CONSUMER-CENTRICCATEGORY

MANAGEMENTHow to Increase Profits by Managing

Categories Based on Consumer Needs

ACNielsenwith

John Karolefski and Al Heller

JOHN WILEY & SONS, INC.

File AttachmentC1.jpg

CONSUMER-CENTRIC CATEGORY

MANAGEMENT

CONSUMER-CENTRICCATEGORY

MANAGEMENTHow to Increase Profits by Managing

Categories Based on Consumer Needs

ACNielsenwith

John Karolefski and Al Heller

JOHN WILEY & SONS, INC.

Copyright © 2006 by ACNielsen. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ACNielsen Company.Consumer-centric category management : how to increase profits by managing

categories based on consumer needs / ACNielsen, with John Karolefski and AlHeller.

p. cm.ISBN-13: 978-0-471-70359-4 (cloth)ISBN-10: 0-471-70359-1 (cloth)

1. Retail trade—Management. 2. Consumers’ preferences. I. Karolefski,John. II. Heller, Al. III.

HF5429.K296 2005658.7′8—dc22

200521556

Printed in the United States of America.10 9 8 7 6 5 4 3 2 1

www.wiley.com

FORE WORD

Reports of category management’s death have been greatly ex-aggerated. Consultants offering their new twists and titles areall too happy to declare the practice dead—so much the better

to promote their own offerings. But the reality is that category man-agement is very much alive and, well, continuing to evolve.

In some parts of the world, especially in developing markets,category management today remains a stretch goal—a new ideafull of untapped potential. In other areas, the eight-step processdetailed by The Partnering Group in the early 1990s forms thefoundation of many companies’ approach to category manage-ment. In still others, particularly in developed countries like theUnited States, the United Kingdom, and others, refinements arebeing made—most of them designed to place consumer under-standing front and center.

New ideas are emerging—from “trip management” to “aisle man-agement” to “customer management.” Some will blossom into full-fledged business processes; some will be plugged into existingprocesses as improvements on specific steps; others will be cast asideas ineffective or too expensive.

Whether a new descriptor emerges to replace “category manage-ment” is yet to be seen. Even if that does happen, what won’t changeis the overall objective—to help retailers and their manufacturer

v

vi Foreword

partners succeed by offering the right selection of products that aremarketed and merchandised based on a complete understanding ofthe consumers they are committed to serving.

At its core, category management is a business fundamental. Thecomplexity of its execution varies from company to company andmarket to market largely based on the amount and quality of infor-mation available to decision makers. Some have highly sophisti-cated systems at their fingertips that quickly integrate extremelygranular and disparate data streams and then create electronic“smart alerts” that help them monitor key performance indicators.Others, especially in developing markets where modern retail storesstill drive less than half of all food sales, sometimes have a difficulttime just measuring their market share.

This book is for those with a vested interest in category manage-ment all along the sophistication spectrum. It can serve such abroad audience because category management is about bringing astructured process to how executives think and make decisions abouttheir businesses, no matter what information and information tech-nology they have access to.

With this book, we are exploring both the state of and the state-of-the-art in category management. For those who are new to theconcept, the first part of the book provides a solid understanding ofthe core process. It’s essential to know where we’ve come from if weare to make changes for the better. For those who are further along,the case studies and essays about the future of category managementshould shed new light on how to get more from the process.

Our intention with this book is to facilitate a conversation aboutcategory management. Where is the practice today, where is itgoing, and how can we continue to make improvements? What arethe essential steps, how can each step be executed most effectively,

Foreword vii

and how can consumer understanding increasingly become the cen-terpiece of the process?

By definition, a book must have a beginning and an end. How-ever, we ask you to view this book differently—to see it as the con-tinuation of an ongoing conversation about a vitally importantbusiness practice that will continue to evolve.

