Babson College - Effective Category Management Depends on the Role of the Category

With a substantial amount of research investigating variability in sales at the brand level, there is now growing interest in analyses at the category level. A focus on overall category performance also has gained prominence in business practice as demonstrated by the significant resource commitments made by both manufacturers and retailers to develop effective category management processes. The work reported in this article uses an analysis of variation in category performance across retailers to infer the key drivers of effective category management and how those drivers depend on the role the category plays in the overall retail portfolio.

Why do some retailers achieve better category performance than others? In one sense the answer is fairly obvious. Holding constant the inherent potential of the market that they serve, retailers get more than their fair share by trying harder: charging lower prices, promoting the category more aggressively, and offering more varied assortments. What is less obvious is the exact importance of each of these marketing decision variables and how their impact might vary by category.

Specifically because consumer behavior and motivations can differ dramatically given what role the product plays in everyday life, the effectiveness of marketing actions should differ systematically across categories. These issues are key to any formal category management process where retailers must explicitly define the role that each category plays in the overall store portfolio. Effective category management requires that retailers understand where to allocate scarce marketing resources in order to get the biggest bang for the buck.

We utilize a popular classification scheme where consumer-based category roles are defined according to the percentage of households that buy the category and the frequency with which it is purchased. Consumer motivation is likely to be quite different depending on whether most households buy the category every week and spend a large part of their shopping budget on it (e.g., bread, carbonated beverages), or if only a few interested consumers make infrequent purchases in the category (e.g., vinegar, yeast). We classify categories into one of four types: (1) staples (high penetration/high frequency); (2) niches (low penetration/high frequency); (3) variety enhancers (high penetration/low frequency); and (4) fill-ins (low penetration/low frequency). Since consumer motivations to make purchases in staples will necessarily be different than in fill-ins and similarly among other category groups, we expect the effectiveness of specific marketing actions to differ by category.

We relate the variability in category performance across retailers to category characteristics and retailer pricing, promotion, and merchandising strategy, while controlling for the level of manufacturer support (advertising and consumer promotion). We conduct this analysis for 19 different product categories using a performance measure that has a long history in the packaged goods world – CDI or Category Development Index – sometimes referred to as fair share analysis. A retailer's CDI for a category is calculated by the ratio of its share of the category in the market, compared to its market share across all categories.

Our analysis helps to determine which specific actions on pricing (regular price), promotion (TPR's, feature, display) and merchandising (national brand assortment - depth or breadth, variance in share, private label strength) help to increase both unit and dollar CDI's. Although lower prices, more promotion, and larger assortments generally improve performance in all categories, the critical drivers of performance systematically vary depending upon the role the category plays in the portfolio of the retailer and the consumer. The key insights are as follows:

We find that merchandising variables as a group play a significant role in affecting CDI. Our results show that reductions in the breadth (number of brands) and depth (number of SKU's in terms of size, type of package, flavor) of assortment may meet with resistance in many product categories due to their positive impact on category performance. Retailers should be more accepting of reductions in assortment in staples categories where assortment has reached saturation levels and reductions are unlikely to get noticed as much as in niches, variety enhancers and fill-ins. Retailers should also be willing to reduce fringe brands that are not doing a good job in catering to heterogeneous tastes.
A strong store brand program not only leads to higher unit CDI's but also higher dollar CDI's for a retailer. In contrast to conventional wisdom suggesting that retailers rely on national brand assortment to build store traffic (and hence category volume), our results indicate that a retailer's store brand can play a key role in increasing primary demand for the category. This role of private labels in building store-traffic and hence category volume is more likely to matter in staple categories that have both a broad-based appeal and constitute an important part of a consumer's shopping budget.
A lower category price plays an important role in increasing retailer unit category sales and to some extent dollar revenues in variety enhancer and niche categories. Our data show that regular price elasticities are low in staples, as competing retailers offer similar prices in these important traffic-building categories. In contrast small in-store discounts in the form of TPR's improve performance only in staples. In niches (and to some degree in variety enhancers and fill-ins), TPR's have no impact on unit sales and significant negative impact on dollar revenue (and likely on profits too), suggesting that retailers just give away margin in these cases.
The analysis supports the contention that feature advertising helps build store and hence category traffic while display influences category volume by leading to opportunistic in-store purchasing. Feature based promotions are more effective in increasing CDI in traffic-building staple categories and to some extent in niches and variety enhancers, while display promotions enhance category volume more so in low-visibility fill-in categories in which displays help to significantly enhance shelf-space relative to the regular shelf-set. Price promotions, without any display or feature support, are mainly effective in high-traffic staples and variety enhancers where they can increase volume by causing opportunistic in-store purchasing.

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