Prior to discussing Category Management, it is helpful to position
Category Management in the context of several opportunities facing
Category Management represents a method for managing increasingly
complex consumer demographics. Consumer lifestyles have changed
dramatically over the past decades. Consumers are getting more
demanding and want to choose from a great assortment of products.
Furthermore consumer satisfaction is a great advantage in a competitive
Given these challenges, many distributors and suppliers are intensifying
their efforts to understand and meet the changing consumer needs.
For example, many have a growing interest in understanding the
composition of their "loyal consumer base" and in defining
the purchase behavior associated with these consumers.
Awareness is growing that failure to recognize and appreciate
consumer loyalty can be costly. For retailers, research consistently
shows that the loyal consumer represents a fraction (20 to 30
percent) of consumer traffic yet results in the majority of sales
and profits (70 to 80 percent) [van
By providing better consumer value through Category Management,
both distributors and suppliers can become more productive, especially
in the key areas of new product introductions. But suppliers are
faced with significant competitive pressures as well. In addition
to the intense competition among manufacturers in increasingly
mature categories, the emergence of high quality distributor brands
has further pressured the market share of national or regional
brands. Concurrently, many suppliers are experiencing unprecedented
new product failures.
It was estimated that 95 percent of more than 17.000 new items
introduced in 1993 would fail within 12 months of introduction
[Partnering Group, 1995]. As a
result, like retailers who are over-stored, many segments of the
industry exceed their capacity, especially in the utilization
of production facilities.
All these and other changes have triggered many within the industry
to do more with current resources and to refocus on the basics
of meeting consumer needs for value, variety and service. This
is where Category Management can be a powerful tool for meeting
these consumer needs in a marketplace sharply and more competitive.
What is Category Management?
The purpose of Category Management is improving the operating
results of the company by focusing on the consumer. Consumers
are getting more demanding and want to choose from a large assortment
of products. Furthermore consumer satisfaction is a great advantage
in a competitive business environment. In this view products are
more than goods, which are just being sold; products also play
a strategic role.
In practice one treats a group of specific products as a business
unit, which is called a category. A category is defined as a distinct,
manageable group of products that consumers perceive to be interrelated
or substitutable in meeting consumer needs. In this setting Category
Management is defined as follows by the ECR Category Management
Subcommittee [ECR Board, 1995]:
Category Management is the process between parts in the
logistic chain, where categories are being managed as strategic
business units, producing enhanced business results by focusing
on delivering consumer value.
Looking carefully at this definition reveals a few key points
of Category Management:
- Category Management is a process and involves series of interrelated
- Category Management is comprised of many distinctly different
distributor and supplier components. Therefore, this process
should not be done alone by either.
- The aim of Category Management is improved business results,
but also (considering the previous key points) an improved relationship
between trading partners.
- The underlying foundation for these improved results is ultimately
based upon understanding and meeting consumer needs more effectively
in the products offered.
Thus a basis for good Category Management is formed by good cooperation,
where the retailer takes the initiative. In order to analyze and
adopt a good strategy for Category Management, several focus areas
can be identified. Category Management has the following three
focus areas [Coopers & Lybrand,
- Efficient Product Introduction,
- Efficient Product Promotion, and
- Efficient Store Assortment.
Efficient Product Introduction
Efficient Product Introduction deals with efficient and effective
developing and introductions of new products or services based
on consumer needs. The primary goal is to reduce the number of
failures of product introductions and the costs associated with
them. The secondary goal is to react more dynamically by means
of better information structure throughout the logistic chain.
The profit due to this will be that the consumer will have a clear
product overview. Moreover only value adding products will be
on the shelves in the stores.
Product introductions can be classified in many ways. One aspect
is the measure of innovation. The simplest introduction is the
introduction of a product, which is an improvement of an existing
product. One also has expansion of the assortment, for example
introducing soap for dry skin, while normal soap already exists.
Introducing a product, which is completely new, is called a product
A second aspect of product introductions is time. Some products
are added to the assortment in a specific period of the year,
which is crucial for the sale of that product. One can think of
charcoal for barbecues in a supermarket or orange custard during
the Dutch Champions League football. The following matrix sums
up the possibilities when we combine both aspects for classification.
Time depending existing products also have to be introduced efficiently.
Non-existing products have properties, which are clearly different
from existing products, these products are relatively easy to
introduce, when compared to existing products. Therefore, retailers
have to add something extra to existing products when introduced.
The example below illustrates this concept.
Measure of Innovation
Coca Cola Light
In each class costs can be reduced and the chance on successful
product introductions can be increased by working together. For
example, a manufacturer can obtain more insight in consumer needs,
when he can get hold of information on sales from a retailer.
This can result in availability of time dependent products when
needed. By discussing the development of a product with other
parts in the logistic chain, the chance on wrong decisions can
|The butcher's shop at Albert Heijn
An example of efficient product introduction
in practice is the butcher's shop at Albert Heijn. Albert
Heijn sells barbecue-meat-packets, which is a product in
the class of time dependent existing products. Meat normally
can be bought at a butcher's shop, but Albert Heijn made
an agreement with a butcher to provide meat-packets completely
with spices and sauces. It is this extra refinement, which
made this product special.
