Category Management Concept in Retailing

Retail is often termed as a business of responding to change. Today‘s retailer is faced with a rapidly changing and demanding consumer, intense competition, and pressures on costs. The combinations of the business condition that exist today and the advances in technology have created an opportunity for the development of new management approaches. One such approach is that of category management.

The need to reduce costs, control inventory levels and replenish stock efficiently, led to the concept of Efficient Consumer Response (ECR) taking shape in the grocery retail industry in Europe and America. By focusing on a superior understanding of consumer needs, category management provides renewed opportunities for meeting consumer needs, and at the same time, for achieving competitive advantage as well as lower costs through greater work process efficiencies.

Category Management can be defined as ―the distributor’s / supplier’s process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value. Thus, a category is a basic unit of analysis for making merchandising decision. In general, a category is an assortment of items that the customer sees as reasonable substitutes for each other. The fundamentals of category management revolve around managing categories as strategic business units.

At the core of the category management concept is a focus on a better understanding of consumer needs as the basis for the retailers‘ and suppliers‘ strategies, goals and work processes. Technology plays a key role, as information is a key enabler. The idea is to use this information to tailor the product offering according to consumer needs. The offering is then measured in terms of its sales, cost and returns per square foot. The whole process is aimed at providing customer satisfaction and at the some time, maximizing the returns for the organization. This focus results in a re-evaluation of many prevalent business practices, which may have obstructed a greater understanding of consumer needs and opportunities.

Components of Category Management

There are six components, which are key to the functioning of category management. Two of these are considered essential, without which category management cannot be started and they are therefore, called the core components. The other four are needed to enable to process, without these, category management can be started but it cannot be institutionalized on an on-going basis.

The two core components are: the Strategy and the Business processes. The enabling factors are performance measurement, information technology, organizational Capabilities and co-operative Trading partner relationships.  The core component strategy is linked to the company‘s overall mission and goals. The business process, which evolves, is a result of these strategies. The business process focuses on how work has to be done within the organization and with its trading partners, rather than focusing on what is to be done.

The steps involved in this process are explained briefly, below:

1. Category Definition: Category Definition is the first step in the process. The definition of the category has a significant impact on the subsequent steps. A category definition should be based on how the customer buys, and not on how the retailer buys. For example, for a grocery retailer, aerated drinks may be one category, ready to cook meals, another and health drinks, a third category. Category definition varies from retailer to retailer.

2.Defining the Category Role: The category role determines the priority and the importance of the various categories in the overall business. These aids in resource allocation. Traditionally, four categories have been identified. They are:

  • Destination Category : This is the main product offering of the retail store. Examples include fresh groceries at a supermarket and apparel in a department store.
  • Routine category: These are products that a customer buys from the retailer as a matter of routine or habit. Examples include toothpaste, soaps, etc.,
  • Seasonal Category: This includes products, which are not purchased very often or are purchased when available and needed. Examples would include mangoes sold in summer, in a super market, and umbrellas and raincoats, in a department store.
  • Convenience Category: These are products that a consumer finds convenient to buy at a neighborhood retailer. Examples include products like bread, eggs and even routine stationery. Category roles must be developed with the customer in mind and must reflect the typical consumer shopping behavior. These roles provide logical framework for the allocation of the retailer‘s resources, based on its mission, goals, and strategies.

3. Category Assessment: In this step, the current performance of the category is evaluated with respect to the turnover, profits and return on asses in the category. It involves an assessment of the consumers, the market, the retailer and the suppliers.

4. Category Performance Measures: The development of category performance measures involves the setting of measurable targets in terms of sales, margins and Gross Margin Returns on Investment (GMROI).

5. Category strategies: At this point in the process, the retailers and the supplier know the category‘s role; they have assessed the current performance of the category and have set preliminary targets for the category‘s performance. The purpose of this step is to help the retailer and supplier to develop strategies that capitalize on category opportunities through creative and efficient use of the resources that are available to the category. Category strategies can be aimed at building traffic or transactions, generating cash, generating profit, enhancing the image or creating excitement.

6. Category Tactics: At this stage, category tactics are developed in the areas of assortment pricing, promotions and the presentation of the merchandise in the store.

7. Category plan implementation: A Specific implementation schedule is developed and responsibilities are assigned. Accurate implementation is the key to the success of the Category Management.

8. Category Review: The final step in the business process is the review of the progress and of the actual achievements as against the targets set for the category. Review aids in the taking of decisions at the right point of time.

Category management is considered to be a ―scientifical approach to relating in the mature markets, largely because it is date driven and fact based.