CATEGORY MANAGEMENT & PRIVATE LABEL PROFITABILITY W. Frank Dell II, CMC DELLMART & Company May, 2001

CATEGORY MANAGEMENT CATEGORY MANAGEMENT &&

PRIVATE LABEL PRIVATE LABEL PROFITABILITYPROFITABILITY

W. Frank Dell II, CMC

DELLMART & Company

May, 2001

2DELLMART & COMPANY

AgendaAgenda Category Management

– Introduction– Distributor Program– Supplier Program

Private Label Profitability– Introduction– Activity Based Costing– Net Profit Applications

3DELLMART & COMPANY

ObjectivesObjectives Provide an overview of category management and

its process Identify strengths and weaknesses Outline a supplier’s approach

INTRODUCTION

4DELLMART & COMPANY

DefinitionsDefinitions Category

A distinct, manageable group of products/services that consumers perceive to be interrelated and/or substitutable in meeting a consumer’s needs.

Category Management

The distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value.

INTRODUCTION

5DELLMART & COMPANY

Charter for ChangeCharter for ChangeFrom

Push

Salesperson

Buyer/Seller

Cost Averaging

Deals

Sales Drivers

To

Pull

Business Team

Account Management

Cost to Serve

Pay for Performance

Profit Drivers

INTRODUCTION

6DELLMART & COMPANY

Charter for ChangeCharter for ChangeFrom

Data Protection

Data

Shelf Management

Win/Lose

Fast

To

Data Sharing

Knowledge

Assortment Management

Win/Win

Fastest

INTRODUCTION

7DELLMART & COMPANY

Does Category Management Does Category Management Work?Work?Copps Corporation - Wisconsin, USA

Snack Category 3 year increase 87%– Year 1 33%– Year 2 22%– Year 3 15%

Candy Category 2 year increase 111%– Year 1 60%– Year 2 32%

INTRODUCTION

8DELLMART & COMPANY

Brand ManagementBrand Management

Started in the 50’s & 60’s Brand General Manager

ProductDevelopment

Promotions

Advertising

Profit & LossResponsibility

BrandManagement

INTRODUCTION

9DELLMART & COMPANY

Supplier MigrationSupplier Migration

Brand Management

Snap, Crackle & Pop

Vs

Tony The Tiger

Vs

General Mills

Category Management

Kellogg

Vs

General Mills

&

Breakfast Alternatives

INTRODUCTION

10DELLMART & COMPANY

ComponentsComponents

Strategy

Business Process

ScorecardCollaborative Trading Partner Relationships

Information Technology

Organization Capabilities

DISTRIBUTOR


ElementsElements Manage the category as a strategic business unit Develop strategic category plans based on category

goals, competitors and market conditions Determine price, merchandising, promotion and

product mix Collaborate with suppliers

DISTRIBUTOR


Process ActivitiesProcess Activities

Category Definition

Category Role

Category Assessment

Category Scorecard

Category Strategies

Category Tactics

Plan Implementation

Cat

egor

y R

evie

w

DISTRIBUTOR


DefinitionDefinition What products are in a category? How will categories be grouped?

Source: ECR Category Management

Category

Sub-Category

Sub-Category

Segment

Segment

Segment

Segment

Sub-Segment

Sub-Segment

Sub-Segment

Sub-Segment

Sub-Segment

Sub-Segment

Sub-Segment

Sub-Segment

DISTRIBUTOR


Category RoleCategory RoleDestinationTo be the primary category provider and help define the retailer as the store of choice by delivering consistent, superior target consumer value.

RoutineTo be one of the preferred category providers and help develop the retailer as the store of choice by delivering consistent, competitive target consumer value.

Occasional/SeasonalTo be a major category provider, help reinforce the retailer as the store of choice by delivering frequent, competitive target consumer value.

ConvenienceTo be a category provider and help reinforce the retailer as the store of choice by delivering good target consumer value.

