?

Jim Hertel: We're seeing that the concept of category management is transforming into something we call "joint business planning." The more sophisticated retailers are increasingly classifying their vendor relationships as most strategic at the top, down to what we would characterize as the transactional relationships at the bottom. The joint business-planning focus really takes place at the very top, and in the middle. At the top it's less about category plans, and more about enterprise business planning. The middle-tier relationships are focused on business plans at the category level. Then the transactional or procurement-based relationships are about price and transaction.

John Ferramosca: Although we are seeing increasing levels of collaboration, it really should be happening on a more frequent basis. We're increasingly seeing supermarkets focus on banner equity development, to better differentiate their chain from other stores and define what their store stands for in the minds of consumers. In order to create this "positioning," many retailers are discovering the critical role that consumer insights play.

Stacey Ring-Sanders: Retailers are continuously challenging manufacturers to help them differentiate themselves from their competition through center store strategy, and to better meet the needs of their customer base. Those who leverage this information on an ongoing basis will have a distinct advantage in the marketplace.

James Dodge: We see manufacturers working across a number of fronts with retailers on collaboration -- from close engagement on category management tactics, to support and participation with industry data synchronization efforts to better drive supply chain efficiencies.

Ted Taft: Competition is too intense for collaboration not to happen, and this includes not only the grocery chain down the street, but any retailer that sells food.

PG: How should the balance of power be structured between retailers and suppliers? Should retailers be taking more control of the category management process?

Hertel: The term "balance of power" almost brings to mind a wrestling match, where it's "I take, you give." We're seeing the very best companies focusing on growing the mutual pie, and then sharing in the game of growth. Rather than arguing about balance, they're asking how they can grow the overall fruits of the relationship. There's definitely a responsibility for retailers that do this the best. They need to be in control of their own strategies. Then they need to open up a discussion with those companies they're doing joint business planning with, and invite them to align their strategies.

Kimberly Senter: The power and the responsibility both have to be shared. Many retailers rely on manufacturers to do a significant amount of category management work for them, because they lack the resources to fully own it themselves. This demonstrates a high level of trust in category management professionals by retailers. In my opinion, the best way for both sides to benefit is for the retailer to provide strategic direction and clear objectives, and work closely with manufacturers.

Win Weber: Since the retailer owns the store, they should definitely control the category management process. As this relates to category analytics, improvements in technology should enable many retailers to bring analytic resources in-house. One advantage to the retailer will be the elimination of brand-biased analysis and reporting. For the supplier, resources can be reallocated to retailer-specific shopper insights. The retailer should also take control of store execution, which has been the Achilles heel of category management. This is the only way execution can improve.

Taft: The balance of power is already shifting, but in a different way than just who owns "category x." While suppliers have expertise in their categories, the attention of senior decision-makers has gone above this to concentrate on connections across categories and for the total store.

PG: Are grocers doing a better job of setting clear strategies so that their suppliers can accommodate them? Are suppliers effectively customizing their programs for specific retailers? How about for specific regions or clusters of stores?

Steve Lutz: The retailers that are most successful do more than fall into a routine of data reporting. At some point the reporting could potentially become a mind-numbing routine, where you're doing nothing more than trying to drive down the road by looking in the rear-view mirror. The most successful retailers are using an annual plan and constantly engaging in forward planning.

Hertel: Many retailers are doing a better job. I think this is going to fall under the law of natural selection for retailers -- it will be a core principle of success going forward. Suppliers are definitely doing a better job of customizing their programs for retailers. While it's not necessarily the vast majority of suppliers, it's those who've really taken that spirit of collaboration and joint business planning to heart.

Ring-Sanders: Manufacturers are more likely to be interested in working with retailers' custom programs when the strategy is well defined. Typically this kind of collaboration occurs when there is a strong partnership between manufacturer and retailer. The same type of logic -- and opportunity -- applies at regional/cluster levels.

Hertel: As far as customizing programs for specific regions or clusters goes, that's going to be a natural if you're starting with the premise that food retailing is at heart a local business. You don't have to look much further than Hy-Vee in Iowa. They're incredibly successful, due in large part to the decentralization and autonomy in decision-making they afford store directors.

