Category Management in the Cognitive Era

Stephen DeAngelis

June 1, 2016

Category Management is a widespread practice in the Consumer Packaged Goods (CPG) sector, yet Winston Weber & Associates (WWA) analysts report, “Well over 50% of CPG manufacturers say they are not getting an adequate return on their category management investment.”[1] The Category Management Association defines Category Management as: “Trading partners collaborating to determine the point of optimization in pricing, promotion, shelving, and assortment to maximize profitability and shopper satisfaction.”[2] It’s clear from that definition that category management can be complex — and that complexity is probably one of the reasons so many CPG manufacturers are dissatisfied with their category management processes. The Category Management Association adds, “Successful Category Management draws on the latest industry trends, leverages available data, and utilizes best-in-class technology from the leading solution providers.” Today, the best-in-class technology is cognitive computing, like the Enterra Enterprise Cognitive System™ (ECS) — a system that can Sense, Think, Act, and Learn®. Cognitive computing systems can handle the complexities of today’s category management environment and provide both manufacturers and retailers insights that improve product placement and pricing. In another article, the Category Management Association noted, “Category Management is the primary platform from which CPG brand owners interact with retailers. Category Management provides the language, process framework, and metrics for communicating all strategic and tactical recommendations to the retailer.”[3] Since category management is such a vital link between manufacturers and retailers, it makes sense that both parties want to ensure precious shelf space is maximized for profitability. The analysts from WWA add:

“Category management has evolved over the past 21 years to where just about every retailer practices this business model in some form. It has contributed significantly to sales and profit growth for a vast majority of retailers. Specifically, it has positioned retailers to align merchandising strategies and tactics more closely with consumer purchase behavior; it has led to an environment that encourages fact based decision making; it has led to greater efficiencies across the supply chain; it puts a much sharper focus on costs down to the item level; and it has provided the framework for retailers to achieve an acceptable return on sizable investments in information technology. It has also created an environment that encourages collaborative information sharing and planning between trading partners.”

Whenever organizations discuss analysis of products “down to the item level,” you can be assured complexity increases. Robert J. Bowman, Managing Editor of SupplyChainBrain, calls SKU proliferation a “disease” looking for a cure. “Retail marketers love complexity,” he writes. “The more variations of a product they can sell, the happier they are. How else can they command all that shelf real estate in big-box stores? How else can they promote innovation? And how else can they drive their supply-chain managers crazy? SKU proliferation is a rampant disease that afflicts a huge number of consumer goods producers. Merchandisers claim the buyer is demanding endless variations on familiar products, whether they be Crest toothpaste, Oreo cookies or the Mini Cooper. That assertion is highly debatable, but whatever the reason for the current explosion in variety, it raises a lot of questions for the supply chain.”[4] Some retailers believe the cure involves simplification. Paul Ziobro (@pziobro) reports, “Target Corp. is trying to simplify things. The discount retailing chain is cutting the number of sizes, flavors and in some cases brands on its shelves to help fix out-of-stock issues plaguing its 1,800 stores.”[5] He goes on to report that other stores, including Walmart, are also culling their products. Manufacturers are taking notice of these simplification activities and are responding. Ziobro explains, “Consumer goods companies, such as Procter & Gamble Co., are in the process of narrowing their focus and eliminating unprofitable product categories. Recently, Procter & Gamble eliminated a sixth of its Olay skin-care products, from acne washes to facial scrubs.” Ziobro warns, however, that simplification can backfire. “About six years ago,” he reminds us, “Wal-Mart embarked on its ‘Project Impact,’ focusing on carrying just the most-popular products in store, as well as uncluttering aisles to appeal more to a slightly wealthier clientele. The change backfired, as shoppers grew upset at not being able to find their favorites.”

 

The point to be made is that category management is going to be complex no matter how much retailers try to simplify. Dan Alaimo explains, “Having the right product on the shelf at the right time for the right shopper is the Holy Grail for retailers and manufacturers.”[6] That’s why the Category Management Association insists, “Without the foundation of Category Management, shopper marketing is ‘a tale full of sound and fury signifying nothing.’ That is why CPG leadership must understand what is happening in the CPG ecosystem and why they must allocate more resources to this critical function. Category Management is not just a department that builds pretty planogram pictures, any more than English is a language limited to writing legal contracts or rap lyrics. Category Management is a fundamental discipline, like consumer research or brand strategy development. Mastering Category Management is what will separate leaders from followers.” As noted above, a good cognitive computing system can deal with the many complexities involved in trying to get the right product on the right shelf at the right time for the right consumer. Manufacturers and retailers know that every store is unique and a number of factors must be taken into consideration to get category management right. Danny Halim (@dannyhalim), Vice President of Industry Strategies at JDA Software, explains, “The consumer goods industry has been working with their retail partners for decades to maximize their store shelf exposure in order to drive increased sales. More recently, some CPG companies and major retailers have collaborated to tailor local store assortments to match local demographics and buying patterns and have seen significant sales uplift as a result.”[7]

 

By now it should be clear why category management is so challenging and complex. Manufacturers and retailers need to rely on a system that can deal with this complexity. They need a cognitive computing system. A cognitive computing system can collect, integrate, and analyze structured and unstructured data. It can discover relationships between products, shelf placement, local demographics, weather, events, and other factors that could affect sales and profitability. With many brick-and-mortar stores struggling to survive, tailoring product offerings to local preferences and lifestyles is becoming increasingly important.

 

Footnotes
[1] “Category Management,” Winston Weber & Associates.
[2] “An expanded definition of Category Management,” Category Management Association.
[3] Category Management Association, “Category Management,” CPGmatters, April 2013.
[4] Robert J. Bowman, “SKU Proliferation: Is There a Cure for the Disease?SupplyChainBrain, 28 October 2013.
[5] Paul Ziobro, “Target Corp. Culling Products in Its Stores to Help Resolve Out-of-Stock Issues,” The Wall Street Journal, 2 March 2016.
[6] Dan Alaimo, “P&G Increases On-Shelf Availability Using Store-Level Data,” CPG Matters, July 2012.
[7] Danny Halim, “The Impact of Category Management and Localized Assortments on CPG,” Supply Chain Nation, 2 July 2014.