VENDORS PAYING A HIGH PRICE TO BE CATEGORY CAPTAINS

JAMES TENSER

NEW YORK -- A darker reality may lie beneath the bright possibilities that category management is bringing to trade relations.

A handful of retail chains are charging brand marketers for the privilege of being category captains.

Brand marketers were already concerned about the high costs and uncertain returns they are experiencing from their investments in data-driven category management. Now some are complaining that a few retailers are demanding up-front fees for the right to do all this good work. "We are doing our company and theirs a favor by doing category management," said an executive at one consumer goods manufacturer. "We spend a lot of money for most of the analytical support, we hire people; then they have the temerity to ask for more fees."

Another brand marketing executive, who asked not to be identified, said, "Someone somehow got the idea that they could turn this into a huge profit center for the retailer. It pollutes the whole process."

Winston Weber, president of Winston Weber & Associates, a consulting firm based in Memphis, Tenn., said he has seen instances where a category captaincy is effectively put up for bid. "To add $50,000 to $100,000 in terms of a fee is absolutely ludicrous because it is contrary to the premise of category management," he said.

The reported fees reflect just a few chains in the food and drug channels. The first manufacturer mentioned told Brand Marketing the demands have been frequent enough that two months ago it established a written policy statement detailing why it will never pay such fees to retailers.

However, other observers said that the charges imposed on category captains do not in every case reflect some new profit center for retailers.

"We have not seen a case where retailers have established financial requirement to participate where the funds are used to support a separate profit center," said Jeffrey Hill, managing director at Meridian Consulting Group, Westport, Conn.

"There is a lot of misinterpretation on this issue. There is a tangible justification for the costs the retailer is asking the manufacturer to offset. But this is a relatively new phenomenon. The manufacturer might assume this is another profit center."

Longs Drug Stores, Walnut Creek, Calif., is one retailer that has charged its lead vendors category management fees in recent months, said Clay Selland, treasurer.

"We invited top players in each category to participate in the process, anticipating that they would learn a great deal as well, but we asked that they help offset the direct cost," he said.

Those fees, "generally in the $5,000, $10,000 to $20,000 range," were determined relative to their categories, not on a flat fee basis, he added. "We think it is a relatively small expense considering what we are after.

"This is not being treated as a profit center," Selland added. "We would be compromising our position if we were to do this on an ongoing basis and make decisions based on some other criteria than performance of the products."

While considerable discussion swirls around the subject of what is and what is not an appropriate type of fee for a retailer to pass along to a category captain, a new survey of brand marketers has determined that "captaincy fees" are being imposed on a significant minority of manufacturers, and that the practice is expanding.

"Our tracking data show that requests for fees are increasing rapidly," said Paul Kelly, president of Silvermine Consulting Group, Westport, Conn., which conducted the survey tracking the costs of category management among several hundred executives.

According to Kelly, 21% of respondents indicated their organizations have paid some form of captaincy fees to retailers.

"Generally, major suppliers said they refuse to do it. But as time goes on, I'm not sure they are holding the line," said Kelly.

Kelly said he asked the question as part of a survey on current practices in category management his firm conducted last fall. A total of 41 companies responded, for a 32.8% response rate. In follow-up interviews, he said, respondents indicated that requests for fees have been increasing rapidly since the survey was completed.

"There are all kinds of things going on," said Kelly. "A retailer may demand that the manufacturer's analyst attend a seminar. If he doesn't show, the chain will take a deduction anyway for say, $10,000."

More subtle, he said, is the demand to "put a person in our building" to do analysis. When he asked respondents which retailers were making these demands, "American Stores and Safeway were the most often cited," Kelly said.

Other sources contacted by Brand Marketing named Longs Drug and Walgreens among the chains that have imposed captaincy fees.

At press time, American Stores, Safeway and Walgreens had not responded to requests for comments.

"I am sure selling a captaincy occurs, but to best of my knowledge it occurs very rarely," said an industry consultant who asked to remain anonymous. "I'm hard pressed to think of any of my clients paying a fee. They'd never pay it. It's the second-tier companies only that would."

Such courage of conviction is possible only among the most secure manufacturers, such as those with overwhelming market share in their categories, said the executive at the manufacturer mentioned earlier that has issued a noncompliance policy.

"That fee goes right in the face of what category management is. The fee implies, 'do whatever you want,' " said the executive.

"This practice goes back about four years to the early days of category management," said an executive at another major brand marketer, who claims his company also refuses to pay such fees. "There were consultants selling their category management services to retailers and telling them, 'here's my fee, you can pay for it by holding manufacturers hostage.'

"Who will most likely step forward to pay that? Will it be the dominant brand in the category? The one with the best consumer knowledge? Not likely," he said.

"It is more likely to be the middle-tier company in the category. One that is struggling and will try this in lieu of other ways of going to market. Once they buy their way in, the manufacturer is going to look for a way to turn this to an advantage."

Said Ken Harris, a partner at consulting firm Cannondale Associates, Wilton, Conn., "The manufacturers I can think of have a quality knowledge base that wouldn't be knowingly willing to pay cash money for a captainship. They may invest in people, in knowledge, but to physically part with cash is beyond my comprehension."

As the Silvermine survey also indicated, the costs of vendor participation in category management are already steep. More than half of respondents (55.6%) said that accounts ask them to invest in data from a specific syndicator, while 85% said that some form of software was mandatory.

The required software most often is category management "templates," which allow for tracking the account analysis process.

Most respondents also indicated that from 40 to 100 hours of analysis time were required to implement a typical category management program, a figure that Kelly said is unrealistically low, given his own experience with the process.

Walt Williams, executive vice president of Neo Inc., a consulting firm in Shelton, Conn., agrees. "To actually develop a comprehensive category management plan from scratch takes 1,500 man hours," he said. That's about three-fourths of a man-year, which could be the equivalent of $75,000 to do that for one of the larger categories.

"You have got to capture all that cost just to break even," he said.

Said Hill of Meridian, "To the extent that the retailer moves beyond offsetting costs and turns it into a profit center focus, the entire partnering, category management strategic platform will be set back significantly."