Retail chains around the world are facing an increasing margin squeeze—from changing consumer behavior, new store formats, rising complexity, supplier consolidation, and other factors. Retailers need to take new approaches to improve operations and boost competitive advantage.
10 Steps to Improve Category Profit—Example
These 10 insights show how you can turn customer satisfaction into brand enthusiasm and beyond. Click each for more information.
To articulate an efficient strategy, it is essential to understand the overall context of the category. This requires clear definition and scope, as well as a specific role for the retailer. For example, traffic categories focus on volume and accept low margins. Destination categories, on the other hand, emphasize innovation and high margins.
Once the playing field has been defined, the next step is to gather all available internal and external performance insights to help shape the strategy. A consumer decision tree (CDT) is a good framework for organizing information.
A CDT is a visual diagram of how a consumer makes a purchase decision. It creates an understanding of relevant shopping criteria and the level at which consumers start to consider purchasing a product (substitution boxes). Structuring data according to the CDT helps to identify potential opportunities and threats.
A best-in-class category strategy specifies the substitution boxes that the retailer wants to attack, defend, or rationalize, and quantifies the expected potential. The strategy also links back to the defined category role and includes high-level implications for assortment, shelving, pricing, and promotions. It is therefore the basis for all of the optimization steps contained in this document.
Complex cross-category supplier conditions and insufficient insights into operational costs can cover up “hidden” margin problems. An understanding of SKUs' real margins is vital to optimizing a complete category with the right fact base.
Adjusted gross margin (AGM) goes beyond the standard margin calculation by including all other retailer-relevant costs and bonuses. It can be determined on multiple dimensions, such as category, supplier, substitution box, and SKU.
Additional margin components to account for include:
An additional gross margin of 6 to 8 percent is achievable in the short term through a better understanding of both SKU profitability and consumer needs. Even higher margins are possible when this process is sustained by complementary placement tactics.
We have found that the most effective way to achieve these results is to analyze a group of interchangeable SKUs (substitution box) based on a broad set of analysis and insights, including loyalty card data. Best-in-class retailers apply most of the following metrics:
A competitive private label program provides consumers with a value-adding choice over branded products. It also provides retailers with a competitive advantage over the competition (assortment, price points, and margins).
Decisions about private label positioning (mainstream, price fighter, premium) per selected category should be based on a comprehensive set of criteria:
Creating planograms can best be described as a mix of art and science. While it is important to build up the shelf in line with the category strategy and to give it a retailer-specific feel, an analytical approach can also increase profitability.
The trade-offs between marketing effectiveness and total cost-to-serve need to be evaluated simultaneously to both influence consumer behavior and achieve cost optimization.
We have found that it is most efficient to work with experts from the supply chain, retail, and marketing as you optimize the shelf based on the following factors:
Note: AGM is adjusted gross margin.
The objective of store clustering is to maximize sales and profitability. It does so by adapting category tactics to local customer needs—clustering stores and defining specific requirements per store cluster. We recommend the following steps:
Previous projects have shown significant differences in sales and shrink (fresh only) for categories between store clusters. Cluster-specific category tactics were implemented by balancing the speed of results with the operational constraints.
The traditional retail landscape has changed as discounters and online food retailers have advanced. All retailers are increasingly focusing their communication on prices, which has decreased their differential positioning.
To compete in the marketplace, retailers have to choose the categories in which to compete on prices and where to generate margin. Since customer price perception does not always coincide with actual price competitiveness and customers are particularly sensitive about select categories, target price positioning is introduced for different categories, products, and store segments.
The following points should be considered:
After the overall (average) price level per category is defined, a further differentiated price index per SKU should be considered. Key value items, generally products that are purchased in large amounts or fulfill daily needs, are associated with a high price awareness among customers. Those SKUs should be priced at least equal to competition to drive price perception. The same logic applies to entry price articles. All remaining SKUs can be priced higher, according to the overall defined price index per category.
Professional retailers have increased control and ownership of the assortment selection, pricing, and placement. However, due to heavy supplier financing they find it difficult to take control of the promotion process. Suppliers can therefore directly influence their level of exposure in the channel without support in category strategies. They also typically have different preferences in terms of which products to promote than the retailer.
We have worked with retailers to put them in the promotion driver's seat, thereby achieving a fundamental shift in promotion management:
Fact-based negotiation can take advantage of category and supplier performance analyses, placing the buyer in the driver's seat by defining a strong negotiation storyline that relies on tangible facts and figures. For this reason, we believe that negotiations with suppliers should always be combined with a thorough category analysis.
We recommend the following actions:
Retailers must ensure “way of working” continuity if they are to realize the potential of these category management methodologies. A first step is to make the analysis in the projected categories refreshable. The end goal is to move from a “project” approach to a “living” process, thereby redefining the buying and category management organization.