Retail Category Management

Learn all about:

• The definitions of categories and category management
• The 8-step cycle of category management
• The four Ps of successful category management

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We’ve discussed humans’ need to put things into buckets before with Finelines, but what about categorization in general? How do retailers manage their categories?

Category management is defined as a purchasing concept which groups products together into discrete classifications. These product categories are then used to define purchasing behaviors. Examples of product categories are dry grocery goods, cosmetics, women’s apparel, and pet food.

Definitions of Categories and Category Management

According to Nielsen, a category definition “involves determining the specific SKUs that constitute the category, based on a manageable group of products that consumers perceive to be interrelated and/or substitutable in meeting a consumer need.” Walmart and other retailers spend a great deal of money on hiring category managers whose job it is to manage products and their categories.

Categories can be based on consumer needs, similar need or substitution value, and manageability. Consumer need is defined as the value a product brings to the consumer, such as the idea that minute rice is nutritious, easy to make, and prepared quickly. Inter-related or substitutable items are defined as products that meet similar needs or can be swapped for other products (such as minute rice for jasmine rice). Manageability is defined as the process of expressing categories that can be controlled in an in-store environment, with such considerations as logistics of the product (such as refrigeration needs) and size of the category (such as dry goods versus just “rice”).

Of course, Walmart and other retailers segment their products into subcategories and finelines so as to better merchandise items. This also aids in understanding the Consumer Decision Tree (CDT) (also known as product hierarchies), which assists in determining consumer buying habits and the decision-making processes.

Category management is defined in a number of ways. It is a process of turning product categories into business units and customizing them to satisfy consumer needs. It is also a strategy to maximize sales and profit via trade partnerships (e.g., retailer and supplier). Category management is also considered a marketing strategy.

The 8-Step Process of Category Management

Retail category management is a continual process. The Partnering Group first created the idea of the 8-Cycle Category Management Process. The cycle consists of:

1. Category Definition: This step determines which products make up the category and its subcategories, finelines, etc.
2. Category Role: This step goes into the purpose of the category and its place in the retailer’s portfolio.
3. Category Assessment: This is when the performance of the category is analyzed by the retailer and/or the supplier.
4. Category Scorecard: This step involves the category’s objectives and targets to see how well it has done.
5. Category Strategies: This step looks at the category’s marketing strategies and in-store services.
6. Category Tactics: This determines the optimal products for the category, along with the placement, promotions, pricing, and supply tactics (see below for the four Ps of category management).
7. Plan Implementation: This is the point where a written plan is created to ensure tactics to achieve the category’s role, implement strategies, and meet the category’s scorecard.
8. Category Review: Finally, the cycle begins again with measuring, monitoring, and modifying the category’s progress.

Category Management 8 Step Cycle

Utilizing this process provides a framework for the retailer and the supplier to work together to create profitable scenarios for products.

The Four Ps of Category Management

The four Ps of category management are Product, Placement, Price, and Promotion. This concept is used to better understand the CDT and create a schema for products. The idea is basically, “Putting the right product in the right place for the right price at the right time.”

Supplier Four Ps:

Product: Suppliers need to be able to group their products into defined buckets as defined by the supplier and the retailer together. This involves creating a unified brand name; defining the quality, types, and sizes of the product; creating packaging that properly displays a product’s use; the styling of the product; and the service the product provides and how it relates to other products in the same category.

Place: Suppliers should be able to define the placement of their products by category, including the destination channels, sales coverage, warehousing, and logistics.

Pricing: Suppliers need to create a price strategy for their products in a particular category. They also should look at allowances or deals they give their buyers and create a discount structure, as well as provide bundles of products.

Promotion: Suppliers need to provide advertising, a sales strategy, sales promotions, and publicity of their products in a particular category.

Retailer Four Ps:

Product: For retailers, they need to look at the number of items in a category, the assortment of products, and the market coverage.

Place: Retailers will need to consider shelf allocation and layout and devise detailed planograms.

Pricing: Retailers need to look at the cost of products in a category and create a price strategy, looking at market price and price gaps.

Promotion: Retailers should also view the feature frequency and feature price of products in a particular category, as well as create promotional displays.

Analytics of the Four Ps

There are many benchmarks and trends to look at while analyzing the four Ps of category management. Additionally, consumer analyses and in-depth analyses must be done on each level to determine the success of categories.

Product

• The benchmarks of the product level should look at the share of items in a category, including the fair share index versus category share. 
• Trends to watch are the change in the number of items, the share of items as a point change, and the distribution point change. 
• Consumer analysis needs to look at demographics, the market basket, household expenditures, the product’s share of requirements as well as its loyalty, and shopper/store clusters. 
• An in-depth analysis will look at the market share per SKU, the sales per point of distribution and distribution points, the product’s cumulative rank, and the variety of the product versus its duplication in a category.

Place

• The benchmarks of the place level will look at the share of shelf space and the fair share index.
• Trends to watch are the linear shelf change and the percent shelf change.
• Consumer analysis needs to dive into the shopper/store clusters, demographics, and the CDT. 
• An in-depth analysis occurs through data-driven planograms and looks at turns, category profit, gross margin return on investment (GMROI), and out of stocks.

Pricing

• The benchmarks of the pricing level look at the percent of the product in a category sold on temporary price reduction, compare the index with the market value, and look at sales margins.
• Trends to watch are the average price percent change and the percentage change versus the market price of the category. 
• Consumer analysis compares the percent sold on a deal and takes a look at brand loyalty in a category.
• An in-depth analysis will check the return on investment (ROI), product lift, category efficiency, GMROI, the correlation and regression of sales and forecasts, the contribution of the category and its products to the sales margin, the sales per million sold, and price elasticity.

Promotion

• The benchmarks of the promotion level look at the category’s share of ads, the cooperative share of promotional materials from the retailer versus the supplier, and the fair share index.
• Trends to watch are ad changes and the percent sold on ads and change in sales numbers due to ads.
• Consumer analysis checks the purchase frequency and the consumer purchase cycle. 
• An in-depth analysis will look at product lift, efficiency, gross profit, best sales vehicles, incremental sales, promotion pricing, percent All-Commodity Value (ACV) sell-out, and competition.

Successful Category Management

Watching the four Ps of category management will help suppliers and retailers alike be successful, but suppliers need to pay special attention to sales numbers and consumer trends. Suppliers can work with buyers and retailers to go through the category management cycle. Walmart, for example, has a category management tool in Retail Link suppliers can use to edit or update their categories as needed.

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