Steven M. SchmidtPresident and Chief Executive Officer, ACNielsen

CONTENTS

CHAPTER 0 Introduction—Why Category Management Is More Important Than Ever 1

P A R T I

IN THE BEGINNING—THE PURPOSE OFCATEGORY MANAGEMENT

CHAPTER 1 The Evolution of Category Management andthe New State of the Art 13

CHAPTER 2 Category Management Begins with theRetailer’s Strategy 33

P A R T I I

THE EIGHT FOUNDATIONAL STEPS OFCATEGORY MANAGEMENT

CHAPTER 3 Step One: Define the Category Based on theNeeds of Your Target Market 67

CHAPTER 4 Step Two: Assign a Role to the CategoryThat Best Supports the Retailer’s Strategy 77

CHAPTER 5 Step Three: Assess the Category to FindOpportunities for Improvement 95

ix

x Contents

CHAPTER 6 Step Four: Set Performance Targets and Measure Progress with a Category Scorecard 111

CHAPTER 7 Step Five: Create a Marketing Strategy for the Category 123

CHAPTER 8 Step Six: Choose Tactics for CategoryAssortment, Pricing, Promotion, Merchandising, and Supply Chain Management 133

CHAPTER 9 Step Seven: Roll Out the Plan 165

CHAPTER 10 Step Eight: Review the Category’sPerformance Regularly and Make Adjustments as Needed 173

CHAPTER 11 Bringing the Consumer into CategoryManagement—A New Take on theEight Steps 179

P A R T I I I

CATEGORY MANAGEMENT SUCCESS STORIES

CHAPTER 12 General Mills—Going Beyond the Categories 201

CHAPTER 13 Big Y—Focusing on Implementation 207

CHAPTER 14 SUPERVALU—The Last Three Feet ofCategory Management 217

CHAPTER 15 CROSSMARK—Just the Facts 241

CHAPTER 16 Acosta—Multiplying the Impact ofCategory Management 251

CHAPTER 17 Chiquita—Extending Category Managementto Perishables 259

Contents xi

CHAPTER 18 The Hershey Company—Linking ConsumerInsights and Customer Strategy 275

CHAPTER 19 Miller Brewing—Tapping Category Management for Competitive Advantage 285

CHAPTER 20 Hewlett-Packard—Taking Category Management beyond Traditional CPG 295

P A R T I V

THE WAY FORWARD

CHAPTER 21 Lessons Learned from the Real World 303

CHAPTER 22 Proactive Category Management 309Shan Kumar

CHAPTER 23 Linking Category Management andLoyalty Marketing 319Glenn Hausfater

CHAPTER 24 The New Category Management Emerges 335Dirk Seifert

Acknowledgments 343

Index 347

1

C H A P T E R

0

Introduction—Why CategoryManagement Is MoreImportant Than Ever

Bell’s Family Markets was facing tough times. The local tradingarea was very competitive with too many food stores serving ashifting shopper base that was increasingly diverse and de-

manding. Wal-Mart was planning a supercenter near Bell’s flagshipstore, while shoppers were checking out some new formats thatopened in the past year: a limited assortment store, a warehouseclub, two extreme value stores, and a Hispanic-oriented grocer. Asif that weren’t enough, a trendy Italian restaurant chain began pro-moting gourmet take-out meals at reasonable prices for customerscoming home from work and looking for alternatives to cookingdinner from scratch.

2 Introduction

As a conventional grocer, family-operated for three generations,Bell’s suddenly seemed out of step with the new marketplace. Saleswere declining as the new competitors enticed some traditional cus-tomers for their shopping needs.

Sound familiar? Such scenarios have been taking place in theUnited States—and in many markets around the world—for severalyears. The outcomes are different because retailers deal with adver-sity in different ways. Some do nothing.

Fortunately, Bell’s was proactive. Management first reviewed itsgo-to-market strategy. Was the corporate strategy still viable? Whowas the target customer group? What shopping occasions did Bell’swant to own? To support the overall strategy, the retailer workedwith key trading partners to implement a consumer-centric categorymanagement program that gradually rebuilt the business.

It’s a Mad, Mad, Mad, Mad Marketplace!

