Michael Langenborg07.01.01
Imagine trying to run your business without the insight of your sales staff communicating from the field. Imagine trying to run a business in a remote location without the benefit of input from the outside world. It's like flying blind without instrumentation…harrowing at best and deadly at the worst. And so it is with the natural products industry. If manufacturers didn't have the benefit of retailers stocking their product, pricing it appropriately, merchandising it correctly and communicating to their customers about the products they carry, then consumers would be left to fend for themselves or be forced to order directly from every manufacturer from which they wished to purchase products. Not a scenario that rings true to today's convenience-oriented marketplace.
The learning here is that retailers are the front line for any manufacturer of a consumer product. Retailers are the gateway to consumers because they control the places where people shop. So it's imperative that manufacturers not only understand the issues facing retailers but also work to improve their business in ways beyond traditional discounting, price ads and point-of-sale materials. Enter category management.
Category management is a well-known term for most retailers and manufacturers in the mainstream of consumer products. But for most natural product retailers and manufacturers, the term is loosely associated with larger and more well capitalized companies. However, times are changing and we're seeing more recognition of the benefits of category management up and down the distribution chain.
For retailers the benefits are obvious as they are the end line for most consumer products and are therefore rewarded with higher profits, greater customer loyalty and better overall store performance. However for manufacturers, distributors and brokers, the rewards are a bit more difficult to pinpoint. Nevertheless, without that triumvirate of players, the category management process would never happen for retailers. The manufacturers are the drivers of category management because they offer consumer insights that the retailers just don't have the time or resources to ascertain. Equally the brokers are the manufacturer's representatives and must communicate the benefits to retailers. Finally, distributors benefit because the items they're carrying are items that are more representative of the consumer's actual purchase patterns, which means higher turns and better inventory management.
The crux of category management is planning. It begins with the manufacturer and ends with the consumer and it's the retailer that is the final step in reaching the consumer. Therefore, manufacturers must be willing and able to commit to a category management program that gives their retailing partners a better opportunity for success. We have created a five-step program that focuses on the retailer because that's where the battle is won or lost.
There are five steps in creating a destination category that defines the retailer as "the store of choice" for consumers. This leads to increased sales, higher overall margins and improved GMROI, among other metrics.
Planning individual categories is the cornerstone of category management. It's also important to understand that the "destination" categories selected will affect what the store stands for and establish its unique point of differentiation versus other retailers in the minds of shoppers.
For example, by recognizing that customers are shopping at a store because of its superior selection, assortment and understanding of a particular category, say medicinal teas, makes the tea section a "destination category" because the consumer is either unwilling or unable to purchase that specific item at any other retail outlet. The result is that any inconvenience, higher price or extra time and effort spent buying from that store are far less important than just being able to find the medicinal tea they need.
Using the "Consumer Category Roles" (Figure 1) you can begin to map out a matrix of categories that would best suit an individual customer base. Remember, only a few categories can be true destination role providers, so choose carefully. Shopability…it's why consumers consistently return to a store.
When a store is set-up to respond to consumer preferences, the store runs more smoothly, allowing the retailer to manage proactively, not reactively. The net effect is increased customer loyalty to the store, because:
• Products reflect actual consumer purchase patterns.
• Shelf space becomes available to add new or seasonal products.
• Out-of-stocks are minimized.
• Inventory is better managed.
The average retail store may be subdivided into about 200 categories. However, a natural food store may have as few as 30. Whatever the number, to be successful with category management the categories must be defined by the Consumer Purchase Criteria (CPC). The CPC is a hierarchical representation (Figure 2) of important product characteristics for consumers. Pricing, merchandising, shelf layout and promotional calendars are significantly influenced by the order in which consumers rank those characteristics. More importantly, if the store delivers on the top priorities it can nurture a loyal customer base. Eliminate duplication and you will improve consumer perceptions.
