CATEGORY MANAGEMENT

1
CATEGORY MANAGEMENT PRIVATE LABEL PROFITABILITY

• W. Frank Dell II, CMC
• DELLMART Company
• May, 2001

2
Agenda

• Category Management
• Introduction
• Distributor Program
• Supplier Program
• Private Label Profitability
• Introduction
• Activity Based Costing
• Net Profit Applications

3
Objectives
INTRODUCTION

• Provide an overview of category management and
  its process
• Identify strengths and weaknesses
• Outline a suppliers approach

4
Definitions
INTRODUCTION

• Category
• A distinct, manageable group of
  products/services that consumers perceive to be
  interrelated and/or substitutable in meeting a
  consumers needs.
• Category Management
• The distributor/supplier process of managing
  categories as strategic business units, producing
  enhanced business results by focusing on
  delivering consumer value.

5
Charter for Change
INTRODUCTION

• From
• Push
• Salesperson
• Buyer/Seller
• Cost Averaging
• Deals
• Sales Drivers

• To
• Pull
• Business Team
• Account Management
• Cost to Serve
• Pay for Performance
• Profit Drivers

6
Charter for Change
INTRODUCTION

• From
• Data Protection
• Data
• Shelf Management
• Win/Lose
• Fast

• To
• Data Sharing
• Knowledge
• Assortment Management
• Win/Win
• Fastest

7
Does Category Management Work?
INTRODUCTION

• 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

8
Brand Management
INTRODUCTION
Product Development
Advertising

• Started in the 50s 60s
• Brand General Manager

Brand Management
Profit Loss Responsibility
Promotions
9
Supplier Migration
INTRODUCTION
Brand Management Snap, Crackle Pop Vs Tony The
Tiger Vs General Mills
Category Management Kellogg Vs General
Mills Breakfast Alternatives
10
Components
DISTRIBUTOR
Collaborative Trading Partner Relationships
Scorecard
Strategy Business Process
Information Technology
Organization Capabilities
11
Elements
DISTRIBUTOR

• 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

12
Process Activities
DISTRIBUTOR
Category Definition
Category Role
Category Assessment
Category Review
Category Scorecard
Category Strategies
Category Tactics
Plan Implementation
13
Definition
DISTRIBUTOR

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

14
Category Role
DISTRIBUTOR

• Destination
• To be the primary category provider and help
  define the retailer as the store of choice by
  delivering consistent, superior target consumer
  value.
• Routine
• To 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/Seasonal
• To be a major category provider, help reinforce
  the retailer as the store of choice by delivering
  frequent, competitive target consumer value.
• Convenience
• To be a category provider and help reinforce the
  retailer as the store of choice by delivering
  good target consumer value.

