The Concept of Category Management - Case Study Example

HOW CATEGORY MANAGEMENT INFLUENCE RETAIL PERFORMANCE By (Student Name) Instructor Submission Date TABLE OF CONTENTS Introduction 4 CM definition and overview 4 CM contribution to retail performance 5 References 12 LIST OF FIGURES/TABLES FIGURE 1: Category management infrastructure TABLE 1: Estimated Impacts of Category Management, 1994 and 2000 HOW CATEGORY MANAGEMENT INFLUENCE RETAIL PERFORMANCE (a) Introduction Retail business is one of the leading industries in the world. It constitutes the final step in the distribution of merchandize, therefore acting as an intermediary between consumers and the manufacturers. In the past decade, retail industry has undergone tremendous changes with the attempts to provide more value for products while optimizing sales volume and profitability (McLaughlin, E & Gerard, 1995). There has been a major shift from traditional brand management to a more holistic approach referred as Category management (CM). (b) Definition of CM CM is a retailer-supplier collaborative process of managing categories of products as strategic business units (Dussart, 1998). Another widely adopted industry definition is that CM is a consumer-centred, data-based process of making business decisions on product mix, merchandising, pricing and shelving (McLaughlin, 1995). The concept involves grouping discrete groups of similar or related products into categories which consumers would ideally want to find together in a store. It is based on consumers’ view that some products categories are interrelated or substitutable and possibly, they would interchange such products in meeting their needs (Aastrup, et al, 2007; Aastrup, et al., 2008). As a result, a greater assortment of product categories from which consumers can to choose is highly imperative. Retailers focus on the assortment of interrelated products into categories to improve the performance of whole product categories unlike the traditional focus on individual brands. Product categories are defined based on the consumer’s needs and purchasing habits. This way, retailers and manufacturer enhances business results by focusing on delivering of consumer value. The concept of category management came into practice in the 1990s (McLaughlin, E & Gerard, 1995). Its conception was marked by the widespread acceptance of the broad-based Efficient Consumer Response (ECR) initiatives. The movement advocated CM as a core discipline in its attempts to align trading Partners and streamline the supply chains. The Grocery Manufacturers of America (GMA) industry association, led by the ECR movement established CM “best practices”, the guidelines which have highly impacted on retail businesses management. (c) CM CONTRIBUTION TO RETAIL PERFORMANCE Although CM is not without its drawbacks, its adoption has led to demonstrable, positive results that justify retailers’ invested time and resources. According to 1995 survey conducted by Cornell University (McLaughlin, E & Gerard, 1995), retailers and wholesalers who adopted CM had increased revenues from 4 to 5% with subsequent years reaching as high as 6 to 7%. CM practices led to cost savings, sales increases, and increased product turnover. Table 1 below shows the estimated impacts of CM on retail and wholesale investments in the US according to a study contacted by Cornell University in 1995. In this discussion, I will establish the CM’s contribution to retail business productivity and growth while safeguarding customer interests. Table 1: Estimated Impacts of Category Management, 1994 and 2000 (Percentage, %) Area of Impact 1994 2000 Retailers Wholesellers Retailers Wholesellers Cost savings 8.3 3.4 18.3 9.6 Sales increase 7.3 5.7 3.3 10.8 Increase in turnover 8.4 5.5 20.8 46.7 Increase in net bottom line (EBIT) 4.9 4.0 6.9 6.5 Decrease in new product introductions 13.2 2.5 16.3 25.0 Improvement in business reviews 21.4 2.5 55.0 35.0 Improvement in customer service 19.6 3.3 3.2 21.5 CM involves segmenting a retail enterprise into independent business units. Managing discrete groups of products as business units has significant benefits for a retailer in terms of profitability and cutting down operational costs. For instance, some products many require same market intelligence such as similar sourcing strategies and distributor relationship management strategies (Aastrup, et al., 2007). Since CM links consumer requirements with supply market capabilities, when retailers identify supplier capabilities that match their customer requirements, they can work with those suppliers to provide value for their customers. This is because supply management strategies are highly influenced by product categories and consumer needs and expectations. According to Basuroy and Walters (2001), all business enterprises want to reduce operating costs and maximize profits and growth potentials. As well, meeting their customer needs responsibly is an equally significant concern. As Dussart (1998) argues, research has shown that CM guarantee benefit of increased sales volume for retailers and their associate partners. By devising effective category strategies, retailers gain