DISTRIBUTOR


AssessmentAssessmentDISTRIBUTOR

Share&

Efficiently

Contribution&

Productivity

Market Share&

Benchmarks

Buyer Profile&

Purchase Behavior

Distributor

Market

Consumer

Supplier

CategorySub-Category

SegmentBrandSKU


Distributor ScorecardDistributor ScorecardConsumer Current Target Retention Level ______________________________ Purchase Incidence ______________________________ Satisfaction Rating ______________________________Share Category of Department ______________________________ Category of Market ______________________________Sales Category $ ______________________________ Growth ______________________________ Sales/Sq. Ft/Week _______________ ______________Profit Gross Profit $ ______________________________ Gross Margin ______________________________ Gross Profit Sq. Ft/Week ______________________________

Private Label Sales ______________________________ % of Gross Profit ______________________________ Gross Margin ______________________________

Product SupplyDays of Supply ______________________________Inventory $ ______________________________Turns ______________________________GMROI ______________________________Service Level ______________________________

DISTRIBUTOR


Consumer StrategiesConsumer Strategies

Category Roles

Attract Strategy - Traffic Building - Image EnhancingBuild Loyalty Strategy - Transaction Building - Turf ProtectorMicro marketing

DC/Store Receiving - Auto ReplenishmentTransportation - DSD, BackhaulDC/Store Handling - Cross Dock - Sale-Ready Packaging

DC/Store Receiving - Auto ReplenishmentTransportation - DSD, BackhaulDC/Store Handling - Minimize Handling - Reduce Shrink

Transportation - Reduce Transit TimeDC/Store Handling - Reduce Shrink - Sale-Ready Packaging

DC/Store Receiving - Auto Replenishment DC/Store Handling - Minimize Handling - Reduce Shrink

Acquisition Strategy - Best Quality/Reliability - Best Cost & Terms

Transaction Strategy - All EDI & EFT


Transaction Strategy - Majority EDI & EFT


Transaction Strategy - Some EDI & EFT

Acquisition Strategy - Low Cost

Full Service - (If Necessary)

Differentiated - (From Competition)

Build Loyalty Strategy - Transaction Building - Turf Protecting

Cluster Marketing

Semi-Service - (If Necessary)

Non-Differentiated - (From Competition)

Attract Strategy - Traffic Building - Excitement Creating

Cluster Marketing

Build Loyalty Strategy - Transaction Building

Uniform Marketing

Self Service - (If Necessary)


Self-Service


Category Roles

Category Strategies

Procurement Distribution Marketing In-Store Service

Destination

Routine

Occasional/Seasonal

Convenience

DISTRIBUTOR


Distributor StrategiesDistributor Strategies

Traffic Building

Transaction Building

Profit Contribution

Cash Generating

Excitement Creating

Image Creating

Turf Defending

Higher Ring-up, Impulse Purchasing

Higher Gross Margin, Higher Turns

Higher Turns, Frequently Purchased

Impulse, Lifestyle-Oriented, Seasonal

Category Strategies Category Strategies Characteristics

Frequently Purchased, Highly Promoted, Impulse, Unique Items, Seasonal

Used by Retailers to Draw Traditional Customer Base

High Share, Frequently Purchased, High % of Sales

DISTRIBUTOR


Distributor TacticsDistributor Tactics

Prime Store Location - High Traffic - High Exposure TimeHigh Cube Allocation (Cube to Time Supply)

Leadership - Best Value (Per Unit or Use) - Entire Category

Competitive/Consistent - Equal to Competition (Per Unit or Use) - Sub-Categories - Segments - Major Brands/SKU - Reduce Shrink

Competitive/Seasonally - Close to Competition (Per Unit or Use) - Sub-Categories - Segments

Non-Inflammatory - Within Reach to Competition (Per Unit or Use) - Major Brands/SKUs

Complete Variety - Sub-Categories - Segments - Brands - SKUs

Broad Variety - Sub-Categories - Segments - Major Brands - Major SKUs

Timely Variety - Sub-Categories - Segments

Select Variety - Major Brands/SKUs

High Level of Activity (If Necessary) - High Frequency - Long Duration - Multiple Vehicles