15
Assessment
DISTRIBUTOR
Market
Market Share Benchmarks
Category Sub-Category Segment Brand SKU
Consumer
Distributor
Contribution Productivity
Buyer Profile Purchase Behavior
Supplier
Share Efficiently
16
Distributor Scorecard
DISTRIBUTOR
Consumer 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
Supply Days of Supply _______________ ____________
___ Inventory _______________ _______________ Tu
rns _______________ _______________ GMROI ________
_______ _______________ Service
Level _______________ _______________
17
Consumer Strategies
DISTRIBUTOR
Category Roles
Category Roles
Category Strategies
In-Store Service
Procurement
Distribution
Marketing
Attract Strategy - Traffic Building - Image
Enhancing Build Loyalty Strategy - Transaction
Building - Turf Protector Micro marketing
DC/Store Receiving - Auto Replenishment Transpo
rtation - DSD, Backhaul DC/Store Handling -
Cross Dock - Sale-Ready Packaging
Acquisition Strategy - Best Quality/Reliability
- Best Cost Terms Transaction Strategy
- All EDI EFT
Full Service - (If Necessary) Differentiated
- (From Competition)
Destination
DC/Store Receiving - Auto Replenishment Transpo
rtation - DSD, Backhaul DC/Store Handling -
Minimize Handling - Reduce Shrink
Acquisition Strategy - Best Quality/Reliability
- Best Cost Terms Transaction Strategy -
Majority EDI EFT
Semi-Service - (If Necessary) Non-Differentiat
ed - (From Competition)
Build Loyalty Strategy - Transaction Building
- Turf Protecting Cluster Marketing
Routine
Self Service - (If Necessary) Non-Differentiat
ed - (From Competition)
Attract Strategy - Traffic Building -
Excitement Creating Cluster Marketing
Acquisition Strategy - Best Quality/Reliability
- Best Cost Terms Transaction Strategy
- Some EDI EFT
Transportation - Reduce Transit Time DC/Store
Handling - Reduce Shrink - Sale-Ready
Packaging
Occasional/ Seasonal
Acquisition Strategy - Low Cost
Build Loyalty Strategy - Transaction
Building Uniform Marketing
DC/Store Receiving - Auto Replenishment
DC/Store Handling - Minimize Handling -
Reduce Shrink
Self-Service Non-Differentiated - (From
Competition)
Convenience
18
Distributor Strategies
DISTRIBUTOR
Category Strategies Category Strategies
Characteristics
Traffic Building
High Share, Frequently Purchased, High of Sales
Transaction Building
Higher Ring-up, Impulse Purchasing
Profit Contribution
Higher Gross Margin, Higher Turns
Cash Generating
Higher Turns, Frequently Purchased
Excitement Creating
Impulse, Lifestyle-Oriented, Seasonal
Image Creating
Frequently Purchased, Highly Promoted, Impulse,
Unique Items, Seasonal
Turf Defending
Used by Retailers to Draw Traditional Customer
Base
19
Distributor Tactics
DISTRIBUTOR
Category Tactics
Category Roles
Promotion
Pricing
Assortment
Shelf Presentation
Prime Store Location - High Traffic - High
Exposure Time High Cube Allocation (Cube to
Time Supply)
Leadership - Best Value (Per Unit or
Use) - Entire Category
Complete Variety - Sub-Categories -
Segments - Brands - SKUs
High Level of Activity (If Necessary) -
High Frequency - Long Duration - Multiple
Vehicles
Destination
Broad Variety - Sub-Categories - Segments
- Major Brands - Major SKUs
Competitive/Consistent - Equal to Competition
(Per Unit or Use) - Sub-Categories -
Segments - Major Brands/SKU - Reduce Shrink
Average Store Location - High Frequency High
Cube Allocation (Cube to Time Supply)
Average Level of Activity (If
Necessary) - Average Frequency - Average
Duration - Multiple Vehicles
Routine
Seasonal/Timely Activity (If Necessary)
- Multiple Vehicles
Good Store Location - High Traffic Average
Cube Allocation (Cube to Time Supply)
Competitive/Seasonally - Close to Competition
(Per Unit or Use) - Sub-Categories -
Segments
Timely Variety - Sub-Categories - Segments
Occasional/ Seasonal
Available Store Location Low Cube Allocation
(Cube to Time Supply)
Select Variety - Major Brands/SKUs
Non-Inflammatory - Within Reach to
Competition (Per Unit or Use) - Major
Brands/SKUs
Low Level of Activity - Multiple Vehicles
Convenience
20
Retail Category Portfolio
DISTRIBUTOR
Sales Dollars
Low
High
High
Flagship
Cash Machine
Maintain/Grow
Gross Margin Percent
Core Traffic
Under Fire
Rehab
Low
21
Retail Category Portfolio
DISTRIBUTOR
Market Growth
Low
High
High
Sleeper
Winners
Retailer Share of Market
Questionable
Opportunity Gaps
Low
22
Consumer Based Category Roles
DISTRIBUTOR
Reach
Low
High
High
Staples
Niches
Frequency
Necessities
Fill-ins
Low
23
Before Organization
DISTRIBUTOR
24
After Organization
DISTRIBUTOR
Product Supply
Space Allocation
Marketing Services
Category Management
Retail Merchandising
Price/Data Integrity
Category Analysis
Advertising Coordination
Retail Pricing
Allowance/Cost Control
25
Responsibilities
DISTRIBUTOR
Responsibilities
Retailers
Wholesalers
84.6
Negotiation with suppliers
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
26.9
26
Category Definitions
DISTRIBUTOR
NUMBER 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
27
Review Frequency
DISTRIBUTOR
28
Whats Really Happening?
DISTRIBUTOR

• 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 cant support
  it with metrics

• 3. Official approach is too complicated
• Only 15 claim to be following the guidelines
• CEO at large chain Wed 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 dont 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..

