Directing the Shelf

When the term category management is evoked, most retailers envision three things -- teaming up with a category captain (typically a supplier), reviewing sales data and culling product assortments. By eliminating slow movers, the belief is retailers can better meet consumer needs and, more importantly, increase sales and market share.When reality sets in, however, things are not so optimistic, leaving some nonfoods buyers and merchandisers to speculate that the time has come to consider more drastic measures. A growing number of retailers believe a solution for boosting sales may lie with reducing the size of the nonfoods department, including doing away with certain subcategories and awarding the additional footage to better performing departments.Industry experts say heeding this suggestion would be a mistake, believing better use of shelf optimization tools and redefining category management will give nonfoods sales a lift. If more retailers were to outsource category management as they have with other areas of the store, experts contend that sales and margins will fall back into place. McKinsey & Co., based in New York, recently tackled the benefits of outsourcing in its quarterly newsletter. According to its Principal Sandeep Dayal, co-author of the article, managing the shelf can be a problem for retailers because, in general, they tend to be masters at supervising only three to five core categories. He says when a retailer establishes a loyal base of customers for those core products, the company must determine which additional categories will make the most of its valuable shelf space. "Too often retailers offer a wide product range to increase their share of overall customer spending without knowing enough about the non-core categories they stock," says Dayal.By outsourcing management of non-core categories, retailers can let those who have expertise in working with certain products, including nonfoods, run the category much more efficiently. It's McKinsey's belief that a category manager can best decide what mix of brands a retailer should carry in a particular category, in what quantity, and can help promote these products. Through economies of scale achieved by serving many retailers, assortment and price are kept in check. "If retailers outsource certain logistics functions, why shouldn't they outsource other areas outside their expertise," asks Dayal, adding that this strategy works well for both physical and virtual retailers. "In a best-case scenario, the retailer makes more money than it could by managing the category itself and increases its share of wallet by matching customers more effectively, without having to invest the time needed to build expertise in non-core products." As a family-run independent with an expertise in natural foods, Pratt Foods Supermarkets based in Shawnee, Okla., has made some strides in correcting shelf optimization issues, but still struggles with the dilemma of how to reduce SKU count without jeopardizing business. As an independent, the company banks on being able to offer a wide variety of items to appease its diverse customer base, which ranges from lower to middle income shoppers. J.B. Pratt, president of the six-store company, believes the company's willingness to place small orders has been an important point of differentiation in a very tough market and says giving up control of a category to an outside category captain is not something he is ready to consider."We know that we probably have too much variety, especially with our dietary supplements," he says. "We know we need to cut back, but for us it's such a person-to-person business and we create so much loyalty by offering what consumers want that it's tough to discontinue certain items. Many of our customers come in knowing what type of product and brand they want. I understand there is a difference between variety and duplication, but we have a fair amount of brand loyalty so it's hard to know where eliminating will help and not hurt sales."Pratt says as the category continues to mature and customers become more sensitive to price and less brand loyal, he may feel differently about aggressively reducing SKUs, but notes that many of his shoppers formerly shopped only in natural food stores. "I have to balance what I need to do on the shelf with the fact that I treat the natural category as a destination and that I don't want my customers to turn to natural food stores," he says. "With some categories, it's easy to figure out what your assortment needs to be and with others there are just so many different products out there it's hard to make the right choice. At the same time, we understand we need to be open and flexible and make appropriate changes when necessary."While some may view outsourcing as a future trend, others see it as a practice already deeply entrenched in nonfoods. Michael Sleeper, president of Imperial Distributors, based in Auburn, Mass., says his company is seeing a lot more focus on the shelf relative to nonfoods now than it has in the past. "In the early days of this business, retailers would just turn over the space and ask us to manage it without getting very involved," says Sleeper. He notes this is not the case today, with many of the chains heavily invested in the productivity of the shelf and active in overseeing the management of the nonfoods department. Sleeper says to a lesser extent the same is true with independents.Imperial's sales over the past five years have been running about three times the growth rate of supermarkets and its field staff has increased from 195 to 251. Sleeper attributes this success to new customers who are brought in by naturals experts. "This business continues to become more complicated, and retailers are finding outsourcing works to get the best job done and is making a difference in nonfoods and in overall store performance," he says. "From my experience, there are two primary approaches grocers are taking in regard to managing the nonfoods category," says Sleeper. "Some