Average Store Location - High Frequency

High Cube Allocation (Cube to Time Supply)

Average Level of Activity (If Necessary) - Average Frequency - Average Duration - Multiple Vehicles

Good Store Location - High Traffic

Average Cube Allocation (Cube to Time Supply)

Available Store Location

Low Cube Allocation (Cube to Time Supply)

Seasonal/Timely Activity (If Necessary) - Multiple Vehicles

Low Level of Activity - Multiple Vehicles

Category Roles

Category Tactics

Assortment Pricing Shelf Presentation

Promotion

Destination

Routine

Occasional/Seasonal

Convenience

DISTRIBUTOR


Retail Category PortfolioRetail Category Portfolio

Flagship Cash Machine Maintain/Grow

Core Traffic Under Fire Rehab

Sales Dollars LowHigh

High

Low

GrossMarginPercent

DISTRIBUTOR


Retail Category PortfolioRetail Category Portfolio

Sleeper Winners

Questionable Opportunity Gaps

Market Growth

RetailerShare ofMarket

Low High

High

Low

DISTRIBUTOR


Consumer Based Category Consumer Based Category RolesRoles

Staples Niches

Necessities Fill-ins

Reach

Frequency

LowHigh

High

Low

DISTRIBUTOR


Before OrganizationBefore Organization

VP Merchandising

Buyer Buyer Buyer Administration

Retail Pricing AdvertisingSpace

DISTRIBUTOR


After OrganizationAfter Organization

Product Supply

Space Allocation

Retail Merchandising

Category Analysis

Retail Pricing

Advertising Coordination

Price/Data Integrity

Marketing Services

Allowance/Cost Control

CategoryManagement

DISTRIBUTOR


ResponsibilitiesResponsibilities

Responsibilities Retailers Wholesalers

Negotiation with suppliers 84.6%

Determine investment buys 76.9%

Determine promotions- items/schedule 73.1%

Sales/profit/market share goals 57.7%

Develop strategic alliances 53.8%

Budget development 50.0%

Strategic category planning 46.2%

Competitive store analysis 34.6%

Optimize by store clusters 26.9%

Develop shelf plan-o-gram

86.4%

83.1%

71.2$

69.5%

66.1%

64.4%

61.0%

61.0%

44.1%

42.4% 26.9%

DISTRIBUTOR


Category DefinitionsCategory DefinitionsNUMBER OF CATEGORIES RETAILERS WHOLESALERS

1 TO 99 20.0% 16.7%

100 TO 199 30.0% 16.7%

200 OR MORE 27.5% 25.0%

Average Number 191 148

DISTRIBUTOR


Review FrequencyReview Frequency

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

Weekly

Monthly

Quarterly

Semi-annually

Annually

Sporadic

Retailer Wholesaler

DISTRIBUTOR


What’s Really Happening?What’s Really Happening?

1. Official approach leaves out consumer

Merchandisers see CM to lift sales

Executives see CM to raise margins

Neither see it for what it was intended: framework for understanding the consumer

2. Wide gap between results and expectations

Cornell study ranged from 3 to 8 point lift in EBIT

73% of CM practitioners rate experience “somewhat” or “not at all” successful

Many of the few that claim success can’t support it with metrics

3. Official approach is too complicated

Only 15% claim to be following the guidelines

CEO at large chain: “We’d have to hire 14 full-time people just to fill out and maintain the templates.”

Personnel talent a problem

4.“One-size-fits-all” is not working

40% don’t even see need to assign roles

Half do not employ Activity-Based-Costing

Industry current-state is too diverse. Take merchandising approaches: high/low, every-day low, premium, limited selection, semi-warehouse, superstore, etc..

