Impact of Category Management on Retail Prices and Performance: Theory and Evidence

This study found that one retailer's adoption of CM increased its average unit price of the category and reduced its sales and revenues. However, the retailer still enjoyed an increase in its gross margin profits when competing manufacturers' wholesale prices fell during the CM process. The retailer that adopted CM in a laundry detergent category had greater profits than those of a rival retailer that followed traditional brand centered management of a product category when the inter-brand competition was high but inter-store competition was low.Industry MotivationSince 1995, CM has produced fundamental changes in retail grocery and drug store industries.Brand-centered management (BCM) vs. category management (CM): Traditional brand (vendor)-orientated buyers have been replaced by category managers who integrate procurement, pricing and merchandising of all brands in a category and jointly develop and implement category based plans with manufacturers to enhance outcomes of both parties.Strong retailer and manufacturer Interest in CM with the vast majority of grocery retailers have cited CM as the most important management issue facing them.Research Questions1. Investigate the impact of retailer's shift from BCM to CM on equilibrium retail and wholesale prices, sales and profits in a competitive decentralized setting.2. Focus on pricing decision and their outcomes.Definitions--Category Management is a setting where a category manager jointly sets the prices of all brands in the category so as to maximize total category profits.--Brand-Centered Management is a setting where each brand's price is set independently so as to maximize its own profit contribution taking the prices of competing brands in the category as given.Previous LiteratureAlthough adoption of CM has rapidly increased since the mid-1990s, little research on the effects of adoption on retailer price and performance has been done.There is now more trade press coverage of the issue, and more surveys expressing interest.Shelf space management: little available dataChoi, S. Chan (1991) "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, Fall, pp. 271-96; (1996) "Price Competition in a Duopoly Common Retailer Channel," Journal of Retailing, Vol. 72, pp. 117-134Raju, Jagmohan, Raj Sethuraman and Sanjay Dhar (1995), "The Introduction and Performance of Private Labels," Management Science, 41 (6), pp. 957-78Steiner, Robert (2001) "Category Management: A pervasive, New Vertical/Horizontal Format," Antitrust, Vol. 15, No. 2, Spring 2001, pp. 77-81Trivedi, Minakshi (1998) "Distribution Channels: An Extension of Exclusive Relationship," Management Science, 44 (July), pp. 896-909Zenor, Michael (1994) "The Profits Benefits of Category Management," Journal of Marketing Research, 31 (May), pp. 202-213.DataInformation Resources, Inc. aggregate store-level scanner data for 156 weeks (January 1993!=December 1995) in detergent category21 stores of national supermarket chain (Retailer A) that moved its laundry detergent category to CM.Aggregated information for rest of market (Retailer C)Weekly average unit prices, weekly unit salesRetailer A moved the category to CM in February 1994For Retailer A, 56 weeks of pre-CM and 100 weeks of CMFor Retailer C, 156 weeks of BCM.Propositions: PricesProposition 1: All else equal, the average retail price of competing brands in a product category will increase when a retailer moves the category from Brand-Centered Management to Category Management.Proposition 2: All else equal, the average retail price of competing brands in a product category moved to CM by a retailer will be higher than the average retail price of that category at the competing retailer who continues with BCM.Propositions: SalesProposition 3: All else equal, the total unit sales volume of a product category will decrease when a retailer moves the category from BCM to CM.Proposition 4: All else equal, the total unit sales of a product category moved to CM by a retailer will be lower than the total unit sales of that category at a symmetric competing retailer who continues with BCM.Propositions: RevenuesProposition 5: All else equal, the sales revenues (average price times total unit sales) of a product category will decrease when a retailer moves the category from BCM to CM.Proposition 6: All else equal, the profits (average gross margin times sales in units) of a product category will increase when a retailer moves the category from BCM to CM.Summary of Findings1. For Retailer A, the move to CM produced a gradual but permanent increase in the category's average unit price by 7%.2. Retailer A's average unit price was significantly higher than that of the rest of the market who did not move to CM.3. Retailer A's weekly unit sales abruptly and permanently declined after the move to CM.4. Retailer A's category revenues declined after the adoption of CM.Research implications1. Category management is likely to lead to higher retail prices2. Despite a decline in unit sales, retailer adoption of CM can still result in higher category profits.3. Adoption of CM can improve a retailer's profit vis a vis a competitor only under certain conditions.

Impact of Category Management on Retail Prices and Performance: Theory and Evidence

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