understanding of their consumers’ purchase behaviours i.e. consumer decision tree (CDT). They understand how shoppers prioritize when deciding what to purchase as well as relative importance of different brand attributes. With such consumer knowledge derived from Decision Support Systems (DSS), retailers and manufacturers can react in accordance with market demand forces to increase sales volume. Only value-added products would be displayed on shelves based on consumer demands and purchasing behaviours (Chiplunkar, 2011). Retailers predominantly practice CM to increase their profitability, revenues and reducing costs alongside optimizing product mix for their customers. According to retailers’ survey conducted in the US (Table 1), 97% of retailers supported CM due to increased sales and profitability. In addition, a study published by Accenture, "ECR Day-to-day Category Management," it was reported that businesses that practiced CM experienced up to a 10% increase in sales as well as increase in profit margin and reduction in inventory. Information Technology (IT) adoption in business processes is increasingly important in the modern age. IT involves the use of computer hardware and software to develop, design, manipulate, and implement the storing and the transmission of data. Basically every retail business requires the storage and transmission of data (ACNielsen, 2012). Retailers can store category product information as well as customer and market information on virtual databases for easier access and retrieval when needed. Automation of category business units has significant roles in decision making process. IT promotes quality and accuracy of data that goes into the CM processes, streamlining processes using automation, and integration of tactics and insights into decision-making process (ACNielsen, 2012). This enables faster response to changing conditions in the marketplace. Research has shown that retailers are using technology to make informed category and product merchandising decisions rapidly and confidently, that impact positively on their business performance (Dussart, 1998). CM promotes efficient communication across the retailers’ value chain. Supply chains are made up of people. CM gives retailers the visibility and opportunity to share information in the right way, to the right people to get the results they want. The collaboration involves exchange of information, sharing of data and joint business ventures. Retailers can also develop and implement category-based plans with manufacturers to enhance their outcomes. Good communication relations create understanding between retailers and suppliers and alignment of suppliers programs with the retailer's strategies. For example, jointly developed strategic category plans offer suppliers a better understanding of retailer issues and priorities (Aastrup & Grant, 2007). On the other hand, retailers can develop Customer Relationship Management (CRM) i.e. enduring relationships with the customers. Using relevant data and information, retailers can tailor make their promotion and marketing to individual customers therefore improving business success and productivity. Every business is prone to uncertainties that pose threats to its continuity. As a result, risk management is an integral component in every business endeavour. CM plays a critical in retail risk management. Product categories are usually under the proper management of category managers who monitor market trends and developments that may lead to commercial risks. By employing appropriate data and information analysis and interpretation, category managers are able to identify possible risks and appropriate actions to mitigate such risks (Dussart, 1998; Basuroy & Walters, 200). Vast amounts of data are analysed categorically identifying trends, measuring results, making adjustments to category strategies and overseeing overall business environment. Product promotion has significant impact on business productivity. CM product promotion deals with the efficient and effective execution of promotion strategies, which can have a tremendous impact on a particular category as well as the entire supply chain. . A retail business is a major customer-centric business. Retailers have the obligation to promote and market their products to gain competitive edge in the marketplace. From a CM perspective, a product promotion can be better executed having better understanding of the consumers, their needs and product strengths (ACNielsen, 2012; Dussart, 1998). Real-time consumer preferences can be applied productively in category assortment analysis to select and optimally place products on store shelves. This helps to meet retailer projected sales, generate required margin, and maintain defined stock cover. Since retailers come into direct contact with their customers who visit their premises to buy products in different categories, they have opportunity to promote their products and create a competitive edge in the marketplace. Customers are highly influenced by store environment i.e. layout and design and shelve management that support customer orientation and positive atmosphere. CM is founded on