DISTRIBUTOR


ScopeScope

Category Leader

Respected

Supplier

Preferr

ed Supplier

Cost Reductio

n

Alliance

SUPPLIER


Sales EvolutionSales Evolution

Available Sales

Gross Margin

Share

D.P.P.Category

Management

SUPPLIER


PerspectivePerspectiveDifferences

Supplier

Retailer Store

Brands

Check your bias at the door

Bring your knowledge

SUPPLIER


PrinciplesPrinciples Consumer is the common focus Mutually agreed objectives, strategies, tactics and

scorecard measures Rewards support collaborative goals Relationships and trust are earned, not given Information sharing is essential Win/win is critical for success Multifunctional access and communication Openness to change traditional attitudes and

relationships

SUPPLIER


Supplier StepsSupplier Steps

Preparation ExecutionCoordination

Create team Develop plan Collect information Develop tools Package program

Target customers Present plan Establish goals Organize team Develop scorecard Establish schedule

Share information Perform analysis Develop plan Implement plan Monitor results Modify plan

SUPPLIER


ObjectivesObjectives Provide introduction to Activity Based Costing (ABC) Identify Net Profit Applications

INTRODUCTION


Why Net Profit?Why Net Profit? Gross Margin ineffective management tool Simple relationship - cost Vs retail price Not a predictor of profit

INTRODUCTION


What is Net Profit?What is Net Profit? Sales

- Cost of Goods Sold

= Gross Margin

+ Direct Revenue

- ABC Costs

= Net Profit

INTRODUCTION


DefinitionDefinition ABC is a cost allocation or assignment methodology Cost assignment based on:

– Activities - Tasks within a process– Drivers - Factors creating costs

ABC


ABC Vs DPPABC Vs DPPABC DPP

Sales Yes Yes

Cost of Goods Yes Yes

Direct Revenue Yes Yes

Headquarters Yes No

Warehouse Yes Yes

Transportation Yes Yes

Store Yes Yes

ABC


Allocates All CostsAllocates All Costs Headquarters

– Management

– Merchandising

– Finance & Accounting

– Human Resources

Warehouse– Management

– Labor

– Benefits

– Space

– Utilities

Transportation– Labor

– Equipment

– Supplies

Stores– Management

– Labor

– Benefits

– Space

– Utilities

ABC


Primary ProcessesPrimary Processes

Product-In Product-Out

Buying DistributionStore

OperationsAdministration

ABC


Costs Follow Product FlowCosts Follow Product Flow

Distribution Center

Direct Store Delivery

Drop Ship Wholesaler

Store

ABC


Greatest cost is Display Greatest cost is Display SpaceSpace

ABC


Sales By DepartmentSales By Department

Edible29%

Non-Edible9%Frozen

7%Dairy15%

Bakery4%

HBC4%

Gen. Merch.1%

All Other31%

Edible

Non-Edible

Frozen

Dairy

Bakery

HBC

Gen. Merch.

All Other

ABC


Gross Margin By DepartmentGross Margin By Department

Edible20%

Non-Edible7%

Frozen7%

Dairy18%

Bakery4%

HBC3%

Gen. Merch.1%

All Other40%

Edible

Non-Edible

Frozen

Dairy

Bakery

HBC

Gen. Merch.

All Other

ABC


Net Profit By DepartmentNet Profit By Department

Edible29%

Non-Edible10%Frozen

10%

Dairy30%

Bakery5%

HBC3%

Gen. Merch.2%

All Other11%

Edible

Non-Edible

Frozen

Dairy

Bakery

HBC

Gen. Merch.