Although Bell’s Family Markets is a fictitious corporation, the pres-sures described are all too real for retailers today. Many cities areoverstored with big-box grocers that look alike and carry the sameproducts. That has opened the door for niche retail formats to chipaway at sales. Consumers want more service and better products atlower prices—and not just at the grocery store, but at the bookstore,the electronics store, and everywhere else people shop.

And then there is Wal-Mart. The biggest retailer in the world hasrattled the U.S. marketplace ever since it expanded beyond dis-count stores into new formats that sell grocery products. The Ben-tonville, Arkansas-based retailer has a toehold outside the UnitedStates and the eyes of the retail world wait to see how internationalexpansion eventually plays out.

Introduction 3

The success of Wal-Mart is largely due to low prices. Other fac-tors that contribute include assortments, customer service, and effi-cient distribution. But low prices are the DNA of the retail brand, aswell as the primary tactic to attract shoppers, unnerve competitors,and galvanize a marketplace.

Wal-Mart’s most powerful format is the cavernous supercenter.These stores, which combine a supermarket with a traditional Wal-Mart discount store, measure some 187,000 square feet. Their stun-ning success has put smaller retailers out of business and promptedlarger ones into decreasing prices, increasing promotions, improvingcustomer service, and all sorts of retail gyrations to hold back the in-evitable. Wal-Mart has become the largest grocer in the United States.

The arrival and rise of Wal-Mart into the grocery marketplacecaught many traditional supermarket retailers off guard. Many didn’tfigure that a discount store operator could master grocery retailing soeffortlessly. But those retailers that have done well with a supercenterin their backyard are the ones with imagination, merchandisingsavvy, and a solid strategy in place. They maintained or reestablisheda connection with shoppers, and that has made all the difference.

ACNielsen recently conducted a study on how shopping behaviorvaries in states where Wal-Mart has a high share of business com-pared to states where they are just starting to develop their business.In the South, Wal-Mart has a 97 percent penetration of the shop-ping base with an average of 44 trips per household per year andwith spending levels of about $55 per trip. On the West Coast andin the Northeast, Wal-Mart has a penetration level of about 65 per-cent of households, and that’s mostly from discount stores, with anaverage frequency of about 18 trips per year. Wal-Mart will eventu-ally leverage its supercenters to try and drive more frequent shop-ping trips in these areas.

4 Introduction

Meanwhile, consumers today are no longer the classic family withmother, father, and two children. The populace is more splinteredthan ever into narrow groups: singles, seniors, various ethic segments,and the “sandwich” generation where the middle-aged consumerlooks after teenaged children and aging parents at the same time.

These consumers have different wants and needs. At the sametime, they are demanding and mobile enough to switch stores easilyif dissatisfied with their shopping experience. Serving them wellenough to prevent shopper erosion is challenging for every retailer.

At the same time that consumers have been changing, two othertrends have developed that are related to the new demographics.One is the rise of competitive distribution channels, and the otheris channel blurring. This means that many stores in different chan-nels are blurred in the mind of consumers because they can buy thesame products seemingly everywhere. That’s especially the casewith food.

Over the past decade, the growth of conventional supermarketshas trailed the growth of formats and channels that offer value,such as supercenters, warehouse clubs, limited assortment stores,and extreme value stores. These retailers are adding more storesand increasing the frequency of shopping visits—all at the expenseof traditional retailers. In addition to Wal-Mart supercenters, someof these banners include Aldi and Save-a-Lot (limited assortment);Costco and BJ’s (warehouse club); and Dollar General, Family Dol-lar, and Dollar Tree (dollar). What all of these formats and retail-ers have in common are low prices and the perception of value byconsumers.

Many also offer one thing that Wal-Mart doesn’t: convenience.That’s because getting in and out of an extreme value or limited as-sortment store is easier than doing so in a supercenter because it is

Introduction 5

so big or a warehouse club because they don’t have as convenient lo-cations as supermarkets. These formats tend to draw the same typeof shopper: a low- to middle-income consumer. But they also drawthe more affluent. In other words, poor people need low prices, richpeople love low prices.

