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    COVER STORY: Beyond the category

    Call it aisle management, trip management, store optimization -- the future of merchandising will be built not around products, but around consumers.

    Mike Terpkosh, director of category management development and retail pricing for Minneapolis-based Supervalu, might have to change his title. In a few years Supervalu will no longer be practicing category management.

    This month Terpkosh puts the finishing touches on a guidebook of recommendations for his category managers in the field. By January 2005 this guide will get Supervalu started on a new journey to aisle management.

    That's how Supervalu currently refers to the merchandising philosophy that category management is evolving into. But in actuality, what Supervalu intends to do goes beyond the aisle, to encompass the entire store.

    Some refer to this evolution as trip management, or total store optimization, or section management, or mega category management. Whatever the term, what the wholesaler and other forward-thinking grocery industry players are seeking is a way of merchandising products in the store purely from the consumers' perspective. It's about how they shop and what their needs are, not selling them products, but rather offering them solutions.

    More than anything, the movement that will one day make category management for its own sake obsolete ought to be called consumer solution management.

    Supervalu's new strategy reflects a groundswell of change as fundamental as category management was when it first spread through the supermarket world. This new way of thinking will, in time, dramatically transform the way this industry goes to market. The holistic approach to merchandising for which it calls subverts longstanding industry practices.

    "A couple of years ago two of our vendor partners that we work closely with, ConAgra and Unilever, had each completed major studies of retail stores across the country," says Terpkosh, "looking at how stores were laid out and how consumers shopped in those stores. The two of them basically came back with the same conclusions: The consumers were having a difficult time finding products in the store, and, because of that, they weren't shopping the entire store."

    What Supervalu discovered was that supermarkets had fallen out of step with a consumer base that had changed -- one with rapidly transforming needs and shopping habits. A second study by Unilever, titled "Industry Opportunity: Aisle & Trip Management," found that 62 percent of consumers' shopping trips are quick excursions, most often aimed at buying food for one to three days. Despite progress being made by some operators with prepared foods and other "meal solutions" initiatives, supermarkets at their core were not equipping themselves to accommodate the change.

    "In the 1950s you had the housewife with two kids who shopped the grocery store for two hours," says Harry Post, category development manager for Englewood Cliffs, N.J.-based Unilever. "Today households are shrinking in size. You have working women. The population is aging. There is more ethnic diversity now. Because of this the shopping trip has changed. Now most trips are stock-up trips that take less than 20 minutes. That is all the time you have to reach them."

    At the same time, the restaurant industry has been quietly siphoning off retail revenue: While grocers focus their attention on competitive responses to Wal-Mart or Whole Foods, McDonald's and Pizza Hut are busy grabbing lunch and dinner dollars.

    "One of the biggest threats to our industry is the increase in dining out and ordering in," says Post. "The risk to the food retail industry is [in the] billions."

    Where does traditional category management fit in this picture? It doesn't -- and that's the problem. Indeed, the focus on categories works against a grocer's ability to provide the kinds of convenient meal solutions that can compete with a No. 2 Value Meal.

    "Today, when you shop a store, it's not atypical that you can go down one aisle and find boxed dinners, but may have to go one or two aisles over to rice mixes," explains Supervalu's Terpkosh. "So within grocery, that is probably the biggest opportunity we have -- regrouping to a meal solutions or a meal component type of aisle."

    Side dishes

    Unilever's Post seizes upon side dishes as another example of the disconnection -- and the opportunity: "In the sides category you have noodles, rice, and potatoes, but they are usually spread across the store in two or three different aisles. They can all be part of a supercategory -- [if] consumers get to an aisle and find the rice, noodles, and potatoes together, they will get more than one; they'll think that they can have one tonight, one tomorrow night. Grouped together like that, it influences the consumer to buy multiples."

    Another inherent limitation posed by traditional category management involves new-item introductions. With a set amount of linear space, inserting new items into an assortment means something else has to go, and it may not necessarily be an underperforming product.

