20080805 Category Management Study

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Category management survey North American retailers

Retail Value Transformation

1RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt© Oliver Wyman � www.oliverwyman.com

Category Management Survey

Oliver Wyman is conducting an ongoing, international study of retail Category Management. The goal is to uncover the processes, tools, and techniques that distinguish the market leaders from their peers.

This document summarizes the first results of our North American study in which we compare a set of twenty major retailers operating in seven retail sectors on the dimensions most relevant to merchandisers.

In the near future we intend to provide a more comprehensive view of the results and their implications in a White Paper.


Contents

� Executive summary 3

� Survey methodology 7

� Benchmarking results 12


Executive summary


Current category management processes are hindering retail progressMost companies have processes in place to review each category periodically, but weaknesses in these processes are acting as a barrier to better category management

Selected interview responsesAs % of total

Complaints about the traditional approach

� One retailer spends 20 weeks per category

gathering data used to populate templates

� 50% of firms thought the planning process inhibited strategic thinking

65

45

20

50

35

35

55

80

50

65

0

10

20

30

40

50

60

70

80

90

100

“Is your company strategy…

… clearly

articulated?”

… tied to your

KPI’s?”

… given in

actionable

terms?”

… involve mid-

year review or re-

forecasting?”

… interfere

with strategic

thinking?”

“Does the planning process…

Yes

No

Perc

en

t o

f co

mp

an

ies

Planning processes are tedious, rigid, and too narrowly focused on the previous year

The current approach offers poor support for decision making

� 60% of firms surveyed did not track competitors’prices and 90% lacked data on their promotions

� Most CMs have no analytical support to inform strategies and lack time to do analysis themselves

Category management seldom ties into the overall company strategy

� Category KPI’s rarely reflect strategic metrics

� Process does not provide a way to sort out

conflicts between strategic and financial goals


Leading retailers have overcome many of these problems Certain retailers have developed an increased level of sophistication that is evident across all category management levers

1

5

10

Process Data Vendors Pricing Promotions Assortment Private label

Incre

asin

g s

op

his

ticati

on

Sophistication levels at three different retailers

Each color represents a different retailer

This level of sophistication is typically a cultural trait of the organization which cuts across all of the category management levers


Benefits for leading retailers Value at stakeOW benchmark value per $1bn of revenue

� A lower-effort and higher quality category planning process

� A more direct link between the company strategy and category-level decisions

� Less reliance on vendors for strategic decision-making

� Higher quality decision making across all of the category management levers

� Optimal pricing decisions $5-10m

� Optimized promotions $8-12m

� Better assortment and $5-15mspace allocation

� Supplier negotiations $5-30m*and sourcing

� Total value at stake $23-67m(per $1bn of revenue)

The benefits are substantialLeading retailers derive many benefits from their approach to category management, not least better financial performance

The leaders have simpler and more

effective category management

processes

The leaders’ higher level of

sophistication drives significant

margin upside

* Potential margin gains from vendor negotiations vary significantly across retail sectors


Survey methodology


Interview summaryBy retail sector

Areas of focus in conducting the interviews

� This provides us with an ‘unvarnished’ view of the varied approaches taken to category management

� Our interviews covered 20 of the largest retail operators in North America across various retail sectors

� In sectors where individual firms can have internal variations in category management processes (e.g. grocery), we have conducted multiple interviews

� We have chosen to speak directly to category managers so as to get the clearest view of the category management processes

Scope of the first round of interviews We cast our net widely in our interviews in order to get a broad perspective across several major retail sectors

11

5

4 4

3

4

2

6

4

3

2 2 2

1

0

2

4

6

8

10

12

Gro

cery

Appar

elC

ateg

ory

kille

rsD

epar

tmen

t

DIY

Mas

sC

onve

nien

ce

Sector

Interviews

Companies


A few words on methodologyOur interviews have focused on the four major areas where we see clear, practical differences in the execution of Category Management

Link to overall company strategy

Assess the strength of the connection between category plans and overall company strategy

– Is the direction ‘top-down,’ ‘bottom-up’, mixed, or unclear?

Category management levers

Compare approaches to:

– Pricing, promotions, visual merchandising, assortment, private label, and vendor management

Category management organization

Understand strengths and limitations of varied team configurations

– e.g. skill-centered expertise vs. product-centered expertise

Data availability and usage

Appraise the organization’s relative sophistication in terms of data capture, usage and deployment

– Does analysis play a fundamental or auxiliary role in decision making?

