Traditional category
management is an old concept in a brave new world. Retailers need a new
solution as they enable the level of differentiation necessary to attract
consumers with an ever-growing number of shopping alternatives.
Merchants need a
better way to create differentiated customer experiences, build solid category
strategies, design compelling assortments, plan productive planograms, and
efficiently price and promote to the market—and they need it now. Enabling all
this will, in most of today’s retailers, require changes to processes tools and
organizational structures. It also means better connecting existing processes,
and bringing together disparate parts of an organization like never before to
deliver a seamless customer experience.
Today, successful
category management encompasses a broader set of capabilities than in the
past, including: category role and strategy, macro space allocation, financial
budgeting, assortment planning, planogramming, price optimization, private brand
development, promotion and event planning, and joint business planning with
vendors.
In addition to an expanded functional footprint, the beginning and end
of the processes a category manager needs to manage have expanded. Many are now
defining this work as spanning from the initial development of the category
strategy and role, through to the completed reset of the store shelf and online
assortment. This is a much wider view of the world than what category
management traditionally included, and creates a big part of the challenge.
Leading retailers are
already planning for the changes and tools needed to integrate these
capabilities and define new ways of planning and managing categories, and these
efforts are paying dividends. Retailers such as Target, Kroger and Walmart have
seen impressive results from revamping category management, including a 2% to
4% increase in sales, a 2% to 3% increase in margin and a 10% to 15% increase
in inventory productivity.
But despite these
positive efforts, most retailers remain stuck in the past, partially due to
fatigue from traditional category management. And even those who have addressed
parts of the issue would benefit from a more sophisticated approach. Leading
retailers will invest in holistic changes to their processes, tools,
organization and culture to enable a necessary shift in the way they plan and
manage categories.
Tackling these historical inefficiencies and problems requires
addressing seven key facets.
1. Real customer
centricity—walk a mile in your customer’s shoes
Today, many retail
organizations are far less customer-centric than they claim to be. But in the
modern retailer-customer relationship, the customer holds all the cards, and
the retailer can’t afford to be anything but hyper-attentive to her
expectations. As a result, everyone throughout the organization—including
everyone involved in the category management process—needs to have a laser
focus on the consumer and her needs and wants at all times. Creating truly
compelling products and customer experiences should be the common thread
linking all parts of the organization and category management process.
Leading organizations
are going about this in several ways. Some, like Hy-Vee and Lowe’s, are
creating the position of chief customer officer to drive customer-focused
improvements across channels and functional groups. Others are taking a closer
look at loyalty and social media data to understand how their core customers
shop their stores and identify opportunities to capture share by satisfying
unmet needs. For example, consider a retailer who found that a key customer
segment shopped only 20% of their basket with that retailer across four
categories. By taking a customer-centric approach, the retailer was able to
identify categories in which the needs of that customer were going unmet and
exploit that gap to increase basket ownership to 40% across 10 categories.
2. True
integration—you’re probably not as integrated as you think
Highly siloed
organizations—within functional groups and across channels—have led to
processes choked by a series of handoffs and put category management, and
ultimately the customer experience, at risk of falling victim to a game of
telephone. Given the breadth of processes that need to be successfully orchestrated
to improve category management, handoffs must be effective and efficient. In
other words, integration is key. This means removing handoffs wherever
possible, and when not possible, ensuring everything is done to make them as
smooth as possible. Process and organizational design can provide some relief
here by carefully considering what can be lost in translation.
However, integrated
systems are providing the biggest benefits in tackling these challenges.
Software platforms have made significant gains in the past 10 years to expand
the functionality required to span the gaps between planning, execution and
functional areas. Traditional supply chain solutions now offer tools to plan
space, assortments and financials, and conversely, planning suites are
expanding into supply management. These tools have fundamentally changed how
processes are executed and have made syncing data, timing and weighing
tradeoffs much simpler. But they’re big, expensive and can stress organizations
ill-equipped to manage this magnitude of change. Adoption is picking up, but
slowly.
3. Strong category
strategies—if it’s not strategic, it’s not a strategy
Today, many category
strategies are lacking necessary consumer insights and are ultimately not
linked back into the category management process in an efficient way.
Developing a strong category strategy takes a well-crafted process in which a
wide array of data inputs drive unique insights, which narrow in on a set of
opportunities and thereby define required initiatives and potential benefits.
The process should culminate in a game plan for the category that defines the
steps, required investments, and expected financial or operational benefits.
As category management has grown in breadth and sophistication, it has driven
up the need for a robust go-to-market strategy the team can rally around and
cascade across support teams. Successfully cascading category strategies starts
with defining each category’s role within the portfolio. It’s also important
to coordinate strategies and tactics related to assortment, pricing, promotions
and placement across channels, and categories and functions and financial plans
should be tied to category-level targets, providing a means for measuring
success.
Throughout this wide
array of processes—from financial budgeting to planogramming, in-store
execution and marketing—it’s critical that the consumer can identify the strategy
as it was intended. For example, the value presented in a pricing
strategy—competitiveness, brand consistency and value—needs to be aligned with
the products that make up that product line—good, better, best. If these are
disjointed, the value proposition is muddled, the customer will be confused,
and the experience falls flat.