PG: Are suppliers and retailers effectively using customer data, especially loyalty card data, as well as general consumer data, in their category programs?

Dodge: More and more of our manufacturer clients recognize that loyalty card data holds great depth in terms of insights into consumer demand and response to marketing efforts. Managing that data and mining it for insights can be a challenge, but leading suppliers are tackling the challenge head-on, finding ways to leverage that content as part of their broader analytical solutions.

Senter: The availability and utilization of these new sources of information that were not previously available have contributed to the evolution of category management. Advancements in technology have made obtaining consumer information easier than ever before, and not only is loyalty card data more robust in many ways than traditional panel information, it is delivered much more quickly. However, it cannot be used alone, as it only provides a view of what is happening in the specific retailer. The challenge then becomes, how much information is enough and what should be used to deliver the most effective, compelling, and actionable story to the retailer?

Taft: There are various success stories in the industry with loyalty card data. However, this has also been an issue because it tends to focus one's energies on shopper retention rather than growth. With a gradual decline in shopper visits to grocery stores, critical needs are to enhance the shopping experience, create new destination opportunities, and establish clearer differentiation. Much of the consumer research in the industry is still on adjustments based on what sold yesterday, rather than techniques to identify "what's next."

Lutz: On the fresh side, there's still a lot of room to grow. Over the last three to five years, we've really just been able to get our arms around the data, being able to provide solid data back to suppliers and retailers. The process is new compared to center store. We're now on an evolution path where the data is available and we're moving on to advanced tools that may be part of the center store planning piece.

PG: Is effective category management limited to the largest chains and suppliers, or is there innovation taking place in smaller circles?

Taft: Actually, much of the innovation is taking place among the mid- to smaller-sized suppliers and retailers. The largest suppliers, for example, are sometimes too often focused on maintaining share dominance. A perfect example is beer. For years the category management efforts have been focused on market share, and because of this, wine and spirits have been able to gain "share of stomach" at beer's expense.

Senter: Smaller retailers are sometimes more receptive to testing new concepts and programs that might take longer to gain support and implement at larger companies. We have made significant strides with retailers who are not the largest in terms of dollar sales, but whose sales growth exceeds the industry average. I find them to be passionate about carving out their unique space in the marketplace.

Weber: Our clients have ranged from $150 million retail chains to over $20 billion retail chains. We find there's an opportunity for more innovation with smaller, regional, family-owned retailers than with the larger, national retailers. Retailers such as Wegmans and HEB far outpace the industry in innovation. They have the luxury of more financial flexibility to invest, take risks, and innovate. This leadership is typically copied by others.

Bill Bishop: At the end of the day, effective category management requires the implementation of category plans at the store level, and small companies are actually advantaged in this area. Marv Imus of Paw Paw Shopping Center in Michigan is a great example.

Ferramosca: During the past 10 years, we've worked with many chains and suppliers to foster innovation, and we've seen that size is not a prerequisite for success. One instance comes to mind, in which a single-product HBC company innovated and effectively changed the rules of the game through consumer insights, which led to strategies to restore growth to a dormant category. Edgewood recently conducted a category management study with key retailers that explored developments in category management. One of the key questions posed to the trade was, "Who do you consider as category leaders?" One of the most interesting responses was, "We don't use the term 'category leaders'; smaller suppliers are just as important as the major suppliers but play different roles, often providing better and more objective shopper insights."

PG: Even though category management is still most predominant in center store, do you see retailers and suppliers making inroads in other parts of the store, specifically the fresh departments and nonfoods/ HBC?

Lutz: Category management is most predominant in center store for two reasons: 1) It happened there first, and 2) there's a better flow of data because you can get information from UPCs. That said, the growth and excitement are in the fresh departments. You've got over 50 percent of the sales dollars in the store occurring in these perimeter departments.