The SKU Velocity Performance chart (Figure 3) shows the contribution of individual SKUs to the Medicinal Blend category in the tea section. When viewed in such a manner, it is rather easy to see where the products that a retailer carries are not performing. For those manufacturers that represent the items in that middle "Discontinuance" area this is a visual representation of non-performance and they should welcome the elimination of these items as no one along the distribution chain is making any money. More importantly, it adds clutter to the shelf and takes away valuable shelf space from the products that do sell. Finally, it causes discord among consumers as they are forced to weed through a veritable forest of products to discover the product they're looking to buy. When items are discontinued, dramatic increases in sales per SKU and inventory movement per SKU take place. The effect on Gross Margin Return On Investment is even more dramatic as it frees up valuable capital for more saleable items.
Natural products retailers and manufacturers alike seem to be overly fascinated with wide assortments represented on the shelf. Nary a new product gets rejected. All newcomers are welcome in the interest of protecting and supporting the "niche" strategy of natural products retailers. There's only one problem with that scenario: consumers don't like it. Knowing what your customers don't buy may be more critical than what they do buy. A step-by-step process of reducing item duplication can be done without reducing your store's image of variety. Eliminating SKU duplication not only reduces inventory, but can also increase sales. By strategically analyzing your product mix and modifying it to reflect your fastest moving and most popular items, turns dramatically increase and the cost to maintain, finance and carry inventory decreases.
An uncluttered shelf is the best salesperson because it silently and effortlessly provides customers with the products they are looking for. When selected properly, duplicate items can be removed from the shelf without most customers ever noticing. In fact, an FMI study (Figure 4) revealed that after duplicate and slow-moving items were removed, 80% of the shoppers saw no change and 16% perceived the variety as increasing. All customers found the category easier to shop and some shoppers thought even more items were available than before! To shoppers, less is more. We suggest monitoring customer requests as a proven technique for tracking consumer satisfaction with your store's variety after any SKU reductions you initiate. A 180-day review cycle of SKU performance is highly recommended.
When pricing is viewed only in terms of price reductions or set margins, the opportunity to earn a higher margin and still satisfy your customers' basic product need is lost. For example, in a destination category like Medicinal Blends a featured ad price for a tea may be $2.19 while the SRP could be $2.99. That 80-cent spread represents a 27% discount but it may not be as motivating to customers as item availability, category variety or a consumer trial program such as sampling.
Use pricing in a variety of ways by looking at the role of individual SKUs to the total item mix. If an item has a strong seasonal swing electing to pulse promotional offers during the entire length of the season captures more full-margin sales. Equally, items that are ailment-related need not be discounted when product availability is the consumer's key requirement. Price is a representation of value to the consumer. Fully understanding the value proposition a particular SKU offers to consumers opens up greater opportunities for higher profits, turf protection and image enhancement.
Step 5: Promotion-Knowing How To Promote Is As Important As What To Promote
Subcategory strategies may be the most closely guarded competitive secret as they will ultimately determine the ability to compete. This is the area where creative retail marketers armed with knowledge can excel. For example, a retailer may have a category called medicinal tea. He or she may want to make the store "the place to shop for medicinal tea" in its trading territory. The category would, therefore, have a "Destination" role. Decisions about pricing, assortment, shelf layout and promotion would be made with this category role in mind.
Within the category individual products would be assigned to achieve specific subcategory strategies, such as:
• Traffic Builder-provide high consumer draw
• Transaction Builder-increase total register ring
• Profit Generating-improve category gross margin
• Turf Protection-defend sales and share
• Cash Generator-increase category cash flow
• Image Enhancing-reinforce retailer's desired image
• Excitement Creator-generate sense of urgency
Develop a promotional strategy that takes into consideration the performance of the individual subcategories over time. Seasonality of items is critical to effective promotional planning. With the effective use of feature and display promotions that match individual subcategories seasonality, dramatic sales increases can occur. Always consider seasonality when planning your promotional calendar.