All Other

ABC


Superior Private Label Superior Private Label CategoriesCategoriesPrivate Label products achieved results superior to branded in the following categories:

Baby Food & Formula Bleach Rfg Dips Hair ConditionerBaking Cups/Paper Charcoal Rfg Sour Cream Hair Spray/SpritzBaking Needs Diapers English Muffins Home Health DiagnosticsBottled Water Pet Suppliers Adult Incontinence Internal AnalgesicsCandy Tobacco Products Cold/Allergy/Sinus Liq MouthwashCoffee Creamer Fz Fruit Cold/Allergy/Sinus Tab Shaving CreamPasta Fz Potatoes/Onions Cosmetics - Nail Weight Control Liq/PwdPowdered Milk Fz Prepared Vegetables Eye Care Products Auto Fluids/AntifreezeSpices/Seasonings Other Frozen Foods First Aid Treatments FilmSugar Rfg Butter Food Care Products Plastic BottlesVegetables Rfg Cottage Cheese

ABC


PLMA ModelPLMA ModelAPPLICATIONS


Success FactorsSuccess Factors Logical presentation Reasonable assumptions Demonstrate knowledge of business Promote benefits

– Consumer sales– Customer profits

APPLICATIONS


New ProductsNew Products Life blood for retailers and

suppliers Primary driver of growth Replacement Vs

Cannibalization Strategy

APPLICATIONS


ApproachApproach Select items for replacement

– Low sales– Matching consumer target markets

Collect customer and competitive data Run model Present

– Current sales and net profit– Projected sales and net profit

APPLICATIONS


Retail SpaceRetail Space Most coveted merchandise

element Interacts with pricing Shelf space is greatest item

cost

APPLICATIONS


Balance SpaceBalance SpaceToo Little

Consumer can’t find Reduced sales Lost sales

Too Much Lower profits

APPLICATIONS


Diminishing ReturnsDiminishing Returns

$-

$5.00

$10.00

1 2 3 4 5 6 7 8

Facings

Sales

Excess space does not increase sales Minimum - Case plus order cycle

– Minimizes stocking labor

APPLICATIONS


ApproachApproach Determine minimum units and facings Identify net profit Test & evaluate alternatives

– Increase unit sales– Increase facings

Present– Current sales and net profit– Projected sales and net profit

APPLICATIONS


Retail PricingRetail Pricing Price discussions should not

be taboo Price too high

– Lost sales

Price too low– Lost sales

– Lost profit

APPLICATIONS


Retailer GoalsRetailer Goals

Low

• Price Image

• Gross Margin• Quality Ratio

High

APPLICATIONS


ConsumersConsumers Recall up to 200 item prices Frequently purchased items High consumables Translates to 500 - 1,000

items creating store’s price image

APPLICATIONS


Value is KingValue is King

Value = Price

Quality

APPLICATIONS


ApproachApproach Compare product quality Load model Test & evaluate alternatives

– Change retail price– Hold constant and change unit sales


APPLICATIONS


PromotionsPromotions Most frequently used

promotion tool– Advertising

– Display

– Price reduction

Private Label under-represented– Accrual funds

– Lack targeted program

APPLICATIONS


Why Promote?Why Promote? Create merchandising excitement Attract customer Foster consumer trial Load pantry Reward loyal consumers Present value proposition

APPLICATIONS


Promotions are DifficultPromotions are Difficult

SelectionSelection

CompetitionCompetition

HolidayHoliday

WeatherWeather

SeasonSeason

ThemeTheme

PricePrice

ProfitProfit

ExecutionExecution

StoresStores

AdvertisingAdvertising

BuyingBuying

APPLICATIONS


Many Promotional FactorsMany Promotional Factors

Advertising(ABC)

Advertising(ABC)

PricePrice DiscountDiscount

DisplayDisplay POPPOP SeasonSeason

APPLICATIONS


Promotion ConclusionsPromotion Conclusions Low Private Label share

Moderate Private Label share

Natl. BrandPrivate Label

Natl. BrandPrivate Label

APPLICATIONS


ApproachApproach Research past promotions Load model Test & evaluate alternatives

– Change price– Change index


APPLICATIONS


SummarySummary Net Profit is the ultimate sales tool PLMA Net Profit Model

– Easy to use– Provides great flexibility– Great learning tool

Coach customer to increase profits

APPLICATIONS

Documents

CATEGORY MANAGEMENT & PRIVATE LABEL PROFITABILITY W. Frank Dell II, CMC DELLMART & Company May, 2001