    "Just think of the explosion in bottled water," says Paul Weitzel, v.p. of Willard Bishop Consulting in Barrington, Ill., a consulting firm that works with food retailers on aisle management strategies. "It went from 24 feet to 48 feet overnight. Where do you get this extra space from? With category management you have a one-in, one-out trade-off. When you work with the entire aisle, you have the flexibility to make adjustments. You can take four to eight feet from a declining category, which would be better served in another section."

    Supervalu ran into this problem with its boxed dinner category. "Like everybody else, we had ourselves locked into set sizes," says Supervalu's Terpkosh. "One category in which this became very evident to us was boxed dinners, where, if you had 16 to 20 feet of boxed dinners in the store, every year when you did the review and changed that mix, you were changing it within the same 16 to 20 feet. If you received a new line of products -- like when the low-carb dinners were introduced -- something had to be sacrificed to fit them in.

    "The right thing to have done at some point is to say, 'I need my 16 to 20 feet of boxed dinners, but I need to find another four feet next to it just for these complete meals.' But that is difficult to do, because we have category managers who are responsible for categories, and the aisles are split up across a lot of different category managers, and there isn't a good way to be able to adjust for that."

    Vaughn Roller, president of Highland Village, Texas-based software company RetailLogic, puts it concisely: "Consumers don't shop by category, so how do we optimize that experience within the context of the aisle or store?" His company is busy developing applications that can help with consumer solution management by analyzing stores from aisle level up through store level.

    Consumers' votes count

    Perhaps the best way to accomplish this is by letting the consumers themselves provide the insight. By studying market basket data, retailers can determine shoppers' buying patterns, and by layering outside data -- demographic and sales -- on top of the transaction data, they can get a fairly accurate picture of how customers are shopping the store. The key, once that sharpened image of the shopper is created, is to forget about traditional category management principles and begin instead to rebuild the store around the customer.

    Salisbury, N.C.-based Food Lion has been working on precisely this shift. With E. & J. Gallo, the chain has reinvented its wine departments at 70 locations. Instead of looking at how it can merchandise wine in a "department" context, Food Lion examined how to best merchandise wine in the store as a whole, taking into account market basket data and external demographic data.

    The result: Wine is merchandised throughout the store according to how it is consumed -- near the cheese case, for example -- and its physical place in the store is determined by traffic flow, visibility, and key category adjacencies.

    Minneapolis-based General Mills worked with a retailer to create a "Lunch Box" set to help the chain capitalize on the growth of carried lunches. Research found that consumers fill their children's lunches with five core components: a main item, a drink, a salty/savory snack, a healthy item, and a sweet treat -- and seek ease and convenience in shopping for those products.

    To address this consumer usage pattern, General Mills and the retailer created a four-foot set to shelve prominent segment leaders for each of the core lunch components, creating a one-stop-shopping experience for busy moms. The eight product groups involved in the set earned double-digit growth.

    Another example of consumer solution-based merchandising is Henning's Family Market in Harleysville, Pa., a one-store family operation since 1892. Co-owner Carey Henning completely transformed the operation one year ago, centering on his shoppers and even incurring a 10 percent to 15 percent loss in selling space to do so.

    The revamped store has two entrances. The east entrance leads to the Meal Fixings section, which serves ingredients shoppers who prepare their meals at home. Each aisle is short -- 24 to 28 feet in length -- runs perpendicular to the main grocery aisles, and carries only one type of ingredient. The west entrance leads to Henning's prepared food offerings, aimed at convenience consumers.

    A single independent store is one thing, but when a retailer looks to build a consumer-centric merchandising system across hundreds of locations, technology must come into play. Companies such as RetailLogic are currently developing software to help retailers benchmark categories and determine SKU productivities, examining multiple categories and adjacencies at the same time, to optimize the available space within the aisle. While many space management software programs are limited to category planning, applications that optimize across the entire store are scalable to thousands of units.

    "This is something different from what was done in the past," says RetaiLogic's Roller. "We're looking at where we should be increasing the size of the categories, where to decrease the size of the categories, as well as where to place them."

    RetailLogic's application examines the marginal trade-offs of performance in a category. "We're not looking at average performance," says Roller, "but rather, where is the worth of the worst-performing four feet of the aisle, what is the next worst-performing four feet, and so on. It also examines categories to find strong adjacencies between categories."