About the author:
Michael Langenborg is chief strategist at Natural Planograms–A Whole Health Marketing Group Company, based in Santa Rosa, CA. He can be reached at 707-537-1406 or via e-mail at michael@naturalplanograms.com.
The learning here is that retailers are the front line for any manufacturer of a consumer product. Retailers are the gateway to consumers because they control the places where people shop. So it's imperative that manufacturers not only understand the issues facing retailers but also work to improve their business in ways beyond traditional discounting, price ads and point-of-sale materials. Enter category management.
Category management is a well-known term for most retailers and manufacturers in the mainstream of consumer products. But for most natural product retailers and manufacturers, the term is loosely associated with larger and more well capitalized companies. However, times are changing and we're seeing more recognition of the benefits of category management up and down the distribution chain.
For retailers the benefits are obvious as they are the end line for most consumer products and are therefore rewarded with higher profits, greater customer loyalty and better overall store performance. However for manufacturers, distributors and brokers, the rewards are a bit more difficult to pinpoint. Nevertheless, without that triumvirate of players, the category management process would never happen for retailers. The manufacturers are the drivers of category management because they offer consumer insights that the retailers just don't have the time or resources to ascertain. Equally the brokers are the manufacturer's representatives and must communicate the benefits to retailers. Finally, distributors benefit because the items they're carrying are items that are more representative of the consumer's actual purchase patterns, which means higher turns and better inventory management.
The crux of category management is planning. It begins with the manufacturer and ends with the consumer and it's the retailer that is the final step in reaching the consumer. Therefore, manufacturers must be willing and able to commit to a category management program that gives their retailing partners a better opportunity for success. We have created a five-step program that focuses on the retailer because that's where the battle is won or lost.
Step 1: Positioning-To Know Your Categories Is To Know Your Customers
There are five steps in creating a destination category that defines the retailer as "the store of choice" for consumers. This leads to increased sales, higher overall margins and improved GMROI, among other metrics.
Planning individual categories is the cornerstone of category management. It's also important to understand that the "destination" categories selected will affect what the store stands for and establish its unique point of differentiation versus other retailers in the minds of shoppers.
For example, by recognizing that customers are shopping at a store because of its superior selection, assortment and understanding of a particular category, say medicinal teas, makes the tea section a "destination category" because the consumer is either unwilling or unable to purchase that specific item at any other retail outlet. The result is that any inconvenience, higher price or extra time and effort spent buying from that store are far less important than just being able to find the medicinal tea they need.
Using the "Consumer Category Roles" (Figure 1) you can begin to map out a matrix of categories that would best suit an individual customer base. Remember, only a few categories can be true destination role providers, so choose carefully. Shopability…it's why consumers consistently return to a store.
When a store is set-up to respond to consumer preferences, the store runs more smoothly, allowing the retailer to manage proactively, not reactively. The net effect is increased customer loyalty to the store, because:
• Products reflect actual consumer purchase patterns.
• Shelf space becomes available to add new or seasonal products.
• Out-of-stocks are minimized.
• Inventory is better managed.
Step 2:Assortment-Categories Reflect Their Importance To Shoppers
The average retail store may be subdivided into about 200 categories. However, a natural food store may have as few as 30. Whatever the number, to be successful with category management the categories must be defined by the Consumer Purchase Criteria (CPC). The CPC is a hierarchical representation (Figure 2) of important product characteristics for consumers. Pricing, merchandising, shelf layout and promotional calendars are significantly influenced by the order in which consumers rank those characteristics. More importantly, if the store delivers on the top priorities it can nurture a loyal customer base. Eliminate duplication and you will improve consumer perceptions.
The SKU Velocity Performance chart (Figure 3) shows the contribution of individual SKUs to the Medicinal Blend category in the tea section. When viewed in such a manner, it is rather easy to see where the products that a retailer carries are not performing. For those manufacturers that represent the items in that middle "Discontinuance" area this is a visual representation of non-performance and they should welcome the elimination of these items as no one along the distribution chain is making any money. More importantly, it adds clutter to the shelf and takes away valuable shelf space from the products that do sell. Finally, it causes discord among consumers as they are forced to weed through a veritable forest of products to discover the product they're looking to buy. When items are discontinued, dramatic increases in sales per SKU and inventory movement per SKU take place. The effect on Gross Margin Return On Investment is even more dramatic as it frees up valuable capital for more saleable items.