better customer understanding as well as better knowledge of the capability of products manufacturers. Retailers who practice CM are better positioned to cope with stiff competition in the marketplace. By adopting CM retailers develop competitive strategies that recognize customer requirements, suppliers’ capability and their business potentials. This is based on thorough analysis of strengths, weaknesses, opportunities and threats in the market. With timely, relevant and more practical information, they develop strategies to better connect with customers and optimize product placements. They employ analysis of various data sources for fact based decisions to gain advantage in the marketplace. CM emphasizes on real-time monitoring and evaluation of data and business performance to make informed business strategies. This provides a way to evaluate the extent into which adopted business decisions are contributing to business growth and profitability (Aastrup & Grant, 2007). Where business is not performing as anticipated, category managers can act on corrective measures to restore business productivity and growth. In addition, category managers can model real situations with real data i.e. POS data. CM aids to better manage and monitor predefined groups of products (Chiplunkar, 2011). Category performance is made possible by automating data analysis and decision making processes using DSS business applications. Business growth and profitability is highly dependent on management of resources. CM promotes better management through adoption of smaller strategic business units that contribute to the broader goals and objectives of entire retail enterprise (Basuroy & Walters, 2001). In addition, CM promotes clear leadership, direction and focus on execution by promoting substantive organization of resources such as personnel, assets, information while taking into account various needs and priorities. Figure 2 below shows how CM brings people, processes, information systems and measurement tools together in the management process. All the components are interrelated and play significant roles in the success of a CM. For instance, a CM would not function productively in the absence of measurement tools and processes. Figure 1: Category management infrastructure, (Aastrup, et al., 2008) In order to enable good management of product categories, retailers ensures that the right skills, experiences and expertise are applied to the right activity within a retail business management process (Basuroy & Walters, 2001). A category manager for instance, is responsible for integrating procurement, pricing, and merchandising of different brands in a category. They also play a critical role in the development of strategies that promote sales and profit margins as well as provision of leadership in assortment, promotional and communication strategies, collaborative partnerships, negotiation of trade and merchandising agreements (Chiplunkar, 2011; McLaughlin, 1995). Such integrated practices at a category level require particular expertise and professionalism to drive retail business growth and profitability. The table below demonstrates the responsibilities of a category manager in different retail businesses. In conclusion, category management is a relatively new discipline in retail business management. The new practice has entirely changed how retail stores manage their businesses and technology, staffing, customer and market perception and optimisation of their growth potentials. From the discussion, it was evident that CM promotes growth in retail sales and Return on Investment (ROI), risk management, category or business reviews, gaining stable market share through aggressive marketing and promotions. With many retail stores implementing CM in their businesses as strategic plans, it is therefore notable that CM has an overall impact on their growth and profit margin projections. Reference Aastrup, J., Grant, D.B. & Bjerre, M, 2007, ‘Value creation and category management throughretailer-supplier relationships’, International Review of Retail, Distribution and Consumer Research,17 (5), 523-541. Aastrup, J., Kotzab, H., Grant, D.B., Teller, C. & Bjerre, M, 2008, ‘A model for structuring efficient consumer response measures’, International Journal of Retail & Distribution Management,36 (8), 590-606. ACNielsen, Al H, 2012, Consumer-Centric Category Management: How to Increase Profits by Managing categories based on consumer needs.New York: John Wiley & Sons.  Basuroy, S. and Walters, R., 2001, “The Impact of Category Management on Retail Prices and Performance: Theory and Evidence,” Journal of Marketing, 65 (October), 16-32. Chiplunkar, R. M, 2011, Product Category Management: retail education. New York: Tata McGraw-Hill Education. Dussart, C., 1998, ‘Category management: strengths, limits and developments’, European Management Journal, 16 (1), 50-62. Dirk, J M, & Schramm-Klein, H, 2008, Strategic Retail Management: Text and International Cases.Springer. McLaughlin, E W and Gerard F, 1995, Category management current status and future outlook. New York: Cornell University. 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