But while fresh presents the biggest opportunity for growth, it can also be the biggest liability in potential opportunity gaps. In the perimeter departments, merchandising, promotion, and pricing are so dynamic relative to some of the center parts of store, where product doesn't move very much. The starting point of tackling all this, of course, is having good, reliable data. With that piece underway, we see tremendous growth in these departments, and tremendous interest. There are multiple large retailers that are now engaged in total perishables category management programs. And if they're not already engaged, they're in the process of setting up systems to identify who their supplier partners will be. For a number of suppliers, the light will go on that there's a response now that's greater than what was before.

Taft: Actually, the best applications of category management of late have been in the perimeter. Examples are the "Integrated Meatcase Program" in the meat department, and the "Total Dairy Maximization" program in dairy. While center store category management efforts tend to be more category-centric, the perimeter programs such as these are more department- and store-oriented, and use a broader range of retail tactics that go beyond just the four Ps of product, price, promotion, and placement. They include use of consumer services, retailtainment, technology, and more.

Weber: The biggest hurdle in general merchandise has been the lack of retailer and supplier sophistication. What's surprising is the number of retail grocery chains that have not figured out how to optimize performance in this department.

PG: Are emerging areas of the business, such as organics, ethnic foods, and private label, getting enough attention? What do retailers/suppliers need to do to improve efficiencies in these areas?

Bill Bishop: Emerging categories typically are not getting enough attention, and this is happening for two reasons. First, many emerging categories, including organics and ethnics, can contain a lot of slow-moving items, and variety in these categories is important. Unfortunately, simple category management principles applied in these situations can frequently do more harm than good. Second, there are not many suppliers with the sophistication or the resources in category management.

Lutz: I think suppliers are missing a great opportunity if they sit back and say, "We have to let retailers figure this out for us -- how to promote, display, and merchandise, and what the pricing should be, relative to conventional products." To expect the retailer to figure that out with everything else that's going on...that's going to be a recipe for slow growth. I think we'll begin to see both organic and ethnic suppliers start to engage at a much higher level.

Ring-Sanders: Organic, natural, and ethnic foods are evolving areas, and it's important for retailers to have a strategy in place to best leverage the opportunities they present. The right kind of strategy should include work across all four tactical areas: product, placement, price, and promotion. As for private label, it has become a core competency for many retailers, and manufacturers have realized this. The goal of the manufacturer should be to help retailers grow both the store brand and their national brand.

PG: Can category management be leveraged to help the supermarket format survive against cross-channel competition?

Weber: Yes! Category management can be leveraged to help the supermarket format survive, by making a major paradigm shift from the current model to one that puts a much sharper focus on the customer and the shopping experience. It will be very important for retailers to move from a "looking in the rear-view mirror" mentality to guide innovation, to a "looking through a windshield" mentality. Unless grocery retailers accept the fact that they must change the way they conduct business, and commit to a major paradigm shift, we will not see innovation, and erosion will continue. Those who don't change will not survive.

David Bishop: Category management can help supermarkets survive, and even excel, in today's increasingly competitive environment. From an efficiency perspective, progressive retailers are moving beyond a template-driven process to one that offers more prescriptive guidance for strategy development that will effectively support optimization activities -- for example, assortment, pricing, and sales space -- as well as direct how they collaborate with supplier partners.

Lutz: The survival of the supermarket is obviously important to retailers, but it's also critically important to the suppliers who sell to them. Any supplier that's seen their retail customers disappear because of acquisitions or the emergence of supercenters in a particular trading area understands that there's truly a vested interest on the part of the supplier to do what they can to ensure supermarkets remain successful. I think the category management piece and flow of information are absolutely vital to working with supermarkets to ensure they remain successful.

Senter: In this highly competitive environment, it's important for category management practitioners to excel in the basics, with an eye on more strategic, multiple-category, and total-store activities that will contribute to the retailer's future success. To help grocers succeed, category managers can drive short-term sales growth through tactical activities that drive efficiencies around the four Ps. Optimizing the assortment, managing the shelf, analyzing pricing, and evaluating promotions are activities -- which, if properly managed and consistently measured -- can help supermarkets uncover opportunities to prevent shoppers from fleeing to other channels. It's about offering shoppers the right products at the right price in an environment that is easy and pleasurable to shop, and category managers, through collaboration with retailers, can help to do just that.
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