Many retailers outsource retailcategory management to achosen category captain. This makes things easier forthe retailer, but long term,who really benefits?

Mümin Kurtulusc & L. Beril ToktayFontainebleau, France

Recently, a new trend has emerged in the sphere of categorymanagement. Retailers have started tooutsource retail category management toa chosen category captain: a supplier onwhom they rely for strategicrecommendations and insights. Theincreasing number of product categoriesoffered by retailers and the scarcity ofthe resource-intensive nature of categorymanagement have given rise to this newtrend.

For retailers, the short term benefits ofsuch arrangements can be great: muchbetter category performance ‘on thecheap’, because most of the work has beendone by a supplier. But the long term costscould be even greater. Retailers whobecome too dependent on their categorycaptains risk a strategic loss of power.

In a typical category captainarrangement, the retailer shares allrelevant information such as sales data,pricing, turnover, and shelf placement of

Category Captainship: Who Wins, Who Loses?

the brands with the category captain. Thecategory captain, in return, analysescategory dynamics and trends and providesthe retailer with a detailed plan includingrecommendations as to which brands tostock, where to locate each brand on theshelf, how to display them, how muchspace to allocate to each brand, which newbrands to include and which old brands toexclude, and how to price products in thecategory. The retailer is free to accept orreject any of the recommendationsprovided by the category captain.

Category captainship practices varydepending on the retailer, resulting in acontinuum of practices. At one end of thespectrum, some retailers implement thecategory captain’s recommendations asthey are; at the other end, some retailersfilter the recommendations provided bythe category captain and verify theirappropriateness before deciding on theimplementation.

award

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Many retailers and manufacturerspractice category captainship and reportpositive benefits. To give but one example,Carrefour and Colgate partner in the oralcare category. Based on a number ofconsumer studies, Colgate suggested thatCarrefour restructure its oral care displaysto merchandise toothbrush products abovetoothpaste products, as opposed to next toeach other. As a result of therestructuring, Carrefour reported a 6-16%sales increase1. Colgate’s sales alsoincreased. For more examples ofsuccessful category captainshipimplementations, see ‘the categorycaptain of the year contest’ in ProgressiveGrocer. These examples demonstrate thatby working together, retailers canconsiderably benefit from theirmanufacturers’ expertise in managingtheir categories and delivering consumervalue through supply chain collaboration.

However, category captainship doesraise important questions, especially thoseconcerning potential conflicts of interest2

between competing manufacturers. Thepossibility that a category captain couldtake advantage of its position todisadvantage or exclude competitormanufacturers has prompted calls forantitrust investigations. For example, theAmerican Antitrust Institute has voiceddoubts about the practice. And specialdebates have been held: for example, the

Antitrust and Category Captains RoundTable Discussion held in 20033. There,various advantages and disadvantages ofcategory captainship were discussed,among them increased efficiencies andbetter consumer service on one hand, andhigher prices, smaller customer selectionand competitive exclusion, on the otherhand. The consensus was that existingresearch is inconclusive about theconsumer impact of category captainship,and that some best-practice guidelines needto be developed to guide categorycaptainship implementations.

In Europe, ECR has taken the lead toensure that category captainship isimplemented in compliance with EUcompetition rules. For example, theDemand Side Projects, EU Competition LawGuidelines developed by ECR Europestipulate the following:

The retailer remains free to follow ornot to follow the manufacturer’srecommendation. The retailer should notenter into any agreement orunderstanding with the manufacturerconcerning the setting of retail prices inthe category, the selection of products fora category, or conditions on the retailshelf.

While concerns about categorycaptainship have not materialized inpractice for the most part, one example

Mümin Kurtulusc(mumin.kurtulus@insead.edu) is a Ph. D student andL. Beril Toktay(beril.toktay@insead.edu)is Associate Professor inthe school of Technologyand OperationsManagement, INSEAD.This is an edited version oftheir winning paper in the2004 ECR Student Awards.

Category captainship raises important questions,especially concerning potential conflicts of interestbetween competing manufacturers.

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where some antitrust issues have beenimportant is the United States Tobacco Covs. Conwood Co. case. United StatesTobacco Co. (UST), the biggest company inthe smokeless-tobacco category, wasrecently condemned to pay a $1.05 billionantitrust award to Conwood, the secondbiggest competitor in the category.Conwood had sued UST, the categorycaptain, claiming that UST had used itsposition as category captain to excludecompetition and provide advantage to itsown brands. The court ruled that UST’spractices resulted in unlawfulmonopolization, harming competition,and consequently, consumers. Many othercategory captainship arrangements in thetortillas, cranberries, and carbonated softdrinks categories are before the courtsregarding category captainshipmisconduct4.

Motivated by these conflictingobservations, our research5 investigatesthe following questions and aims todevelop best-practice guidelines. 1. What is the impact of category

captainship on the non-captainmanufacturers?

