Category Management

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CATEGORY MANAGEMENT

Category management is a practice used for managing retail operations by classifying the assortment of a retailer into categories on the basis of consumer needs rather than individual brands.  The method is used to group products and plan their pricing, promotion and display in such a way that consumer needs can be met more efficiently and profits can be maximised. 

Category management makes the retailer’s categories, rather than manufacturer’s brands the focus of retailers’ resources.  It is a retailer’s concept where manufacturer plays a supportive role. 

CATEGORY The category is the basic unit of analysis for making merchandising decisions.  A category is an assortment of items that the customer sees as a reasonable substitutes for each other. Girl’s apparel, boys’ apparel, and infants’ apparel are categories. 

Each of these categories has similar characteristics. Eg. Girls jeans are purchased from a set of vendors that are similar to each other.  Also, the merchandise is priced and promoted to appeal to a similar target market. 

The Retailer and their vendors may have different definitions of category.  A vendor might assign shampoos and conditioners as different categories due to difference in their product attributes.  The category manager for a grocery store may put them in a single category on the on the basis of common consumers and buying behaviour.  Paper towels could be assigned to a paper products category or combined with detergent, paper tissues and napkins in a “ cleaning products” category. 

CATEGORY MANAGEMENT Category Management is the process of managing a retail business with the objective of maximising the sales and profits of a category.  It means that the category manager oversees every aspect of the merchandise function.  He is responsible for developing the assortment plan for the entire category, working with vendors, selecting merchandise, pricing merchandise, and coordinating promotions with the advertising departments and stores. 

REASONS FOR ADOPTING CATEGORYMANAGEMENT 

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An important reason for adopting category management is that one person is ultimately responsible for the success or failure of a category. The second reason is that it is easier to manage for maximizing profits. Eg, the breakfast, cereal category manager has a choice of purchasing corn flakes from Kellogg’s , General Mills, General Foods, a private label vendor , and a popular locally produced brand. The category manager decides the best combination of sizes and vendors, that is the one that will get the most profit from the allocated space.

REASONS Change in Consumer preferences: Consumers’ needs, population growth rates, their spending and lifestyles have been changing.  Shoppers start from home with a choice set, not just a brand and decide on the basis of service, quality, freshness, price and promotions.  Shoppers define their needs in terms of benefits such as haircare, breakfast food and fresh breath whereas retailers have departments based on merchandise. 

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Category management draws attention to these kinds of unproductive departmental separations by emphasizing that categories should be defined first and foremost by consumer need, and not by departmental separations. It helps in fine tuning the merchandise offer so that it suits such buying patterns. Intensified Competition: Advancements in technology: Effective category management requires that retailers and suppliers are capable of gathering, organising, analysing and acting upon data gathered from customers and other members of the supply chain.

CATEGORY CAPTAIN The success of retailing depends on establishing strategic relationships with the vendors.  Since retailers and vendors share the same goal of –selling merchandise and making profits, they share information that will help them achieve those goals.  Some retailers turn to a favoured vendor to help them manage a particular category.  Known as a category captain, this supplier forms an alliance with a retailer to help gain consumer insight, satisfy consumer needs, and improve the performance and profit potential across the entire category. 

Kraft acts a category captain by working with key retailers to help balance assortments.  As a category captain, grocery chains give Kraft access to all market and store information including costs and sales of its competitors.  In return, the captain works with the category manager to make decisions about product placement on shelves and promotion of all brands in the category.  A potential problem of establishing a category captain is that vendor would take advantage of their position. 

Merchandise group

GM Marchandise

Department

VP of Children Wear

Classification

Category Sportswear

SKU

Formal wear

Girls jean, size S, Straight

CasualWear

THE BUYING ORGANISATION Merchandise group: The largest classification group is the merchandise group.  The merchandise group is managed by senior vice-presidents of merchandise, also called general merchandise managers. These merchandise managers are responsible for several departments. 

DEPARTMENT These departments are managed by divisional merchandise managers who report to vice presidents.  E.g. the vice president of merchandising for men’s , children has responsibility for five divisional merchandise managers.  Each divisional manager is responsible for a department. 

CLASSIFICATION The classification is the third level in the scheme.  Each divisional merchandise manager is responsible for a number of buyers or category managers.  The children’s apparel divisional merchandise manager here is responsible for six buyers. 

