Information is the key
Two other trends encouraged the development of category management as a stand-alone concept. First, major retail and wholesale companies – such as Wal-Mart in the US, Tesco in the UK and METRO GROUP in Germany – became more common in the 1990s. Manufacturers no longer had to deal with small retailers. Instead, they were now able to concentrate on just a few strategic partners. Second, the data basis that plays a decisive role in measuring and monitoring the needs of customers grew consistently better. For instance, barcodes at stores’ checkouts made it possible to record and analyse sales figures quickly. Computers continued to become more powerful, making it even easier to analyse and process findings. Consultants continued to refine the planning process between industry and retail, creating the theoretical foundation for category management.
A process in several steps
According to the model of consulting firm The Partnering Group, category management is an eight-step process. The first step is to define categories from the customers’ perspective. In this phase, companies decide which products belong in which categories. “This is about making clear distinctions,” explains Dirk Reichelt, Category Manager for tobacco, luxury and baked goods at METRO Cash & Carry. The wholesaler caters exclusively for professional customers (independent small businesses). “When it comes to coffee, for example, we have an internationally valid classification for hot beverages, which includes capsules, pads, filter coffee, whole beans and instant coffee. We do not choose the country-specific structure until the next step. For instance, in Germany, instant coffee has a market share of 10 percent – but in Russia it’s 60 percent. That’s something we have to keep in mind.”
In the second step of the process, the retailer determines the role the category is to play in its market. Is it a power category that positions the company as the best provider in terms of assortment range and depth or image, for instance? Does the category cover a basic need of the target group? Or is it impulse or seasonal merchandise that is intended to generate additional sales? Depending on its role, each category has different targets, measured in sales or customer penetration. In the third phase of category management, retailers and manufacturers evaluate the individual categories.
Dirk Reichelt comments: “We do not make a gut decision, we use strictly empirical methods. We receive part of the statistical data directly from the manufacturer. In addition, we work with market research institutes or perform our own analyses, among other things. The number of sales slips, customer penetration rate and comparable figures are leading indicators of how important an item is.” This analysis paints a comprehensive picture of customers’ expectations and shopping behaviour – and shows the category’s potential for the company.