are choosing to focus on how they can expand the range of product within 8, 16 or 24 feet to create a fluid assortment for customers. Other retailers focus on selling units and are not as interested in margin or assortment. They want to make sure their assortment is fixed to the items that are going to sell units. If they can't get a certain threshold of sales out of certain units, then they don't want it on the shelf. Regardless of approach, almost all retailers we work with are looking at micro-marketing as a key way to manage the category and differentiate the department with certain regions. We maintain more than 800 planograms and four full-time people to help retailers address this issue."While it's true that outsourcing can be a solution, David Heist, director of industry affairs and consumer relations for Bayer Consumer Care in Duluth, Ga., says that execution is critical. He believes there is value in outsourcing, provided it originates with an objective company. "There have to be performance and accountability measures in place, and I'm not sure that happens if the retailer controls things," he notes. "A third party hired by a retailer can signal a loss of control for manufacturers and can change the whole complexion of the business."Some observers believe that all too frequently retailers view outsourcing as a way to bring in extra income, rather than as a better way to manage the shelf. According to one source, retailers can make an average of 3% on a transaction, which leaves some to question if they have the best interest of the consumer in mind if they are making a profit from buying and selling product. "More often retailers are trying to control this end of the business, and it's gotten to the point where we're pushing back and saying no," says Heist. "But there are many manufacturers who aren't big enough to do that, so they bend over and pay the retailer. Retailers further compound the situation by asking for an unrealistic number of resets. Their demands take away from the normal maintenance of the shelf and promotional activities, and that's a major part of this problem." Michael Langenborg, chief strategist with Natural Planograms, based in Santa Rosa, Calif., agrees that under the right circumstances using a category expert may be a winning solution, noting that mass marketers such as Target and Wal-Mart have adopted this strategy and are excelling in categories they outsource. "Companies like Wal-Mart hire someone who is a music expert to pick selections, manage the set and advertise. And as a result, they own the music category in many areas they operate," says Langenborg. "Most grocers manage produce, dairy, frozen, meat, maybe some bakery and center store well, but that's it. There are a lot of companies floundering in other supermarket categories that could benefit from outsourcing. It's not just category sales that are at risk; it's all the lost cross-merchandising opportunities too, especially in seasonal. More than three-quarters of all charcoal, for example, is sold in the food store, so if grocers are managing this category right, they stand to sell more barbeque sauce, meat, rolls, ketchup, lighter fluid, etc." However, Langenborg admits that solutions to improve shelf management go beyond whether or not to contract out management of the department and its related categories. "Retailers have been working hard at reducing SKU counts, but change has also come at a price. While consumers do have an easier set to shop and retailers have lowered their operating costs by reducing their inventory and focusing on faster moving items, the process has stymied innovation and made this a game only for the major players, particularly in natural and nonfoods." Experts like Langenborg say companies that come in with true innovation often never get the chance to succeed because they lack resources and clout. "Companies that speak the loudest get the most attention, but not necessarily because their products warrant it," he says. He believes as long as a system exists where you have to pay to play, retailers will continue to look at new products as a zero sum game. "They get paid to bring the product in and to take it out," adds Langenborg. "A product's potential for success has nothing to do with it, and what you end up with is a shelf full of clutter. The consumer is the one getting lost in this process and is often the last check point instead of the first." Like Langenborg, Sleeper believes assortment issues are a thorn in the side of some nonfoods retailers. "There is a lot of margin to be made, but that is wasted if inventory is sucking up the investment. At the same time, in this competitive climate you need to set long-term goals because no one can afford to operate on knee-jerk reactions," he says.While there is still a lot of work that needs to be done, according to Sleeper, a significant number of retailers do understand the importance of developing an assortment business model, both for nonfoods and each of its subcategories. "More retailers have adopted this approach than you might think," says Sleeper. "Going back to the mid-90s, kitchen gadgets was one of the first sub-categories to be defined as a destination category. That was followed by photo, pet and more recently bath and body, salon hair styling products and stationery where grocers are featuring home and office items. To be current, means you need to be flexible in managing the shelf." Instead of eliminating space in nonfoods, retailers should look to create a multi-prong approach by viewing the category and sub-categories as separate business units. From there they can develop a strategy for short-term and long-term success that fits within the total store philosophy. From most accounts, retailers want to be in this business in a stronger way, but to do that means they need to look beyond assortment or hasty reactions and instead focus on management of the category by creating a business plan.

Directing the Shelf

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