Main focus of the

interviews


Details of category management ‘levers’Our interviews focused on the business levers that merchants use to drive their categories

What we cover

Pricing � How pricing decisions are made, and who makes them

� What tools and support is available to inform these decisions

Promotions � How promotions are planned, and which stakeholders are involved

� How the effectiveness of a given promotion is evaluated

Assortment, space & visual merchandising

� On what basis items are added to or deleted from the range, and how space is allocated

� To what extent assortment varies locally

Private label � How great a role private label plays in the overall merchandising strategy

� How developed are stores’ own-label brands

Vendor management � How negotiations are handled and who is involved

� What information can be leveraged to get the most favorable cost position

Visual merchandising � What criteria are used to configure planograms

� How far stores are allowed to deviate from standard planograms

Data quality / availability and tools

� Which data sources tend to be the most widely used or available

� What decision support tools exist and how extensive are their capabilities

Strategy and category management process

� How company strategy is translated into specific category targets and plans

� What infrastructure / processes govern the category planning process; what are its outputs


Staircases of sophisticationWe can picture these levels of sophistication as representing different positions on a staircase, which progresses from basic competence to advanced capability

Basic

competence

Advanced

capability

Average or typical retailer

Relatively advanced

retailer

A ‘Staircase’ model of sophistication

� Each step describes a certain level of development or sophistication for a given category management capability

� The staircase summarizes the current range of sophistication observed in the global retail marketplace

� Retailers extract greater value by moving further up the staircase

What the staircase represents

� Gradually, over time:

– Most retailers tend to climb up the staircase slowly, as their existing processes evolve and improve

� With bursts of concentrated effort:

– “Step-change” improvements can be achieved by investing to radically improve a given capability

How progress is made

1

2

3

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9

10


Benchmarking results


Process and strategyA subset of retailers have created processes that link strategy to execution in a way that classic category performance reviews fail to do

1

2

3

4

5

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7

8

9

10

Levels of sophistication

Mass merchant

Grocery Department

Apparel Convenience

DIY

Category killers

Legend

� Each category is reviewed once annually- Standard, 40 slide template used for all presentations- Months of preparation go into populating these templates, often with granular, raw data

� Goal of the presentation is to think strategically about the category- CM “the brain behind the category strategy”- Templates meant to stimulate strategic thinking by ensuring nothing is ‘missed’

� End result is that more time goes into data collection than into analysis and interpretation- Amassing the data is laborious- Little discussion of strategies & tactics and no predictive component to strategy

Basic example

� Annual category reviews focus on setting the strategy for the business- Discussion of one and five year plans- Preparation includes templates, but with focus on category tactics and financial impact- Process involves establishing and codifying category roles- Output is a set of tactics to reach strategic goals

� Category managers continuously update this strategy- Quarterly reviews track progress and redirect strategy as necessary- Monthly re-forecasts to reflect changes in the market/strategy- Category roles change to reflect shifts in underlying market conditions

Relatively advanced example


Data and tools A large fraction of the retailers we interviewed still rely on detailed weekly sales reports, but the leaders take a far more proactive approach to mining their data

1

2

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9

10


Mass merchant

Grocery Department

Apparel Convenience

DIY

Category killers

Legend

� Merchants are responsible for conducting most of their own analysis- Pricing support group provides competitive data but no predictive insights or scenarios

� Merchants have access to performance data, including sales, margin, costs, and inventory at a very granular levels of detail

� Where loyalty programs exist, card data collected but not used in category mgmt decisions� Competitor data only on key item prices� Analysis not forward looking on long-term

- Focus on weekly performance vs. same period last year- No scenario modeling capability

Basic example

� Separate support groups for each key category management lever- Groups provide category managers with concise answers to analytical questions- Because groups have narrow focus, they develop expert analytical capabilities

� Analysis is forward-looking and strategic- Scenario modeling capabilities- Focus on providing well-supported assessments of a range of strategic options

� Insight is rooted in detailed customer, competitor and performance data, including:- Credit card, shopping basket or transactional data- Competitor price tracking, surveys and demographic profiling



PricingMost of the retailers in our study used basic, ‘rule-of-thumb’ pricing approaches that do not leverage detailed knowledge of customer preferences or sensitivities

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2

3

4

5

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9

10


Mass merchant

Grocery Department

Apparel Convenience

DIY

Category killers

Legend

� Item pricing decisions are made exclusively by merchants� Process is driven by very simple rules

- Pricing decisions are based on a margin target for all products- No pricing zones, so prices do not vary across stores

� Prices are not optimized according to customer or competitor intelligence- No consistent competitive price monitoring, though some key item prices are tracked- No insight on the relative price sensitivities of different product groups- No knowledge of customer implications of price moves

Basic example

� Pricing support group provides expert guidance to merchants- Item set classification is based on price elasticity- Merchants can request more detailed scenario models to make specific decisions

� Competitive monitoring is key to the price strategy- Major emphasis on competitive entry price point- Competitors’ prices are tracked centrally- Merchants spend time in competitor stores to better understand relative pricing strategies

� Pricing decisions are based both on short-term goals and long-term strategy- Analytics used to optimize prices on non-key items- Focus on 5-year strategy and competitors ensures long-term implications are considered



