Retail Dogma

Category Management: A Complete Guide

Category Management is a function at retail and ecommerce businesses, where related products are grouped together under separate categories, in order to manage their performance more efficiently.

When a retail or ecommerce business grows to a level, where there are thousands of SKUs across many different product departments, the need arises for assigning a team member, the category manager, to be responsible for his/her category’s performance and return on investment.

Category management is often implemented by big retailers, such as grocery stores, home improvement stores, furniture stores, drugstores, and major ecommerce players like as Amazon.

Benefits of Category Management

The goal of the category management function is to ensure that each category’s performance is maximized to its full potential, by implementing different strategies and tactics starting from buying and supplier management to visual display and sales performance management.

Each category is hence treated as a stand alone business unit and extra care is given to the different product SKUs under that category. This ensures that products don’t get neglected and inventory return is maximized as much as possible.

It also means more effective buying, as each category will have its own Open to Buy, and managers will put more insights into the sales forecast of the category’s products, that is based on their trend monitoring, rather than just budgeting based on sales history.

Another main benefit of category management is consolidation and achieving savings through economies of scale.

This is because the purchasing for all the stores for the same retailer will be centralized through the category manager, and instead of buying for one or two stores, the manager will be buying for a chain of 50 or 100 stores and negotiating better product prices.

This also gives the retailer a big bargaining power while dealing with suppliers, which allows him to further negotiate better payment and shipping terms, in addition to the product cost savings.

Read Also: Bargaining Power of Suppliers

The 4 P’s of Category Management

The 4 P’s of category management are product, price, placement and promotion.

The category manager will ensure that the right products are bought based on his analysis of the previous sales reports and current consumer trends.

He will then ensure that those products are priced at the right level for them to perform as planned and to maximize their returns.

He will also make sure, through planograms and other visual display elements, that those products are placed correctly at the store and highlighted to improve their performance.

Finally, the category manager will use different promotional tactics to push the sales of those products, maximize their sell through rates and manage excess inventory if necessary.

Category Management vs. Buying

The category manager and the buyer share similar responsibilities, such as choosing the right products and managing vendors relationships. However, the category management function is broader than the buying function and it extends to marketing the category and managing the visual display on the sales floor or the ecommerce website.

The category manager is more like an end-to-end business manager for the respective category he is in charge for.

The 8 Step Category Management Process

According to the Brian Harris Model, category management process is divided into 8 steps that are implemented in order as below:

8 Step Category Management Process

1. Define The Categories

The category management process starts by defining what exactly goes together under one category.

The is no standard definition for each category of products in the industry, and so retailers have a freehand in choosing what goes where, based mainly on their end goals behind applying category management.

When a retail or ecommerce business initially starts, it sets up its own merchandise hierarchy.

Merchandise Hierarchy

This hierarchy groups down products into product departments, categories, classes and subclasses. So a retailer can choose to make the category management process at product department level (e.g Men’s Apparel, Women’s Apparel, Kids..etc) or can go further down to product categories levels.

It depends on how big the product catalogue is and how efficiently it can be managed.

2. Assess The Role of Each Category

Not all products in a retailer’s product portfolio play the same role.

Some products serve as the core of the business and their role is to build transaction volume and help shape the main image & positioning of the retailer. For example, the core product category at Victoria’s Secret is “Bras“.

Core products are the main contributor to the total sales for the retailer.

Other products serve as a destination, or what we refer to as “traffic drivers”. These do not contribute much to the total sales of the business, but help bring new & repeated customers to the stores. A good example here is Costco’s rotisserie chicken.

These products are usually not very profitable, as their main goal is not to build profits, but rather to drive traffic.

Read Also: Loss Leader Pricing Strategy

Other products are convenience products. They are there to complement the shopping experience and are usually used as add-ons to the main categories. Their contribution is not high but could have high profit margins, and so they can add to the profitability of the portfolio. For example, if you are running a shoe store, these could be shoe polish.

Finally, some products are seasonal. They will play an important role in driving your sales and profitability during their particular season, but will not be there all-year-round. Example for that are Christmas related products.

Assessing and assigning roles to the different categories and the different products under each category will help in setting up the right strategy for those products.

For example, as we mentioned, destination products are not meant to drive profits, so their pricing strategy will be different from the core products or the convenience products. The same will apply to buying, as seasonal products will be planned differently.

3. Assess Current Performance (Category Analysis)

Assessing the performance of each category will require a thorough category analysis.

Here, you will generate the sales and inventory reports and perform a complete inventory analysis for the products under each category.

The Category Analysis will cover:

4. Set a Scorecard for Each Category

Then you will set your new objectives based on the analysis you made in the previous step.