The increasing popularity and store count of these formats hasled to the phenomenon of channel blurring: Because new brands offood and beverage are promoted so heavily today, some consumersare tempted to buy products no matter where they are if they seesomething that meets their needs.

Certainly, drugstores are selling more and more food. Office sup-ply stores sell candy, gum, mints, and snacks. Sports drinks areavailable in sporting good outlets.

Given the incredible number of new product introductions eachyear, it’s not surprising that there are so many new distributionpoints nowadays. According to Datamonitor’s Productscan Onlinedatabase of new products, marketers launched some 33,185 newfood, beverage, health and beauty, household, and pet products inthe United States and Canada in 2004. That total was 1.5 percentless than the record of 33,678 new products in 2003.

New trends in food and health fueled many of these new prod-ucts. For example, the popularity of “low-carb” diets led to 3,375new low- and no-carbohydrate product launches in the UnitedStates in 2004.

These new products are part of the quest for growth on the part ofretailers and manufacturers. The overall population in the UnitedStates is growing at just 1 or 2 percent per year. So marketers are fo-cusing on consumers such as seniors, ethnic groups, and other con-sumer segments of the population because they are going to growsignificantly.

6 Introduction

How does that translate into new product offerings? The olderpopulation is looking for healthier food, and manufacturers arelooking to make their products more nutritious. There are already“functional foods” such as orange juice with calcium and vitamin-fortified pasta. Expect manufacturers to develop more. In addition,traditional food makers will continue to launch lines of food prod-ucts from a multitude of countries as the globe shrinks and people ofall backgrounds become exposed to new cuisines.

Against this backdrop of a mad, mad, mad, mad marketplace, re-tailers and manufacturers of fast-moving consumer goods have beenconsolidating. The big are getting bigger, while the small are eithermerging, being acquired, or going out of business.

Marketing Basics and Category Management

The way out of the madness starts with a solid strategic foundationbuilt on the basics of marketing. Who are the customers? What dothey want? Even in this era of new competitors, channel blurring,and product proliferation, business success—and indeed survival—is still all about having the right product at the right price with theright promotional support and in the right place.

Category management emerged in the early 1990s as a method ofturning marketing basics into an organized process. Its eight-stepprocess is the foundation of every category management programtoday and is widely used outside the United States in its originalform. Many U.S. companies have streamlined and customized theeight-step process to better suit their needs, objectives, and circum-stances. But the traditional process remains as a starting point anda framework for deploying a retail strategy.

Category management builds on the marketing basics to help re-tailers and manufacturers reach consumers. Clearly, understanding

Introduction 7

how to manage categories for these groups is critical. Trading part-ners need to leverage the power of categories to drive higher shopperpenetration, increase shopping frequency, and encourage larger bas-ket size. Shoppers go to the store to buy products. Retailers must fig-ure out what categories will drive desirable behavior in the store.

For example, if there is a category with high penetration and highfrequency, retailers must focus on having those products in the rightlocation because consumers want them. Retailers have to be con-cerned about pricing and promotion. The more often a category ispurchased, the more familiar consumers are with price, and themore they expect to get some promotion to drive their buying. So,how a category is purchased by consumers can be leveraged by re-tailers in terms of how they go to market in their stores. Manufac-turers can help them in that regard.

Category management is all about finding out what shopperswant and providing it better than the competition can. In that way,the process solves the key problem of shopper erosion. If retailers se-lect the right products for target customers and then price and mer-chandise them appropriately, the result should be a satisfiedconsumer who remains loyal to a store.

Shopper loyalty is critical today because of consumer mobility.People are willing to shop at different stores to fill shopping needs.In addition, they are willing to drive out of their way to shop in aformat that caters to their special interests.

This trend has led to the notion of trip management as the nextlevel of category management. In other words, the process has to bemore than managing categories. It has to be also managing thetypes of trips that consumers make to the stores and how well retail-ers capture various trips compared to the competition. These tripsinclude the standard weekly shopping trip, fill in, stock up, specialoccasion, and many others.