4. Clean, accurate
data—it’s true what they say about garbage in
Retailers are awash in
an ever-growing flood of data and information, but many are not positioned to
use it to its fullest. For example, while most organizations have a data
quality strategy in place, 94% suspect the data is inaccurate in some way,
according to Experian. Accuracy is clearly a significant hurdle to many
organizations’ abilities to harness analytics to drive decision making and improve
the customer experience.
Getting the most out
of all this data also means integrating it across the business, providing one
version of the truth across integrated planning processes and connecting the
dots across channels, categories and competitors to develop a true picture of
the consumer’s needs and behavior. This includes a better understanding of past
performance and consumer needs than currently exists for most retailers.
Retailers who can achieve this soon will hold a tremendous competitive
advantage, as only 37% of retailers currently have a contact data quality
strategy in place that supports a single view of the customer, according to
Experian.
5. Actionable
insights—in the end, you have to do something
Ensuring the data is
accurate and integrated is only half the battle—retailers are also challenged
to derive actionable insights from that data and use it to drive smart decision
making. Many organizations don’t devote enough time to this important exercise.
As a rule of thumb, category management teams spend 80% of their time
gathering and organizing data and only 20% of their time using it to develop
actionable insights. Plus, insights are often supplier focused—as they provide
much of the data—at the expense of the retailer’s customer experience and
loyalty.
To really unlock value
from their data, retailers first need to create a centralized analytics team
that can identify and develop core insights for category teams. Secondly, these
insights should be organized into three key categories—customers, clusters and
channel; we call these lenses. The first lens, customers, prioritizes using
data to figure out how to influence key customer segments. The second lens,
clusters, focuses on harnessing demographic and consumer data to develop store
clusters that require similar go-to-market strategies. Finally, the channel
lens helps address the growing omnichannel challenge as click-and-collect and
delivery models expand.
The key is to derive
insights with an eye toward decision making and action. Organizing, funneling
and interpreting data requires the correct structure and people to make it work
efficiently.
6. Localization and
personalization—how will you manage expanding complexity?
One of the industry’s biggest
mandates is developing personalized and pervasive relationships with customers
across channels—one-to-one retailing. Consumers expect to be recognized and
treated as individuals, and those expectations are spurring significant changes
to all aspects of retail operations. Modern category management is tasked with
“assorting to the individual,” whether that’s an individual consumer or an
individual store. Localized and customized pricing is the first push for many
retailers, including Target, Kroger and Staples, which recently made news with
its sophisticated pricing system that changes online pricing based on a
customer’s proximity to competitors’ stores.
But this focus on
granularity will also drive other changes. In assortment planning it will mean
a continued evolution from national to regional to store-level, and finally, to
individually curated assortments and experiences across channels. In space
management, retailers will need to switch from a “one-size-fits-all”
standardized approach to a store-level approach that’s flexible enough to allow
localized adjacencies and shelf and product arrangements. And of course,
marketing, promotions and pricing will change as well, as all move from a
market-based approach to one that’s highly dynamic and individualized. These
shifts will mean an exponential increase in complexity as increasingly
granular decisions need to be made across more and more stores, customers,
channels, functional areas and processes. While tools and systems will relieve
the burden of computational work and coordinating decisions, this increasing
granularity will require a significant redesign of key processes and
organizations.
7. Clear roadmap—manage
and measure progress
Of course, fixing so
many problems won’t be a cinch, and benefits require investment.
The necessary
changes span many processes and organizational silos—and we’ve seen that one
cannot be optimized without making improvements to another. Additionally,
modern category management can add operational complexity that will need to be
supported by enablers such as new process, tools and organizational structures.
Organizations that are
able to successfully transform their category management processes will start
with a clear vision, multiyear roadmap, and consensus and commitment among key
leaders across functions. The new approach to category management will also
require new tools—with considerable data needs—and new processes and
organizational change, both of which come with significant cultural
implications. Starting small will help prove out the value opportunities, while
a focus on change management will ensure that new ways of thinking take root.
Finally, focusing on setting and measuring key metrics helps demonstrate
benefits and build accountability and ownership.
Although it’s not
easy, transforming category management is quickly becoming necessary. As more
and more retailers start to address bits and pieces of the issue—78% of
retailers plan to revamp their category management processes, according to RSR—
those who pull it off now will be well positioned for what the future holds.
Meanwhile, those who stand still run the risk of watching their customers jump
ship for retailers who are proactively improving their category management
capabilities to be more customer-focused, integrated and analytically driven.
CASE STUDY: HOLISTIC
CATEGORY MANAGEMENT
Issue: A large,
multiregional North American grocer struggled with flat or declining sales for
several years—the result of a hypercompetitive market, rising supply chain
costs and intense margin pressure from a heavy reliance on discounts and
promotions.
Solution: The grocer
built customer-centric clusters based on key demographic data to inform
localized assortments and implemented leading assortment planning capabilities
to build these assortments. They also established a robust and easily
repeatable category strategy development process supported by robust analytics.
Finally, a new space planning organization and tools helped the retailer build
better planograms optimized to inventory turns.
Result: Sales
increased 2% to 4% for pilot categories across stores, and that was with only
10% to 15% of each cluster’s assortment differentiated from the core
assortment.