To provide enough packets Albert Heijn also made an agreement
to internally distribute the meat between manufacturer and
warehouse by means of a conveyor-belt. This construction
minimized the number of steps from manufacturer and distribution,
which resulted in greater flexibility and supply of barbecue-packets
Efficient Product Promotion
Efficient Product Promotion deals with efficient and effective
promotion strategies, which affects all parts in the logistic
chain. Three techniques of product promotion can be identified
[Gaither, 1994], these are:
- Consumer advertising,
- Consumer promotion, and
- Trade promotion.
The goal of Efficient Product Promotion is using these three
techniques throughout the logistic chain efficiently and effectively
in order to improve the application of the promotion-budget and
to form a clear overview of products for the consumer. The next
figure displays the three techniques in relation with the logistic
The first technique of promotion is consumer advertising, which
concerns promotion between retailer, manufacturer and consumer.
Traditional means of consumer promotion are advertisements on
radio, television and advertisements in newspapers and magazines.
But with new technologies such as CD-ROM, CD-I and the Internet,
one can place consumer specific advertisements.
A special application of this technology is electronic consumer-cards,
which make it possible to track and analyze consumer behavior.
This analysis can be used to send advertisements by E-mail to
consumers. This technology also makes it possible to show a specific
advertisement on a LCD screen, when a consumer walks in the store,
based on his consumer behavior. In this way the retailer can stimulate
a consumer to buy specific products. This approach has great advantages,
however certain privacy issues must be dealt with first.
The second technique of promotion is consumer promotion. This
technique forms an important part of promotion strategy. It concerns
promotion between the manufacturer, retailer and the consumer.
One must think of special offers or premiums (little gifts, which
come with the product). Traditional means are coupons and savings-stamps.
The differences between these two are that coupons create product-loyalty,
whereas savings-stamps create store-loyalty.
The special offers and saving methods can now be implemented
more efficiently by using electronic cards, which replace the
savings-stamps and can be used to acquire a discount. Again it
is technology that makes this possible.
The last technique is called trade promotion, which only affects
the first three parts in the logistic chain. This type of promotion
only concerns transactions between companies and does not affect
consumers. The promotion often concerns special offers and discounts.
Traditional means are letters and folders, which are being sent
between the parties involved.
This type of promotion can also be done more efficiently by using
Electronic Data Interchange (EDI). This technology makes it possible
to send and receive information very fast and allows better coordination
of promotion, which can serve consumer needs better.
The following matrix summarizes the discussed techniques in traditional
form and in the more efficient form, which can be applied to serve
Advertisement by regular
Consumer specific advertisement
by new media
Discount coupons and
Communication by paper,
Communication by EDI,
Consumer promotion in the Netherlands is quite advanced.
Electronic cards are frequently used for special offers
or discounts. The most well known application is the AirMiles
card. This card enables a consumer to save points in order
to travel by airplane freely or with a great discount. This
card enables one to analyze consumer behavior. Individual
advertisements, which flow from this analysis, are part
of consumer advertisements [Distrifood,
Other similar electronic cards are the Co-op-Club Card,
the Edah Card and the Superklanten card. However the information,
which is revealed by these cards, is not used for sending
advertisements by mail. This is too costly and not effective.
To gain more insight in consumer behavior certain coupons,
with the consumer's name, are printed at the cashier. These
coupons have a barcode to speed up the administration-process
and to measure the response of the consumer to the special
offer on the coupon [Distrifood,
Efficient Store Assortment
Efficient Store Assortment deals with composing an assortment
of products and services, which is complete and profitable, and
also satisfies consumer needs. The aim is to use the space in
the store efficiently and the advantages are higher profits, better
clientele and less frequent out-of-stock sales. Efficient Store
Assortment, from the point of view of the consumer, means a better
and flexible assortment and also less frequent out-of-stock sales.
When optimizing the existing space and assortment in the store,
the value of the product, which accounts for the profit gained,
must be taken in consideration. The preferences of consumers can
be studied with the help of information on the actual sales, which
are gathered by the cash registers and by information revealed
by market research. This enables one to adjust the assortment
to the consumer's needs.
Determining the profit of a product per cubic meter can also
be helpful to assortment planning. However one must not forget
to take into account the needs of the consumer. There is a strain
between the value a consumer assigns to a product and the value,
which the product generates when it is sold.
Two methods, which can help in the above analysis, are Direct
Product Profitability (DPP) and Direct Product Costing (DPC).
Both methods are variants of Activity Based Costing (ABC). Activity
Based Costing is a method, which relates costs and profits with
activities. This results in better understanding and insight in
costs and profits, which enables one to make decisions about those
products [van Goor, 1996b].
There are several important issues, which have to be taken into
account when planning Efficient Store Assortment. Firstly, the
cooperation between parts in the chain is of crucial importance.
When several trading partners combine information about products
and sales, a good overview of the market can be formed. This makes
Efficient Store Assortment possible with great success.
Secondly the space must be allocated on basis of correct data.
Allocation space is an important key point in Efficient Store
Assortment and this space is directly related to the profit per
cubic meter. Therefore this allocation must be based on information
- Correct scanning at the cash registers,
- Historical data of sales,
- Database with products in the store, and
- Demographically oriented data.
Efficient Store Assortment is a difficult process. That is why
it is important to monitor the results of the current assortment
and the results due to changes in the assortment. This enables
one to response quickly to product introductions or special offers.
||If you have
any suggestions, comments, or links related to any of my subjects,
please send E-mail to: S.Bhulai@few.vu.nl.