Increasing category calibre

Manufacturers are realising the benefit of category management based on data analysis, not theory, to make their products stand out on the shelves

Suppliers, both large and small, to the packaged goods/retailing industry can no longer rely on traditional category management to achieve a competitive advantage. Why? Because everyone is doing it, diminishing the potential for products to stand out from the rest.

Category management is the step-by-step process of analysing product categories; it requires a lot of time and a huge financial investment.

From start to end, the category management process involves assessing, defining and then segmenting a category, establishing a role for it in the market, setting performance objectives and developing its market strategies and tactics. Category management also includes implementing and reviewing these procedures to ensure manufacturers’ returns are maximised.

But how can manufacturers, especially smaller ones, increase their profitability through category management? There is no one answer to this, but in each case a tailor-made strategic and tactical approach is needed to develop solutions for problems identified through data analysis, not through process-oriented, theoretical models.

Because this kind of research and data analysis demands major financial and human resources, smaller packaged goods/retailing suppliers have been progressively squeezed out by their larger competitors. However, it is just as critical for smaller suppliers to understand their products’ roles within the category, and to identify and act on opportunities that arise in the market.

Now that suppliers are realising the important role category management has to play in business management, the practice of category manage ment in the packaged goods market is finally moving beyond its traditional concept and implementation.

In some cases, the flexible and pragmatic use of category management has resulted in companies increasing turnover by between 20 and 30 per cent. By focusing on shoppers, companies are able to place even more value on managing the category as retailers strive to differentiate their stores more clearly. As a result, manufacturers and retailers are understanding each other and shoppers more, resulting in greater cost savings.

This success is not restricted to the larger manufacturers which have their own category management departments. Smaller companies which don’t have such departments are also reaping such rewards.

Management consultants are often brought in by the larger suppliers to carry out strategic analysis on categories. However, because they do not provide tactical and implementation support, this will also need to be brought in, leading to higher costs.

By combining the different aspects of category management and providing analysis of the data, critical insight of the business can be obtained, helping suppliers to differentiate themselves and their products effectively and sell them profitably to their customers – retailers. Category management is an important part of the packaged goods business and is likely to remain so in the future.

Recent surveys by IGD show that manufacturers and retailers believe category management will be increasingly important to their strategies over the next ten years. The crucial issue is for them to extract true value from the data.v

Key for charts:

The information used in the tables above is taken from both the retailer and consumer data, AC Nielsen RMS and AC Nielsen Homescan Data (Panel).

Departments: a top-level measure, for example Total Frozen Foods

Sectors: the next level of segmentation – the sectors within a category, for example Ready Meals within Frozen Foods

Sub-sectors: the third level of segmentation – how ready meals are segmented, for example Indian Meals

DEPARTMENT PERFORMANCE IN RETAILER X

Source: AC Nielsen RMS

This chart illustrates the performance of a department (in this case it is Total Frozen Food) in Retailer X compared with other departments. For example, frozen foods only account for 15.5% of Retailer X’s share of the total multiple market. As Retailer X has an 18.5% share of the total multiple market (vertical dotted line), the table shows that frozen foods are underperforming in Retailer X. If Retailer X were to increase the share from 15.5% to 18.5%, this would result in an opportunity value of &£0.9bn. The chart also illustrates how other departments are performing within Retailer X and in other multiples. For example, the snack category represents a clear opportunity for Retailer X as the table shows it has an above average year on year growth in other multiples (6.3% compared with the all purchasing level of 4% [horizontal dotted line]), yet, in Retailer X, snacks are under-represented with 16.5% share compared with the 18.5% for the total multiple market. Baby & Beauty on the other hand is under threat because it is over-represented in Retailer X and its growth in other multiples in almost static.

Increased value opportunity by key sector

Source: AC Nielsen RMS

This chart illustrates the percentage value contribution of key sector categories in Retailer X and other multiples over a 52-week and 12-week period. The chart can help determine which sectors contribute the most value to both other multiples and Retailer X. The percentage change in value over the defined time periods is also illustrated. Opportunities can be highlighted related to share point gaps between other multiples and Retailer X, and which sectors are showing time period growth and whether this is changing in the short or the long term.

Factfile is edited by Julia Day. Daryl Barry, AC Nielsen senior category consultant, and Adam Donaldson, AC Nielsen consulting group manager, contributed

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