PromotionsMany retailers run the same promotions every year – profitable or otherwise – to smooth out year-on-year sales comparisons


Mass merchant

Grocery Department

Apparel Convenience

DIY

Category killers

Legend

1

2

3

4

5

6

7

8

9

10

� Promotion performance economics incomplete, based mainly on item’s sales uplift� Critical effects of promotions, such as brand switching, impact on total footfall, stockpiling or

“pantry-loading” effects, often go un-measured � Promotional decisions are not customer driven

- Heavy focus on repeats of previous promotions to ensure comparable sales spikes- Vendors often drive promotional programs by offering funding

� Promotional planning process is disorganized- Ad space allocated quarterly by category, but subject to constant shifts- Last minute changes in strategy lead to accumulation of unneeded inventory

Basic example

� Promotional analysis is done by a separate group- Full understanding of customer effects of promotions, including lift, switching, stockpiling, traffic and perceptual impacts- Ability to forecast expected incremental sales and margin contributions- Scenario modeling for discount optimization

� Promotional strategy is viewed as part of the overall category strategy- The company’s overall strategic direction is a key driver of the ad planning process- Promotions viewed as one element of a total customer value proposition- Vendor funding does not drive promotional decisions

� Planning is done well in advance, ensuring buys are appropriate



AssortmentNone of our respondents scored especially highly on assortment management, due in part to a consistent gap in understanding item-level switching

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10


Mass merchant

Grocery Department

Apparel Convenience

DIY

Category killers

Legend

� Assortment is based on offering ~85% of SKUs available in the market- The overall degree of SKU coverage varies slightly between categories- Decisions on new items based primarily on quality of vendor presentations- No independent research to validate customer priorities

� Since merchants lack insightful analysis, vendors often win using a ‘veil of sophistication’- Item removal is based primarily on sales

� Some thought is given to substitutability, but no measure for this is used

Basic example

� Assortment decisions firmly tied to category roles- SKU breadth- Private label share of the range- Range of price points / overall architecture

� Quality of the range is reviewed regularly during the year and roles are modified as necessary

� SKU performance is evaluated using up-to-the-week data on space productivity- Sales and margin per square foot are key assortment metrics - “Customer decision trees” used as a simple proxy for switching estimates



VendorsLeading retailers show a mastery of their vendors’ funding programs, and leverage this information for better negotiating outcomes


Mass merchant

Grocery Department

Apparel Convenience

DIY

Category killers

Legend

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2

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10

� Category managers rely heavily on vendors for information as- The main source for competitive pricing and promotions- The source of information regarding market trends and product innovation

� Negotiations are a significant focus of the category organization- Their preparation is the responsibility of individual merchants- No central or shared support

� Category managers have insufficient data to build a correct view of items’ net costs- Funding for promotions or markdowns is stored or evaluated separately from list costs

Basic example

� Most negotiations with vendors handled by central support organization, with input from category managers- Focus on getting lowest costs across a portfolio of items- Clear understanding of funding programs- Private label sourcing issues are addressed centrally

� Category managers meet to discuss trends, new items, potential deletions or other assortment changes- Category managers views of trends are anchored in their own customer / sales data- Vendor analysis is used in addition to, not in place of, the retailer’s own view



Private LabelIncreasingly, retailers are pursuing tiered private label offerings, but only a subset spend significantly to create distinct or vivid PL brand identities


Mass merchant

Grocery Department

Apparel Convenience

DIY

Category killers

Legend

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� Private label brands organized into tiers or hierarchies- Value tier (typically an entry price point item)- National brand equivalent tier- Premium tier- Increasing emphasis on specialty lines, such as natural / organic

� No internal product design facilities - Majority of private label items imitate established national brand products

� Some marketing support given to private label brands- Often have blocks allocated in the circular- Some categories given promotional funds to support discounting

Basic example

� Private label brands act as a store differentiator- Aim of PL is to foster an image of exclusivity- Strong store brand identity leveraged across all private label lines

� Internal design capabilities are strong- Customer research groups identify key product trends and feed this to category managers- Internal design teams create and source products to capitalize on trends

� Private label development is viewed as a core organizational priority

- Development efforts command significant resources and executive attention



Contact details

Oliver Wyman’s Retail Practice has more than 20 year’s track record in helping clients deliver high-impact performance improvements using proprietary, state-of-the-art analytical tools and techniques. We help retailers deal with the full range of their challenges, including pricing and promotions strategies, space and assortment optimization, improved sourcing, store and supply chain cost reduction, inventory management, and capital efficiency.

About Oliver Wyman

Paul Beswick+ 1 617 424 [email protected]

To learn more about this survey or to find out more about Oliver Wyman’s capabilities in Retail Value Transformation, please contact:

Matthew Isotta+ 44 20 7 915 [email protected]

For more information

20080805 Category Management Study

Documents

Transcript of 20080805 Category Management Study