Category captains -- manufacturers who take a lead role in setting up shelf planograms and assortments for their categories, covering both their brands and others -- have been around for a long time. But their role may be changing.
For one thing, a major legal precedent was set in January when the U.S. Supreme Court let stand a $350 million Kentucky jury decision against United States Tobacco Co., Greenwich, Conn., the nation's largest snuff manufacturer. The case, brought by Conwood Co., Memphis, Tenn., alleged that U.S. Tobacco used its position as a category captain to keep Conwood's products out of stores. Conwood will receive a whopping $1.05 billion, or triple damages.
On the other hand, last week in New York the U.S. Court of Appeals for the Fourth Circuit affirmed a lower court's decision to dismiss a lawsuit challenging Philip Morris USA's Retail Leaders merchandising program. The original decision arose from a lawsuit brought by competitors R.J. Reynolds, Brown & Williamson and Lorillard against Philip Morris USA, claiming that the Retail Leaders program violated federal antitrust law by foreclosing competition; this suit was dismissed in May 2000.
On its Web site, Philip Morris USA explains that the Retail Leaders program "offers five principal merchandising options that allow retailers to choose how they merchandise the cigarette category." The site shows a planogram for each of the five options, all of which use a 50% Philip Morris USA share size. Of the 400,000 U.S. outlets that sell cigarettes, 175,000 participate in the Retail Leaders program, according to the site.
To avoid legal entanglements, manufacturers who serve as category captains should "make sure the retailer makes all the competitive decisions, particularly if you're the dominant manufacturer," Irving Scher, a partner in the New York law firm of Weil, Gotshal & Manges, told SN (SN, June 9, 2003, Page 18.)
But based on interviews with manufacturers, retailers and technology vendors, it is clear that a closer working relationship is forming between manufacturers and retailers on category planning. More consultation is taking place as retailers assert themselves. At the very least, retailers are tweaking the proposed shelf set before a consensus is reached.
"The category captains have the first pass at providing the thought, logic and idea generation for their areas of expertise. But their recommendations are reviewed by the [retailer's] category manager who may make revisions," explained Rob Borella, spokesman for Pittsburgh-based Giant Eagle
According to Chris Hogan, vice president, sales information & technology, Kraft Foods North America, the category management process involves tactics such as pricing, promotion, assortment and space management that are developed and shared with retailers. As a collaborative process, consensus is gained on category decisions between the supplier and retailer. The final decision, he added, is always the retailer's.
"To a large extent, retailers are taking help, support and recommendations," said Peter Charness, senior vice president of global marketing and chief product officer at JDA Software Group, Scottsdale, Ariz. "But I don't think they will ever cede the final decision-making processes away."
Joe Teller, who handles category management for Swedish Match North America, Richmond, Va., a maker of specialty tobacco, said there is "absolute trust" in a good category captain, but there is always tinkering.
"Nobody is taking what you present to them and just running with it," he said. "When you take in your proposed planogram, which is supported by an extremely thorough and efficient assortment analysis, the focus isn't on the planogram. The focus is on the assortment. You rarely get everything right. There are different opinions on things. There are different gross margin levels that the retailers have. They make different decisions based on private label or warehouse vs. DSD or whatever the case may be. They make the final decisions. If retailers don't tinker with [the planogram], then they're not really doing their job."
There's a lot of discussion between the retailer and vendor before a planogram is finalized, according to Don Bacon, manager of analytical services, Gladson Interactive, Lisle, Ill. "Manufacturers are going to meet with the retailers and get their spin on the things that have to be done. The manufacturer lends his expertise on consumer behavior in a particular category -- the category trends -- because they are experts at that. But the retailer is always going to have specific things that they have to accomplish with the set."
By the time a final proposal reaches the retailer, it's close to being what actually could be implemented at store level, according to Gene Ponti, North American product manager, Merchandising Services, for ACNielsen, Schaumburg, Ill. "But the retailer adds a twist. There might be a color break, or a package break, or maybe they want their private label positioned differently." He called the collaboration between trading partners "a very open and flowing conversation that is very productive." ACNielsen works as a mediator in this process.
To validate the final assortment, ensuring that a category captain is not skewing a category in its favor, many retailers today consult with competitors of the category captain, said Ponti. "It's a reality check to make sure everyone's in line," he observed. "It's to pull the brand loyalty influence out of it and just look at the total category rather than just the manufacturer goal."
Teller of Swedish Match agreed that many retailers consult with competitors of the category captain to validate the final assortment. "The retailer doesn't typically present our analysis to our competitors, but they let them know what the new assortment is going to be and specifically what is going to be added and deleted," said Teller, whose company uses space management software from JDA.
Many of the clients of Gladson Interactive are "validating vendors," according to Bacon.
"They have the retailer's ear, so to speak. The retailer entertains proposals and other planogram versions from validators -- the other people in the category," he said.
Bacon uses the example of the candy category with three major manufacturers: Nestle, M&M Mars and Hershey Foods. "They trade off being captains at different retailers, and the retailers like to change them up just to get a fresh look at things," he said.
Category captains are also changing the kind of service they provide retailers, said observers. Today's category captain goes beyond just statistics and planograms by focusing more on business and consumer insights.
"In the past, Kraft's space management analyses were category focused and utilized typical scorecard measures such as space to sales, unit movement and profit," explained Kraft's Hogan. "Today, our focus is on delivering business insights in space management that drive department and category growth."
"More so today than in the past, the category captains are becoming category analysts. They're offering complete insights into the entire category," said Ponti of ACNielsen. Category captain relationships have certainly paid off for retailers by expanding whole categories in many cases. For example, Kraft Foods has proved that shelving the Pourable Dressing category vertically in a separate section from Spoonable Dressing will increase Pourable category volume by 12.3% and Spoonable Dressing volume by 7.4%, said Hogan. In addition, he noted, brand "blocking" has outperformed flavor blocking by a category average of 3.4% for the Pourables, Shredded Cheese, Pet Snacks and Ready-to-Eat Cereal categories.
USING SPACE IN REPLENISHMENT
The next step in the evolution of space management is tying the process to replenishment, according to executives familiar with the emerging practice and technology.
ACNielsen already has clients using its Spaceman tools to drive the replenishment process, according to Gene Ponti, North American product manager for merchandising services at the Schaumburg, Ill.-based firm. He mentioned Eckerd as one of the 10 to 20 chains doing so.
"In the space management process, the planogram has inventory information like days of supply, holding power and inventory models. All that information is sitting inside the planogram. We're linking it to their internal POS systems. It's almost like an electronic bill. We know what the volume is, and we know what the capacity is. So we know what to base the order on," he said.
Giant Eagle is actively considering tying the planogram to replenishment, according to Rob Borella, spokesman for the Pittsburgh-based grocery chain. The retailer believes that tying these together can improve the in-stock position at retail and therefore improve customer satisfaction.
There are several retailers using auto-replenishment systems based on an item's shelf capacity and case pack, according to Chris Hogan, vice president, sales information & technology, Kraft Foods North America. Automatic reordering systems track items as they are scanned at checkout, compare them to stock room and on-shelf inventory, and figure out when an order should be placed. Before new item placement, reorder points are set up within the store's computer system.