2. What is the impact of categorycaptainship on consumers?

3. What is the impact of categorycaptainship on the retailer’s long-termperformance?

To answer these questions, we have

developed a game theoretic model thatcaptures the basic tradeoffs in usingcategory captains for categorymanagement. There are two mainscenarios. In the first scenario, the retaileris responsible for managing the categoryand decides retail prices, shelfspaceallocations and retail assortment,manufacturers compete for the retailer’slimited shelfspace. In the second scenario,we assume that the retailer delegates allretail category management decisions toone of its manufacturers and implementsthe recommendations unchanged, inreturn for a target category profit. Ourresults are based on a comparison of twoscenarios.

The Impact of Category Captainship onNon-captain ManufacturersWe define competitive exclusion as thesituation where the category captainallocates no shelfspace to a non-captainbrand. Our results suggest that in somecases, the category captain prefers toexclude some of the non-captainmanufacturers’ brands from the category.The UST vs. Conwood case is a goodexample of a high level of competitiveexclusion. In practice, competitiveexclusion may take many different forms,most of them less extreme than completeexclusion. For example, displaying thenon-captain manufacturers’ brands at thebottom of the shelfspace allocated to the

Some cases show high levels of competitive exclusion.But exclusion can take many forms, many of them lessextreme than delistings.

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category, or promoting two non-captainmanufacturers’ brands at the same timewould be some less obvious forms ofcompetitive exclusion.

We identify a number of factors thatwould play a role in the likelihood ofexclusion. First, as the brand differentialbetween the captain brand and anotherbrand in the category increases, it is morelikely that the captain manufacturerexcludes that brand from the category.Second, if in addition to branddifferential, the captain manufacturerhas a cost advantage over the non-captainbrand, then exclusion is much easier.Finally, we show that as the level ofproduct differentiation between captainand non-captain brands increases,exclusion is more likely. The implicationof our results is that competitiveexclusion of some brands is more likely incategories where there is a clear marketleader or in categories where the retaileroffers a wide range of products fromvarious suppliers.

A natural question to ask is: Whatmeasures can the retailer take to avoidcompetitive exclusion? One obvioussolution would be for the retailer tomandate that the category captain notexclude any of the brands in the category.However, as we mentioned already,exclusion may take many different and

non-obvious forms, which may make itdifficult for the retailer to monitor suchexclusions. A second measure is for theretailer to filter the category captain’srecommendations before implementingthem. This would avoid the more blatantforms of exclusion. Of course, for thesame reason as before, it may not be easyfor the retailer to detect biasedrecommendations when they are subtle.In both cases, having a mechanism forsoliciting input from other supplierswould be helpful.

In practice, retailers tend to assigntheir leader manufacturers as categorycaptains because of their resourceavailability and their expertise in thecategories they compete in. Our resultssuggest that the retailer can decrease thelikelihood of competitive exclusion byassigning a non-leader manufacturer ascategory captain. Retailers have to makea tradeoff between assigning a leadingmanufacturer who may exclude otherbrands and effectively decrease productvariety, and assigning a non-leadingmanufacturer who may not have as muchexpertise as the leading brand. Thisconcern should be minimal in categorieswhere the two top competitors are bothlarge, established firms who invest inconsumer research.

It may not be easy for a retailer to detect biasedrecommendations when they are subtle. So retailersneed to solicit inputs from other suppliers

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The Impact of Category Captainship onConsumers

Our results suggest that categorycaptainship may lead to lower averageprices in the category, which benefitsconsumers. This is one of the desirableoutcomes of manufacturer-retailercollaboration. For example, Wal-Mart’sgeneral philosophy concerning supplychain collaboration is to benefit from theexpertise of the manufacturers to deliverconsumer value through a reduction inretail prices.

Our results also suggest thatconsumers are better off under thecategory captain’s assortment selectionas opposed to the retailer’s assortmentselection. The reason is that the categorycaptain prefers to offer highlydifferentiated products in the categoryas opposed to the retailer’s preferencesthat are in favor of less differentiatedproducts. The intuition behind thisresult is that the retailer benefits fromhigher competition betweenmanufacturers and is able to extractmore profit when the products in thecategory are less differentiated, whereasthe captain manufacturer benefits fromcompeting with a brand that is clearlydifferentiated from its own brand. As aresult, consumers are better off undercategory captainship because they gethigher utility from having access todifferentiated products.

However, on the negative side, categorycaptainship may result in competitiveexclusion, and as a result, a decrease in thenumber of variants offered to consumers.Where consumers value the flexibility ofhaving access to a number of brands, thismay result in a decrease in customersatisfaction. In addition, effectivemonopolization in the category (as in theUST example) can provide the captainmanufacturer with significant power overthe retailer, which would over time lead toincreases in wholesale, and consequently,retail prices.

To summarize, category captainshipmay reduce the average retail price andoffer more differentiated products,thereby increasing customer satisfactionin the short-run. However, categorycaptainship can harm consumers throughcompetitive exclusion, leading to a smallerselection and future price hikes. Thus, theretailer should be more vigilant aboutcompetitive exclusion in categories whereconsumers value high variety, and in caseswhere the leading brand is very powerful.