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Categories: Each buyer purchases a number of categories like Sports wear, Formal wear and Casual wear,

Stock keeping Units (SKUs) : A SKU is the smallest unit available for keeping inventory control. In soft goods merchandise, for instance, a SKU usually means size, colour, and style.

SETTING OBJECTIVES FOR THE MERCHANDISE PLAN Financial plans start at the top of the retail organisation and are broken down into categories.  Top management looks at the overall merchandising strategy.  They set the merchandising function direction for the company by (i) Defining the target market (ii) Establishing performance goals (iii) Deciding on the basis of general trends in the marketplace, which merchandise classifications deserve more or less emphasis. (iv) They study their categories’ past performance, look at trends in the market, and try to project the assortments for their merchandise categories for the coming seasons. 

The resulting merchandise plan is a financial buying blueprint for each category.  It considers the firm’s financial objectives along with sales projections and merchandise flows.  The merchandise plan tells the buyer and planner how much money to spend on a particular category of merchandise in each month so that the sales forecast and other financial objectives are met.  Once the merchandise plan is set, the buyers and planners develop the assortment plan. 

The buyers work with vendors choosing merchandise, negotiating prices, and developing promotions.  The merchandise planners break down the overall financial plan into how many of each item to purchase and how they should be allocated to stores. 

PUTTING MARGIN, SALES & TURNOVER TOGETHER 

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At the corporate level, return on assets is used to plan and evaluate performance of overall retail operations. Return on Assets= Net profit margin x Asset turnover

= Net profit/Net sales x Net sales/Total assets = Net profit/ Total assets With the strategic profit model, ROA is use to plan and compare the performance of executives since they are responsible for managing all of the retailer’s assets and realising a return on their assets. But merchandise managers have control over only the merchandise they plan and manage.

The financial ratio that is useful for planning and evaluating merchandising performance is a return on investment measure called gross margin return on inventory investment or GMROI.  The merchandise managers have control over only the merchandise they buy and manage. .  It measures how many gross margin dollars are earned on every dollar of inventory investment. 

GMROI= Gross margin percentage x Sales-tostock ratio = Gross margin/Net Sales x Net sales/Average inventory =Gross margin/average inventory

AN EXAMPLE OF USING GMROI A supermarket manager wants to evaluate performance of two classifications bread and ready to eat prepared foods.  If evaluated on gross margin percentage or sales alone, prepared foods is certainly the winner with a 50 % gross margin and sales on $300,000 compared to bread’s gross margin of 1.333% and sales of $150,000.  Yet prepared food turns (sales-to-stock-ratio) only four times a year but bread turns 150 times a year.  Using GMROI, both classifications achieve a GMROI of 200%. 

BREAD

PREPARED FOOD

Gross Margin $2000 $150,000  Sales $150,000 $300,000  Average inventory $1,000 $75,000 GMROI= Gross margin/Net Sales x Net sales/Average inventory =Gross margin/average inventory Bread= $2000/$150000 x $150,000/$1000= $2000/$1000 (GMROI) = 1.333% x 150 times = 200 % Prepared food = $150000/$300000 x $ 300000/$75000 (GMROI) = $ 150,000/ $75000 = 50 % x 4 = 200% 

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GMROI is used as a return on investment profitability measure to evaluate departments, merchandise classifications and vendor lines.

With GMROI, merchandise with different margin/turnover characteristics can be compared.

ADVANTAGES OF HIGH TURNOVER 

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Increased Sales Volume: Rapid increases sales volume since fresh merchandise is available which sells faster. Less Risk of Obsolescence and Markdown: Value of displayed goods start declining Improved Salesperson morale More money for market opportunities: Money tied up in inventory is available for other merchandise. Decreased Operating expenses: Lower inventory, lower cost of operating expense. Increased Asset turnover.: When inventory which is a current asset declines, even if sales remain same, then asset turnover increases.

DISADVANTAGES OF TOO HIGH AN INVENTORY TURNOVER Lower Sales Volume: One way to increase turnover is to limit the number of merchandise categories, which leads to lost sales.  Increased Cost of Good Sold: To achieve rapid turnover, inventory may be bought in small quantities hence quantity discounts could not be leveraged.  Increased operating expenses: 

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Developing a Sales Forecast

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Developing an Assortment Plan.