Shelved cases

Category management started in the supermarket industry in the mid-Nineties and has rapidly swept across non-food categories in the US and, more recently, Europe and Asia.

It is difficult to pin down exactly what category management is: as a marketing trend, it is still in the process of developing. According to Macfarlanes senior partner Jane Whittaker and head of competition law Martin Ballantyne, category management is a co-operation between manufacturers and retailers – usually multiples – to rationalise pricing and promotion for an entire category (for instance, washing powders) in order to ensure maximum efficiency and boost sales.

Meanwhile, retailers outsource market analysis and marketing plans to a third party, usually the manufacturer of the market-leading brand. This is beneficial for the retailer, since it can concentrate on other aspects of its business and leave it to manufacturers to find ways of increasing sales.

Friendly agreements

Since the aim is to make an entire category as profitable as possible, it could be said that the goal of category management is to deliver consumer value. This obviously demands close co-operation between manufacturers and retailers. Important factors to consider when establishing category management are: the product range with respect to available shelf space; the volume and line profitability; and the number of days’ supply kept in stock versus delivery speed.

Considerable debate exists on how to define a category. Direct marketing experts claim that the definition of a category should be based on how the customer buys, rather than how the retailer buys. Retailers’ purchase and display of products by particular suppliers is dictated by their stock management tactics; but customers buy according to individual product characteristics, for instance flavour, or whether products are low- or full-fat.

But it is not essential to define categories precisely from the start. The first thing is to define the roles of the categories to be developed. Four common category types are:

Destination categories – those where the retailer is the customer’s first choice for specific products.

Routine categories – categories where the retailer is the preferred supplier of routine needs of targeted consumers.

Seasonal categories – where the retailer is a major supplier for a particular time or season.

Convenience categories – where the retailer is the supplier of fill-in products.

Category criteria

The actual selection of the category to be developed is an important part of category management. In making the decision, the most important criteria to take into account are how much the category contributes to profits; the category’s ability to draw store traffic; and the category’s impact on store image.

The selection of the partner supplier is critical, both in terms of gaining the most benefit from category management and in terms of the legal implications that can follow cases of abusive category management. Ideally, a supplier partner should be a key player in the category and have a track record of following through on promises. Furthermore, the supplier should have the skills and resources to deliver business-building information, insights and ideas. Finally, it is important that the partner candidate should share the retailer’s category objectives and marketing attitude.

An effective way to measure success is to use a category management scorecard, which defines, measures and monitors the progress of the category business plan. The scorecard takes into account traditional internal financial factors, such as gross profit and tries to balance them with external factors such as consumer satisfaction ratings. The objectives of the scorecard should be jointly developed by the retailer and suppliers, and should form part of the category planning. Suppliers need to recognise that formal planning should include only those categories large enough to produce benefits that justify the planning effort. Mainly large suppliers, such as Procter & Gamble in the US, have taken the lead in this area.

Between you and me

Category management doesn’t always work to the benefit of all parties – supplier, retailer and consumer – however. On May 15, 2002, the US Court of Appeals upheld a district court judgment condemning US Smokeless Tobacco Company (USTC), the largest smokeless tobacco manufacturer in the US, for “unlawful monopolisation” in its category management practices. The court imposed fines totalling $1.05bn (&£616m).

The case arose from a complaint by Conwood Company LP, USTC’s nearest competitor. Conwood alleged that during the Nineties, USTC used category management to exclude competition. USTC’s role as a category manager was not challenged, but the company was challenged on the manner in which it had used its position as a category manager to exclude its competitors.

The court decided that the category manager foreclosed competitors from outlets by using false information. The case shows that, although category management is not itself an offence in (US) competition law terms, suppliers providing this service to retailers must ensure that competition offences are not committed, especially when it comes to the impact of category plans on competing products and access to sensitive information.

There are three main types of relationship between manufacturers and retailers: co-operative, competitive and collusive.

They co-operate in order to ensure the beneficial application and function of category management; they compete when they can take sales, margins or market shares from each other; and they act in collusion with each other when they declare a truce in vertical competition, in order that both of them can raise margins – a move that clearly injures consumers.

According to Martin Ballantyne, head of the competition law department at Macfarlanes, competition concerns arise mainly in respect of the manufacturer’s role as the category manager or “captain”. The supply of information by the retailer to the category manager can raise discrimination issues with regard to competing manufacturers.

The European Commission, perhaps lagging behind the US, has not made a decision in relation to category management yet. However, the EC is watching closely the practices of dominant companies in this area. Theoretically, there are a few matters arising from the function and methods of category management that need to be addressed by competition law. For instance, it needs to be defined when the category management activities justify providing access to competitively sensitive information.

What is more, there legal guidelines are needed to make sure that recommendations as to listings and shelf-space allocations are objectively justifiable and that the retailer is free from any pressures and incentives to accept or reject these recommendations.

The UK Competition Commission has briefly addressed the issue in the context of a specific investigation into supermarkets and their relationships with suppliers. The supermarket report was published in 2000, and confirmed that category management is a precious direct marketing accessory that needs to be explored, exposed and defined in a legal way in its place of birth – the supermarket.