Step 3: Shelf Management-To Consumers, Less Is More
Natural products retailers and manufacturers alike seem to be overly fascinated with wide assortments represented on the shelf. Nary a new product gets rejected. All newcomers are welcome in the interest of protecting and supporting the "niche" strategy of natural products retailers. There's only one problem with that scenario: consumers don't like it. Knowing what your customers don't buy may be more critical than what they do buy. A step-by-step process of reducing item duplication can be done without reducing your store's image of variety. Eliminating SKU duplication not only reduces inventory, but can also increase sales. By strategically analyzing your product mix and modifying it to reflect your fastest moving and most popular items, turns dramatically increase and the cost to maintain, finance and carry inventory decreases.
An uncluttered shelf is the best salesperson because it silently and effortlessly provides customers with the products they are looking for. When selected properly, duplicate items can be removed from the shelf without most customers ever noticing. In fact, an FMI study (Figure 4) revealed that after duplicate and slow-moving items were removed, 80% of the shoppers saw no change and 16% perceived the variety as increasing. All customers found the category easier to shop and some shoppers thought even more items were available than before! To shoppers, less is more. We suggest monitoring customer requests as a proven technique for tracking consumer satisfaction with your store's variety after any SKU reductions you initiate. A 180-day review cycle of SKU performance is highly recommended.
Step 4: Pricing-The Best Price Is Whatever The Customer Is Willing To Pay
When pricing is viewed only in terms of price reductions or set margins, the opportunity to earn a higher margin and still satisfy your customers' basic product need is lost. For example, in a destination category like Medicinal Blends a featured ad price for a tea may be $2.19 while the SRP could be $2.99. That 80-cent spread represents a 27% discount but it may not be as motivating to customers as item availability, category variety or a consumer trial program such as sampling.
Use pricing in a variety of ways by looking at the role of individual SKUs to the total item mix. If an item has a strong seasonal swing electing to pulse promotional offers during the entire length of the season captures more full-margin sales. Equally, items that are ailment-related need not be discounted when product availability is the consumer's key requirement. Price is a representation of value to the consumer. Fully understanding the value proposition a particular SKU offers to consumers opens up greater opportunities for higher profits, turf protection and image enhancement.
Step 5: Promotion-Knowing How To Promote Is As Important As What To Promote
Subcategory strategies may be the most closely guarded competitive secret as they will ultimately determine the ability to compete. This is the area where creative retail marketers armed with knowledge can excel. For example, a retailer may have a category called medicinal tea. He or she may want to make the store "the place to shop for medicinal tea" in its trading territory. The category would, therefore, have a "Destination" role. Decisions about pricing, assortment, shelf layout and promotion would be made with this category role in mind.
Within the category individual products would be assigned to achieve specific subcategory strategies, such as:
• Traffic Builder-provide high consumer draw
• Transaction Builder-increase total register ring
• Profit Generating-improve category gross margin
• Turf Protection-defend sales and share
• Cash Generator-increase category cash flow
• Image Enhancing-reinforce retailer's desired image
• Excitement Creator-generate sense of urgency
Develop a promotional strategy that takes into consideration the performance of the individual subcategories over time. Seasonality of items is critical to effective promotional planning. With the effective use of feature and display promotions that match individual subcategories seasonality, dramatic sales increases can occur. Always consider seasonality when planning your promotional calendar.
About the author:
Michael Langenborg is chief strategist at Natural Planograms–A Whole Health Marketing Group Company, based in Santa Rosa, CA. He can be reached at 707-537-1406 or via e-mail at michael@naturalplanograms.com.