29
Scope
SUPPLIER
30
Sales Evolution
SUPPLIER
Available
Sales
Share
Category Management
Gross Margin
D.P.P.
31
Perspective
SUPPLIER

• Differences
• Supplier
• Retailer Store
• Brands

• Check your bias at the door
• Bring your knowledge

32
Principles
SUPPLIER

• 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

33
Supplier Steps
SUPPLIER
Preparation
Execution
Coordination

• 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

34
Objectives
INTRODUCTION

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

35
Why Net Profit?
INTRODUCTION

• Gross Margin ineffective management tool
• Simple relationship - cost Vs retail price
• Not a predictor of profit

36
What is Net Profit?
INTRODUCTION

• Sales
• - Cost of Goods Sold
• Gross Margin
• Direct Revenue
• - ABC Costs
• Net Profit

37
Definition
ABC

• ABC is a cost allocation or assignment
  methodology
• Cost assignment based on
• Activities - Tasks within a process
• Drivers - Factors creating costs

38
ABC Vs DPP
ABC
ABC 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
39
Allocates All Costs
ABC

• Headquarters
• Management
• Merchandising
• Finance Accounting
• Human Resources
• Warehouse
• Management
• Labor
• Benefits
• Space
• Utilities

• Transportation
• Labor
• Equipment
• Supplies
• Stores
• Management
• Labor
• Benefits
• Space
• Utilities

40
Primary Processes
ABC
41
Costs Follow Product Flow
ABC
42
Greatest cost is Display Space
ABC
43
Sales By Department
ABC
44
Gross Margin By Department
ABC
45
Net Profit By Department
ABC
46
Superior Private Label Categories
ABC

• Private Label products achieved results superior
  to branded in the following categories

47
PLMA Model
APPLICATIONS
48
Success Factors
APPLICATIONS

• Logical presentation
• Reasonable assumptions
• Demonstrate knowledge of business
• Promote benefits
• Consumer sales
• Customer profits

49
New Products
APPLICATIONS

• Life blood for retailers and suppliers
• Primary driver of growth
• Replacement Vs Cannibalization Strategy

New Improved
50
Approach
APPLICATIONS

• 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

51
Retail Space
APPLICATIONS

• Most coveted merchandise element
• Interacts with pricing
• Shelf space is greatest item cost

52
Balance Space
APPLICATIONS

• Too Little
• Consumer cant find
• Reduced sales
• Lost sales

• Too Much
• Lower profits

53
Diminishing Returns
APPLICATIONS

• Excess space does not increase sales
• Minimum - Case plus order cycle
• Minimizes stocking labor

54
Approach
APPLICATIONS

• 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

55
Retail Pricing
APPLICATIONS

• Price discussions should not be taboo
• Price too high
• Lost sales
• Price too low
• Lost sales
• Lost profit

56
Retailer Goals
APPLICATIONS
High

• Gross Margin
• Quality Ratio

Low

• Price Image

57
Consumers
APPLICATIONS

• Recall up to 200 item prices
• Frequently purchased items
• High consumables
• Translates to 500 - 1,000 items creating stores
  price image

58
Value is King
APPLICATIONS
Price
Value
Quality
59
Approach
APPLICATIONS

• Compare product quality
• Load model
• Test evaluate alternatives
• Change retail price
• Hold constant and change unit sales
• Present
• Current sales and net profit
• Projected sales and net profit

60
Promotions
APPLICATIONS

• Most frequently used promotion tool
• Advertising
• Display
• Price reduction
• Private Label under-represented
• Accrual funds
• Lack targeted program

61
Why Promote?
APPLICATIONS

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

62
Promotions are Difficult
APPLICATIONS
63
Many Promotional Factors
APPLICATIONS
64
Promotion Conclusions
APPLICATIONS

• Low Private Label share
• Moderate Private Label share

Natl. Brand
Private Label
Natl. Brand
Private Label
65
Approach
APPLICATIONS

• Research past promotions
• Load model
• Test evaluate alternatives
• Change price
• Change index
• Present
• Current sales and net profit
• Projected sales and net profit

66
Summary
APPLICATIONS

• 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