8 Introduction

At a glance, it may seem that category management is addressingyesterday’s problems that are still with us: intense competition, de-manding shoppers, and product proliferation. While that’s true ingeneral, there are specific differences. Today’s retail competition iscoming from new channels of distribution. Demanding shoppers arenow divided into narrow segments, and product proliferation is in-deed at an all-time high. After all, how many brands of olive oil doesa grocery store need to stock? Isn’t there a lesson in the fact that lim-ited assortment stores and warehouse clubs are very successful with afraction of the number of SKUs that a typical supermarket carries?

The bottom line: Category management is needed more todaythan ever before.

What Is the Purpose of This Book?

In 1992, ACNielsen published a book on category management. Itoutlined a process that was relatively new to retailers and manufac-turers. The book sought to position organizations to win in themarketplace.

Many changes have taken place since then. Many organiza-tions—and certainly the marketplace—are not the same. The tradi-tional process of category management focused on categoriesmanaged as business units. While that is still true today, categorymanagement now elevates the importance of the consumer. Forleading practitioners, the process has evolved into consumer-centriccategory management. The new focus: using categories to targetthe “right” consumer segments to ensure the long-term health ofthe shopper base, while supporting the retail position and strategy.Consumer understanding—demographics, attitudes, interests,shopping occasions, and much more—is at the center of it all.

Introduction 9

The industry needs an update and that is the main purpose of thisbook. Its aim is also to educate. Readers will learn how to reach morecustomers more profitably. What could be more important today?

Part I is a brief overview. Part II looks closely at each of the orig-inal eight steps of category management. Veterans of the processand its current practitioners will benefit from this detailed re-fresher course. Newcomers will learn about the roots of categorymanagement and connect the dots to the customized processes oftoday.

In Part III, a portfolio of case studies provides real examples ofcategory management in action. Readers will see how trading part-ners have creatively applied the process to suit their needs and solvetheir problems. These best practices are shining examples of thepower of the process.

The book ends with a look back and a look ahead. First, there is asummary of the lessons learned between the two covers, includingconclusions reached about the state of the art of category manage-ment. Finally, a group of experts peers into the future to predict howthe process will evolve.

Who Should Read This Book?

Every retail executive in every trade channel, plus their tradingpartners and representatives, should read this book closely. It makesno difference if the organization is large or small. The principlesapply to everyone who works with the process.

While category management began in the United States for su-permarket retailing, the process has spread beyond grocery to otherchannels of distribution. In addition, it has spread to other retail in-dustries such as electronics, books, home centers, and many others.

10 Introduction

Executives in those sectors will learn from the principles outlinedin this book.

Others will benefit as well—vendors, consultants, academics,students, and more.

The business of fast-moving consumer goods has morphed into arestless, cluttered industry full of demands and compressed dead-lines. To succeed today, executives in every corner of the world seeka clear path forward. Consumer-centric category management willprovide the map. The chapters that follow are the directions.

11

P A R T

I

IN THE BEGINNING—THE PURPOSEOF CATEGORY MANAGEMENT

Category management began as a process that enabled retailersto manage product categories as individual business units. Theoriginal version had eight steps, beginning with category def-

inition and ending with a review. Along the way, a category planwas created and deployed.

The process has evolved over the years into various customizedversions with fewer steps. However, the traditional process remainsthe starting point for many companies and its original intent andspirit remain.

Today, category management is more than a way to manage a cat-egory as a business. It is essential to operating a successful retail op-eration. Moreover, the process can give retailers a powerfulcompetitive advantage if executed properly. The winners in themarketplace will be those companies that satisfy consumer needs byknowing how to blend data, insights, and merchandising savvy.

