For nearly 30 years the retail industry has focused heavily on category management. The practice has served the industry well, but today’s supermarket landscape is increasingly competitive and complex, requiring new methods and a new model of thinking to succeed. It’s time to re-evaluate the generic category-by-category approach in favor of Total Store Optimization.
When University of Southern California professor Brian Harris coined the phrase “category management” nearly 30 years ago, he couldn’t have imagined the impact his creation would have on the retail industry. Category management launched hundreds of new careers on both the retail and brand sides, spawned dozens of consulting and technology firms and generally shook up the world of retail.
For decades, the practice has served the supermarket industry well, but according to Food Marketing Institute, today’s customers are shopping less in the channel, leading to a loss of share by supermarkets to a wide array of competitors like limited assortment and discount retailers, organic/specialty stores and e-commerce. In addition, there has been a long period of deflation, dramatically changing demographics of key shoppers and placing a squeeze on margins throughout the store.
Category management in its current form doesn’t allow for efficient support of e-commerce, which continues to grow in importance, and the industry needs to re-evaluate the old, generic category-by-category approach that restricts trading partners’ ability to satisfy shopper needs while reaching their sales and profit goals.
Today, Harris, shopper-centric marketing trailblazer Win Weber and most other industry experts agree that it’s time for an evolution — if not a revolution — in the way retailers think about marketing and merchandising.
Total store optimization
To adapt to the current landscape, the industry needs a total store optimization approach. This approach should systematically deploy the enhanced insights attainable with today’s technological solutions, as well as to go (far) beyond product and category optimization, ideally in a way that is customer-centric throughout the entire shopping experience. It must also take into account a total store, cross-category marketing and merchandising methodology.
To embark on this total store optimization approach, retailers need to directly translate the actionable shopper insights at their disposal into price, promotion and assortment targets that make sense for categories across the entire store. Some categories are better at driving price perception and volume, while others are more suited to driving revenues and profits. The retailer should adopt a portfolio approach that leads to achieving their varied objectives. The key to success is balancing all activities between the store, categories and individual products — all with the aim of satisfying shoppers’ needs for value.
Tactical keys for success
There are several critical tactics retailers and their trading partners need to collaborate on. Here are a few:
- Start by aligning prices across the store to offer value from the shopper’s perspective. Implement a mechanism that creates the maximum opportunity for the whole store to profit.
- Take local competition pricing into consideration and maintain a willingness to lower prices to improve value perception.
- Determine which categories require more depth and breadth to satisfy shopper needs.
For promotions, retailers should adopt a three-pronged strategy:
- Stop (identify which promotions are not working and stop running them)
- Fix (adjust promotion mechanics to improve shopper engagement)
- Slant (direct promotions toward loyal customers and eliminate cherry-picking)
Retailers and manufacturers have a finite amount of promotional funding available; it should be allocated in the most productive way. Loyalty cards or customer identifiers enable promotions to target the most loyal customers.
The total store optimization approach should deploy optimized prices for all items simultaneously across all categories and provide optimized pan-category assortment recommendations that incorporate demand transfer and halo effects. Retailers utilizing it should also perform total store promotion evaluations across all promotions simultaneously, leading to dramatically improved sales and profits.
The implementation of total store optimization requires a strategic, phased approach that will take retailers from a category focus to a shopper focus in a gradual way. This process will offer strong results within the first few months; allow a full year or two to fully implement the system, assuming buy-in from the management team and collaboration with trading partners. This phased roll-out should focus on three steps:
- Crawl (make the most impactful changes and build momentum)
- Walk (tailor category targets and objectives and implement total store price, promotion, assortment and personalized marketing decisions)
- Run (evolve the organizational structure, roles and responsibilities to be shopper-centric)
Win Weber said at a recent event, “Considering the magnitude of change to shopper-centric retailing, and thinking about what is best for the industry going forward, the continued use of the term category management can best be compared to putting a new paint job on a Model T Ford. This term should now be placed in the annals of history.”
The total store optimization approach, with its customer-centric focus and deployment of actionable insights at the total store level, is the next step in the shopper-centricity journey, positioning retailers for the future — beyond category management.