TOP-TO-TOP 1994-06-27

Paul J. Kelly

Category Management has more definitions than a Webster's Dictionary. Rather than authoring yet another entry, I'd like to offer a metaphor instead -- the category as a business.

Like any business, the category has assets, liabilities, equity, revenues and expenses. The category manager must create a "balance sheet" that goes beyond top-line sales to develop a management strategy that builds long-term value and profitability.

ASSETS. The category manager must leverage limited assets of a few linear feet of shelf space, a few inches of ad space and an occasional display to render maximum return. Two pivot points typically are balanced to make asset allocation decisions -- gross margin and turns. Other strategies include lowering acquisition costs, resetting the shelf or even reconfiguring case counts, to name a few. Ad space and displays can be scrutinized similarly. An item that turns eight times should not be displayed or featured if a comparable item turns 12.

LIABILITIES. Auditors may classify inventory as an asset, but most retailers consider excess inventory to be a major liability. Inventory can be reduced by ordering smaller quantities with greater frequency or ordering less overall and reducing warehouse/store service levels. Selecting the appropriate approach can be tricky, however, requiring savvy in finance, logistics and marketing as well as procurement and sales. The wrong choice could result in increased costs or out-of-stocks, for example.

EQUITY. Determining a category's equity involves understanding the dynamics of consumer behavior within a given retail environment. A "traffic builder" category for one account may be a "margin enhancer" for another. It is ultimately up to the retailer to decide. Marketers must be able to provide a full range of benefits -- from promotional support to extended terms to fixturing and display materials -- depending on the category's role.

REVENUES. Increasing revenues is no longer a simple matter of raising prices and passing the difference along to the consumer. Improved revenues can be realized by increasing unit sales through greater category traffic, no mean feat in today's "overstored" environment. Increasingly, "fine-tuning" provides a better solution to improving average transaction sizes. Larger sizes, multiple sales (buy-one-get-one-free), upselling to premium segments and related item promotions can be used to deny competitors access to consumers while increasing register ring.

EXPENSES. In a business lucky to yield a 1% profit after taxes, it certainly is important to squeeze a few more pennies out of the expense side. Unfortunately, waste is everywhere in the distribution system. Despite value pricing, long-range planning, vendor managed inventory and Efficient Consumer Response, manufacturers continue to load when they need to make their numbers. Disposing of a "10K Fever" approach to promotion may be the only way to eliminate these expensive practices once and for all.

The challenges and activities of managing a category like a business exceed the abilities of any single individual. Retailers must openly share strategies, information and operational capabilities. Manufacturers must look beyond parochial stockkeeping units or brand-based objectives to improve overall category consumption and profitability.

Paul Kelly is a principal with Silvermine Consulting Group, Westport, Conn.