Category management and customer-loyalty programs may not be a famous mismatch like Felix and Oscar of "Odd Couple" fame. But they are different enough that the idea of linking the databases they produce in order to support more effective merchandising and promotion decisions certainly raises a few eyebrows.
But industry experts insist that drawing from both information pools would bring retailers closer to truly satisfying their best customers. This goal, however, requires technology that allows widespread access to both types of databases, as well as decision-support tools tailored to each retailer's market situation.
The concept of integrating category management and customer-loyalty programs is relatively simple. Most retailers already use some category management systems to maintain and maximize inventory control. Many retailers also have frequent-shopper programs, which allow them to track information such as average market basket size, frequency of shopping, favorite items, use of coupons and customer profitability.
"Category management is a great tool, but it was always missing a key aspect of our business -- the consumer," said Marv Imus, vice president of Paw Paw Shopping Center, Paw Paw, Mich. Imus has been testing a combination approach for about a year. "My quest is to come up with a plan using category management to determine how it impacts the shopper.
"But really all I'm trying to do is what my father did in the 1950s and 1960s," he added. "He knew all his best customers personally and knew what they liked. All we're doing is using technology to help us meet the volume standpoint of the loyal shopper."
Big Y Foods, Springfield, Mass., also practices "customer category management." The retailer's efforts are powered by nearly a decade's history of customer-loyalty data. "When our category managers sit down, they think 'How do I fit into our card program?' " said Daniel Lescoe, senior vice president of merchandising at Big Y. "The card program is the backbone."
Lescoe spoke on integrating customer loyalty and category management at the Fourth Annual ECR Conference, held last month in Atlanta.
A few manufacturers have also made significant studies of the ways such programs can be tied together. Glenn Stoops, managing director of market research and category management for Coca-Cola Co., Atlanta, feels the linkage is logical.
"The essence of category management is understanding the consumers and their purchasing behavior," he told SN. "Loyalty programs provide the ultimate insight into the consumer. They give access to consumer behaviors across the total store, not just within specific categories, and thus provide a broader perspective of the category role and its interaction with other categories."
Stoops said Coca-Cola integrates loyalty-card data and category management via proprietary analytical tools with more than 25 retailers.
"Coca-Cola uses customer-card data in a very holistic sense," he added. "We feel it is important to maximize the retailer's total business, not just the beverage category. If we are successful, the value of the beverage category also grows."
While he would not share specific examples, Stoops said Coca-Cola's work has led to "significant increases in expandable consumption categories including carbonated soft drinks, beer, snacks and cookies. However, there is also opportunity to improve on staple categories for the retailer," he added.
Meeting true consumer demand is the key element in integrating category management and customer-loyalty programs. "We have good data from manufacturers' warehouses to retailers, and good data from retailers' warehouses to store shelves," said Glenn Hausfater, a partner with Partners in Loyalty Marketing, a consulting firm in Chicago. "But we don't have a link to consumer households. This would give [stores] a single unbroken chain of information that has enormous power."
According to Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., and Hausfater, who gave a joint presentation on this topic at the MarkeTechnics convention in February, linking customer-loyalty and category management would provide three key benefits.
First, it would build sales and ultimately customer loyalty through reward and recognition programs. Second, stores would be able to harness information about their most important shoppers, in order to allow retailers to plan their promotions and product mix more successfully. Third, the information about what specific customers are purchasing could be shared with suppliers to make the systems even more efficient.
The payoff would be significant, especially since most industry experts note that the top 30% of a store's customers account for as much as 70% of its business.
One of the best aspects of customer-loyalty programs is that they enable stores to market to customers purely by shopping habits, rather than on more established demographic guidelines.
"[Retailers] can group customers as high-end or low-end consumers, or that they buy 75% on promotions. All of a sudden whether a customer is black, Hispanic, single or 65 years old isn't as important. What's going to matter is shopping profile. You're trying to migrate from the unprofitable shopper to the profitable and loyal shopper."
Just who is a profitable customer isn't always apparent. Lescoe, recalling when Big Y began to analyze customer-loyalty data in 1989, said "we had customers spending $120 a week with us, but we were making more money on our food-court customers." The contribution of peripheral departments was an important element in determining each customer's contribution to profits, Lescoe said.
In addition, a number of other variables are crucial to getting the most out of the customer category management concept. Coca-Cola's Stoops listed four areas the manufacturer analyzes: efficient assortment at the household level, the profitability of each household to the retailer's total business, advertising and promotional effectiveness across all categories, and the value of displays and merchandising treatment.
He added that there are significant stumbling blocks in the process. "One is the retailer's ability to maintain accurate and accessible data systems, and another is the sheer magnitude of the data necessary to complete a total category management initiative," said Stoops.
Other barriers include the quality and completeness of the data captured by a retailer's customer-loyalty program, and the retailer's willingness to share this valuable resource with key strategic manufacturing partners, he added.
Even for stores that already have loyalty-card programs, significant investment in technology would be required to maximize the data, sources said. This could be especially daunting for smaller chains and independents.
While there have been rapid improvements in the speed of database and decision-support technology, more is needed. "We need even more speed. It's still too time-consuming," said Imus.
Even the concept's strongest proponents admit it is still in its infancy. "This is still largely in the theory stage," for a large-scale implementation, said Imus. He has done analyses using customer and product information to try to better understand certain categories, such as spaghetti sauce, and he plans to analyze 15 to 20 other categories in the same way in the next year.
Imus looks at both sales volume, profitability and purchase patterns by loyal consumers -- if and when they're purchasing certain products, such as only if one brand is on promotion -- to determine assortment and promotions.
Iplementing such programs also requires changing long-held attitudes and business practices. Retailers and vendors will have to practically rethink the way they structure their business in how they buy, stock and merchandise products, said Merl.
"In the current structure, they buy within a category," he said. "We're suggesting another layer of information to go across the structure," by creating consumer managers to focus on the top shoppers.
Big Y addressed this issue by bringing together its category managers and database managers under one department head, said Lescoe. "Our dilemma was to get category managers to think about the customer, and to get database managers to think about the category. We had to change the organization" to accomplish it, he noted.
Hausfater added that another potential pitfall is a retailer becoming so focused on its heaviest shoppers that it alienates smaller, but still loyal, customers. This latter group could include "Empty nesters who were heavier shoppers, or young couples who will be heavier shoppers," he cautioned.
Still, while the issue is being fine-tuned, believers in the concept are convinced it will be the wave of marketing in the future.
"I don't think it's a matter of choice" to implement the programs, Merl said. "The competition will mandate it. The question is how quickly, and how painful it will be."