You will set specific, measurable targets for each metric you want to improve, so you can measure the performance of the category at the end of the year against it.

Example

Category X Scorecard

Sales Contribution Target: 30%

Inventory Turnover Target: 3

GMROI Target: 2.5$

5. Device Strategies

Based on your analysis (step 3) and your objectives and targets (step 4), you will now draw a roadmap of how you will get from the current performance to the targeted performance within the required timeframe.

Here you will set your broad category management strategies that you will then implement through tactics around buying, pricing, promotions and display.

Six Category Management Strategies:

  1. Traffic Building
  2. Transaction Building
  3. Turf Defending
  4. Profit Generating
  5. Excitement Generating
  6. Image Building

6. Set Tactics to Implement Your Strategies

Now, you will take the broad strategies you set in step 5, and form specific, actionable tactics that translate those strategies into specific actions.

For example, you might decide to change your buying strategy towards a higher breadth and lower depth. This means adding more styles and products to your portfolio, in order to add more products to the transactions (Transaction Building)

The tactic here will be: Finding 3 new products and new suppliers for those products (Buying).

You might find that the main product in your category is losing market share to a new competitor and your strategy is to price it more competitively (Turf Defending).

Your tactic will then be to lower the price to X level, by sourcing it at a lower price or finding a new supplier (Pricing).

You might find that the sell through of Product X that has very good margins was very low and your analysis revealed that the product was not having good visibility at the store. So your strategy for this product is to improve its visibility to drive its sales and overall profits (Profit Generating).

Your tactic will be to assign a better place for Product X in the planogram or display it next to product Y that could push its sales (Display).

7. Implement

Here you will implement the tactics in step 6 and attempt to deliver them within the agreed timeframe.

Implementation can be done directly by the category manager or his team, or might require collaboration with other parties, such as suppliers, store managers, visual merchandisers,..etc.

So it is important while setting the plan to assign roles for each tactic in the plan and be realistic about the expectations you have from other parties.

8. Review

The review process will typically be at the end of the agreed on time frame (e.g. end of quarter or end of year) and here you will measure how you have performed against the set targets that you have put in the scorecard in step 4.

From this step you will then go through the process again to review the performance and improve on what you have achieved so far.

Category management is an ongoing process, so the 8 steps will keep repeating as products and trends will keep changing and there will always be room for further improvement.

Category Management Tools

Open to Buy Plan

One of the most important tools for any buyer or category manager.

The Open to Buy (OTB) is a planning tool that provides an overview on the inventory levels of the category and how this goes with the projected & actual sales figures. It then calculates how much inventory is needed to deliver future sales.

Merchandise Plan excel template
Download the OTB excel from members area

The OTB plan is done for a period of rolling 6 months and gives the buyer the amount in dollars to buy products for this 6 months period, in order for the business to have adequate amount of inventory for the level of sales it is projecting.

It can be broken down into any number of classes or subclasses to match the respective category by using more tabs on the sheet.

We explain this in full details in our free Open to Buy guide, and our members get access to download the excel sheet and practice the entire process using simulated data.

Google Trends

Another tool that is used by marketers and we have found to be very useful in category management is Google Trends

This tool helps the category manager or buyer to spot specific trends inside their respective category. It can help in choosing which brands to carry and which colors to choose.

We explain this in more details, using the example of sneakers category, in our article on Google Trends for Buying.

Category Management Considerations

The goal of category management in the first place is to give more attention and resources to each category at the business, in order to maximize its performance, and consequently the performance of the entire business.

However; since category management is a function at a bigger business (the retail or ecommerce business), but at the same time the category is managed separately, it is very important for the top level management of the business to ensure that the different categories do not compete with each other or jeopardize each other’s plans.

At the end, all the categories have to ensure communicating the same message of the business to the end consumer and contributing to building the same brand image.

This is especially important when it comes to implementing different pricing and promotional strategies.

This can be achieved by setting broad guidelines and rules for the entire business and having regular meetings, where each category manager will present their strategy and their future plans, which will then be compared against the set guidelines of the business.

How to Become a Category Manager?

A category manager is viewed as an independent business unit manager, so in order to become a category manager you will need to have good business acumen and managerial skills. You will also be expected to have experience or product knowledge of the category you will be managing.

Skills Required for a Category Manager Role:

  • Relationship Management Skills
  • Communication Skills
  • Business Acumen
  • Analytical Skills
  • Presentation Skills
  • Using Excel
  • Category Knowledge

Furthermore, you should be comfortable with reading financial reports and analyzing a lot of different retail metrics and numbers, such as gross margins, inventory turnover, GMROI.

You can start by reading our free resources on retail buying, merchandising, pricing and inventory management.

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