    Mix and match

    Adjacencies are something Supervalu's Terpkosh's guidebook will explore. For example, he's evaluating opportunities to include general merchandise tie-ins at every aisle.

    "We are looking for different ways of integrating more g.m. into the aisles, such as with clip-strip programs," explains Terpkosh. "We want to try and integrate them in at more places in the store, which increases impulse and increases gross for the retailer."

    To facilitate effective cross-merchandising, Terpkosh will include mobile fixture recommendations in his guidebook. "There are mobile units and various fixtures they can explore to create secondary displays," he says. "The idea is that putting these things out in front of the shopper is going to create a lot of interest, and a lot of good things are going to happen in the stores."

    For some aisles all that will be needed is a change in how the store communicates with consumers, by offering guidance -- and perhaps instruction -- as they work their way along the shelves. "What we are finding is that, in some of these aisles, it's just a matter of getting in some new signage and doing some minor rearranging, to create some excitement for that consumer as they walk down that aisle," notes Terpkosh.

    "Purina has done a great job with pet," he continues, by way of example, "whether you want to go into a full-blown destination-type pet aisle, or even if you want to do something smaller than that because of the size of your store -- maybe you just want to get some new signage in there and some educational pieces."

    Purina is tapping into consumer shopping patterns to drive its pet care shelving strategy. For instance, to draw "aisle skippers" into the pet care aisle, it leads off with a permanent pet promotion end cap and signage to announce the aisle. And just inside, colorful impulse items, such as supplies or snacks, are placed in "hot zones" to catch the attention of shoppers who might otherwise walk right past.

    So far most consumer solution management efforts have been focused in the center store. Applying the discipline to perishables sections such as meat or dairy would involve moving refrigerated cases, which, with the associated changes in wiring, is likely to be cost-prohibitive.

    However, a simple rearrangement of categories within these departments may be all that's needed to make an impact. Supervalu's recommendation for dairy is to rearrange the existing categories to get the consumer to shop the entire department more thoroughly.

    "For example, spreading the very large sales categories -- like milk and yogurt -- throughout the department gives the consumer a chance to look at more products," says Terpkosh. "It's kind of going back to some of the fundamentals, but instead of the fundamentals on the category level, it's the fundamentals of the department and total center store level, and how to get that consumer more re-engaged in the shopping experience."

    Impediments to change

    Such fundamental changes in the way a retailer interacts with its shoppers won't happen easily, or cheaply.

    "One challenge is the cost of the research," says Unilever's Post. "You have to understand how the categories interact to meet customers' needs, understand the trip as opposed to the category. There's some good stuff being done, but it can get expensive."

    In some cases a dearth of information may pose a formidable roadblock. "There's a lack of information on certain aisles," says Terpkosh. "There are aisles within the grocery department today, such as the baking aisle, in which it's hard to do anything different."

    Plus the trend toward dissolving departmental borders inside the store will require category managers to cooperate with each other, particularly if their categories are being downsized. "If you're going to look at categories in terms of trip management or aisle management, you will need cross-category cooperation," says Post. "There will probably be some operational changes to make it happen."

    The biggest challenge for Supervalu in its new venture, says Terpkosh, is the size of the undertaking itself. It can't happen overnight.

    "This is a long-term thing," he points out. "We have over 1,200 stores on the category management program today. For us it's probably a two-to-three-year project, just because we don't reset every store every year. Our independents only get resets an average of every three years. So it's kind of 'let's get started now' and gradually, over the course of time, try to move everybody in this direction and kind of try to rearrange things. Then at some point over the next year or two, when we have enough stores on the program, we will move the category managers into more of an aisle management perspective."

    Fortunately, Terpkosh says he's encountered a lot of willingness on behalf of Supervalu's retail customers to try new things and move beyond just the category level. The stores that have tested some of his concepts have seen impressive results.

    "Is it tougher to do?" asks Terpkosh rhetorically. "Yes. Does it take more time than a typical category management type of process? Yes.

    "But I kind of look at it as the next level. Once you have matured through the category management process and you've gotten from category management everything you can get, the next thing you have to look at is, 'how do I go beyond that category?'"

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