The Long-term Impact of CategoryCaptainship on Retailers

Our research suggests that retailersshould adopt a strategic perspective indeciding how and where to implementcategory captainship, rather than jump atshort-term benefits. There are severalreasons for this.

Best Practice Guidelines:

To avoid competitive exclusion: 1. Create opportunities for non-captain suppliers to provide input into category

decisions.2. Consider assigning category captainship to non-leading brands that have

sufficient knowledge and resources.3. Maintain enough control over the process to be able to filter manufacturer

recommendations.

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First, any retailer’s long-term success isclosely related to its consumers’satisfaction. As we discussed, categorycaptainship may lead to a reduction in theaverage retail price for a given productassortment, which has a positive consumerimpact. If category captainship leads to adecrease in the level of product varietyoffered to consumers it could createimmediate consumer dissatisfaction.Longer term, price hikes might take placedue to effective monopolization (even ifaverage retail prices fall in the short-term). Both these potential short-term andlong-term effects are detrimental in ahighly competitive retail environment.

Second, retailers should be aware thatwhat is in the best interest of the categorycaptain may not be the best for them. Inparticular, if the assortment decision isleft to the category captain, the level ofdifferentiation in the category mayincrease, undercutting the retailer’s powerover the manufacturers, and leading tolower margins. Therefore, relying oncategory captains for recommendations onassortment planning may not be the bestapproach for the retailer. For example,Carrefour and Kraft Foods are involved in apartnership in the candy bars categorywhere Carrefour mostly relies on Kraft forrecommendations related to shelfspacemanagement and product pricing, butkeeps assortment decisions internal.

Third, category captainship requiresthat the retailer share a lot of strategicinformation with its category captain. Inpractice, a leading manufacturer willprobably serve as a category captain formany retailers that are competing for thesame consumers. A potential danger isthat some of one retailer’s strategicinformation ‘leaks’ to other competingretailers.

Finally, retailers need to consider thelong-term effect of relying manufacturersfor category management. It may betempting to say “the retailer can alwaysterminate a category captainshipagreement and return to managing itsown categories.” But categorymanagement requires a thoroughunderstanding of consumer preferencesand purchase patterns, a knowledge basethat is hard to build once the expertise islost.

Traditionally, manufacturers such asProcter & Gamble and Unilever were themain players in the fast-moving consumergoods industry and retailers were just ameans of reaching consumers. The earlynineties saw an increase in the number ofhigh quality new product introductionsand the emergence of other strongmanufacturers, which led to highercompetition for shelfspace. This,combined with the retailers’ awareness of

Best Practice Guidelines:

To avoid consumer dissatisfaction:1. Avoid competitive exclusion.2. Implement category captainship in categories where high variety is not crucial to

consumer satisfaction.

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the importance to be in contact with endconsumers, provided the basis for a shiftin power from manufacturers to retailers6.Many retailers such as Wal-Mart,Carrefour, and Metro owe their rapidgrowth to these developments. AsCorstjens and Corstjens describe in theirinfluential book Store Wars, ‘... the giantretailers, now, stand as an obstaclebetween the manufacturers and the endconsumers, about as welcome as a row ofhigh-rise hotels between themanufacturer’s villa and the beach.’ It istherefore no surprise that manufacturerswould advocate any initiative that canincrease their influence over retaildecisions, and category captainship issuch a practice. Indeed, by outsourcingretail category management to theirleading manufacturers, retailers may inthe long-run lose their capabilities inmanaging their product categories andtheir knowledge about consumers. Thisloss of capability may prepare the basis fora shift of power back from the retailers tothe manufacturers. Retailer beware!

Acknowledgement: This research waspartly funded by the INSEAD-Pricewaterhouse Coopers ResearchInitiative on High PerformanceOrganizations.”

Further reading1 Category Management is Here to Stay, ECR

Conference, Brussels, 2004(http://www.ecrnet.org/conference/files/24-05-04/04-category%20management.ppt).

2 Gruen, T.W., R.H. Shah. 2000.Determinants and Outcomes of Plan Objectivityand Implementation in Category ManagementRelationships, Journal of Retailing, Vol.76(4), pp.483-510.

3 http://www.antitrustinstitute.org/recent2/270.pdf

4 Greenberger, R.S., UST Must Pay $1.05Billion To a Big Tobacco Competitor, AsianWall Street Journal, New York, NY: Jan,15, 2003, p.A.8.

5 Kurtulusc, M., and L.B. Toktay, CategoryCaptainship: Outsourcing Retail CategoryManagement, insead Working Paper,2004.

6 Corstjens, J., and M. Corstjens, StoreWars: The Battle for Mindspace and Shelfspace,Wiley, 1995.

Best Practice Guidelines:

To avoid long-term negative retailer impact:1. Be carefull when sharing strategic information with category captains.2. Do not rely solely on category captains for assortment decisions.3. Do not become dependant on category captains in strategically important

categories (e.g., store traffic driving categories).