13

C H A P T E R

1

The Evolution of CategoryManagement and the New

State of the Art

In the early 1990s, grocery retailers in the United States wereready for a better way to run their business. Margins of about 1percent at that time were unacceptable. New products were prolif-

erating, while consumers were becoming more diverse and demand-ing. Other classes of trade such as warehouse clubs were emerging.Wal-Mart was getting ready to roll out its supercenter format thatcombined the retailer’s traditional general merchandise store with afull-line grocery store under one roof.

Clearly, a dramatic change was needed. Retailers sought a way toimprove margins and compete more effectively. They wanted to re-connect with consumers and satisfy their needs, or face the prospectof an eroding shopper base. Given the endless variety of new prod-ucts pouring into the marketplace, retailers wanted to ensure that

14 In the Beginning—The Purpose of Category Management

their shelves were stocked with products that consumers wanted tobuy. Mainly, they wanted to stay in business.

Birth of the Eight-Step Process

Many progressive retailers and manufacturers realized that therewas gold in the reams of data available from retail point-of-sale(POS) systems. Was it possible to figure out which products to stockin a certain store? Could analysis of the data tell retailers how tocustomize the shelf sets in all the stores of a chain according towhat shoppers were buying and wanted to buy? Could they attractand retain specific niches of high-value shoppers?

The answer was yes. The way to do it was a process called cate-gory management that was developed in the early 1990s by ThePartnering Group (TPG), a consulting firm. A few of the larger re-tailers began testing the process. Soon the manufacturers jumpedon board with advice and support. They then started to help otherretailers adopt the principles as well. In no time, category manage-ment was promoted enthusiastically and became a must-have pro-cess for retailers and manufacturers.

TPG’s process, which is now considered the traditional form ofcategory management, consists of eight steps:

1. Category definition

2. Category role

3. Category assessment

4. Category scorecard

5. Category strategies

6. Category tactics

The Evolution of Category Management and the New State of the Art 15

7. Plan implementation

8. Category review

Early Practitioners

The retailers that pioneered category management are among thelargest chains in the United States. Safeway was one of the originalpractitioners. Others included Kroger, Albertson’s, and Publix. SU-PERVALU, the first wholesaler to practice category management,brought the process to small independent retailers.

On the manufacturer side, Phillip Morris and the Coca-ColaCompany were early supporters of category management. The latterdeveloped a training program about the process that is still distrib-uted to retailers. It helps them understand what category manage-ment is all about and what Coca-Cola’s role in the process is.

Some of the early practitioners saw nearly immediate benefitsthrough reduced inventories and increased sales. For others, ittook more time. But word soon spread about the potential of thisnew process.

Evolution of Category Management

The original version of category management started a revolutionin the way retailers operated their businesses. More and more retail-ers built their businesses around its principles through the 1990s.

Eventually, however, the process proved to be too complicatedfor many retailers to adhere to. There were too many details andvariables. It was too cumbersome and unwieldy. Too much coordi-nation was needed from too many departments such as logisticsand finance.

16 In the Beginning—The Purpose of Category Management

Problems even developed on the manufacturer’s side when sales-people were asked to learn the intricacies of category management.Their primary job was developing relationships, moving products,and building the top line. They weren’t analysts. As a result, manymanufacturers created category management departments staffedwith analysts to support the salespeople. But even then, trainingsomebody to be capable with the entire category management pro-cess remained a daunting task.

Meanwhile, some larger manufacturers came up with their ownway to simplify matters.

They restricted their proprietary category management to thelarger retailers; that is, they invested most of their time and effort onfull-time account teams for their largest customers. Smaller chainsreceived less interest and support.

Role of Technology

The development of technology and its steady growth spurred theuse of the process. But the journey from the beginning to today wasfull of obstacles.

In the early days, the software applications for category man-agement required too much number crunching. Instead of talk-ing to customers, salespeople were sitting behind a personalcomputer pulling data, putting it on Excel sheets, and then cre-ating PowerPoint slides for a presentation. The process was te-dious and time consuming.

The problem of data overload and the time spent crunching num-bers led to a major change in category management. Companieswere forced to streamline their approach to data analysis and de-