Suppliers in Fast Moving Consumer Goods(FMCG) sectors who use a category management approach when working with customers enjoy along term security of distribution. They also implement their consumer marketingstrategies at a retail level.
European retail environment
The similarities between retailerstrategies in the main European markets are becoming increasingly noticeable.Concentration of ownership, acquisition and cross-border alliances between retailers aredriving a reduction in the number of buying points. Ten of the major grocery markets inEurope now have at least 50 percent of trade passing through the hands of five or fewerretailers.
Many retailers, especially in NorthernEurope, have high overhead costs. They are borrowing heavily. They also see reducedprospects for organic growth while experiencing commercial pressures to deliverincremental profit. Strategies to create profit can be a source of conflict withsuppliers. As attention focuses on negotiated margin, cost reduction, own labeldevelopment, and so on, suppliers are driving against range expansion or up trading. Inaddition, leveraging size in buying price negotiation, common strategies includerationalizing branded suppliers. This is done while:
- seeking additional own label suppliers
- switching promotional budgets into plans that develop spend per shopping trip and store loyalty rather than brand-specific activities
- sourcing products from a European rather than a domestic supplier network
Although not the case in the UK, most majorEuropean retailers are actively developing portfolios of store groups differentiated bytype, positioning and region. Successful suppliers recognize the need to match theranging, merchandising, pricing and promotion policies of the stores with their own supplyand marketing strategies. They must do this at the same time as considering the interfacewith the central management structures of these complex customers. Developments in ITintegration can ensure these objectives are met in the most effective manner. Brandedsuppliers cannot confront these pressures within ‘traditional’ trading dialogues. Theyneed to redesign the interface in order to place themselves as long-term businesspartners.
European supply environment
Major FMCG suppliers based in Europe nowclearly recognize the broader geographical market in which they are competing. They havebeen developing multi-territory operations for several years. US-owned manufacturers havebeen acting as though Europe were a discrete operating arena for some time. Consequently,European owned players must match developed marketing and production synergies. Theencouragement of cross-border trading within the EC fuelled the rush to make strategicacquisitions and joint ventures across Europe. This is creating new competitive conditionsfor many domestic suppliers and international companies. As customers are developing morepower, companies must defend their home markets and make inroads into new ones.
Under these circumstances one can point totwo fundamental but realistic goals:
- become an indispensable supplier within your category
- execute your marketing strategy at retail point-of-sale
As the chairperson of a leading Europeanfood manufacturer commented recently, “Our ability to construct strategic allianceswith major customers is now a key corporate issue”. This recognizes that securing thedistribution base goes further in suggesting some form of joint working or common agenda.
Many retailers have become cynical aboutthe concept of ‘partnerships’. They have been approached by manufacturers who use thisconcept as an attempt to distract attention from the harsh realities of negotiating overbuying prices and supply terms. In fact, what they will respond to is concrete ideas:
“There is a lack of practicalexpertise inside a lot of suppliers upon which to base a true partnership” (Germanretailer).
“In most categories we work with onelarge supplier to develop strategies for the category as a whole” (Dutch retailer).
“I am sick of partnershippresentations – suppliers do not know enough about our business. We need practicalproposals and solutions from suppliers who understand our commercial issues” (Germanretailer).
Of course retailers have well-developedpoints of view about how to manage their ranges. They often act unilaterally in theabsence of clear objective input. In fact, they believe they are more capable thansuppliers of adopting a perspective on the total category.
Understanding customer needs
The adoption of a total categoryperspective lies at the heart of successful alliances between two trading parties. Asource of retailer frustration is the reluctance of branded suppliers to recognize thetotal category as a whole and present their brand plans in this wider context. In the US,customers are setting the agenda for joint efforts to develop tailor-made businessstrategies for core categories. Wal-mart, a discount retailer, provides its suppliers witha statement of objectives and priorities. This information includes macro-economic andshopper behaviour information, customer profile category ‘mission statements’, and a listof service standards (e.g. full Electronic Data Interchange, planning calendar, and soon).
In return they demand aStrength-Weakness-Opportunity-Threat (SWOT) analysis of the supplier’s marketing programin the context of Wal-mart’s objective. They also need a strategic business plan designedspecifically for their Wal-mart trade. This includes product mix strategies, logistics andmarketing strategies and quarterly meetings with suppliers’ vice presidents. Usingintegrated IT systems in conjunction with sales and operations planning helps managementteams work together.
In Europe there is still much more scopefor suppliers to take the initiative in joint working. This makes it less likely thattheir own plans will be ruined by the customer.
Category management principles and practice
Manufacturers wish to secure long termdistribution for their brands at the same time as securing cooperation in theimplementation of their consumer marketing strategies. They want to do this withoutinflating the real cost of doing business with their customers. They need to approach thesubject of joint working by considering how they can add value to customers’ operations. Acommon misconception is the purchase of copious amounts of scanning data when connectedwith shelf space planning software.
They are under the false impression thatDPP formulae will offer powerful answers to ranging, merchandising and promotional issues.This approach is flawed. It does not provide the necessary understanding of shoppingbehaviour and consumer usage needed by retailers to make a strategic response for thefuture. Neither does it offer any sustainable advantage when the same data and software isavailable to competitors and customers alike.
In fact ‘real’ category management is thestrategic management of individual consumer markets as businesses in their own right. Itdemands that suppliers identify specific opportunities within individual customers. Theymust do this for sales and profit growth in a category as a whole based on a comprehensiveunderstanding of the convergent factors of:
- supplier’s objectives and plans
- retailer’s objectives, strategies and shopper profile
- consumer needs, perceptions and motivators
- dynamics in the category – how it will evolve
- competitive influences on the customer and supplier alike
Market, brand and store performance dataare necessary. However, what is more important is that these opportunities are manifestedas clear plans that both customer and supplier can jointly act upon. This can be done inthe form of range, merchandising, promotion, or pricing plans at retail level. Informationsystems allow better visibility of all relevant data, enabling more informed decisions tobe made more quickly.
A supplier must be able to demonstrate thatrecommended action plans add value to the retailer’s business. This can be done by virtueof their insight into consumer behaviour in the category. By describing the results interms which match the internal performance measures of the customer, a clear vision can bedemonstrated for how the category is evolving. Marketing objectives and strategies need tobe aligned. This alignment is based on a mutual understanding of aims and plans for thetotal category. It should not include just the segment in which the suppliers may operate,but the own label even if not supplied.
Category management in a Europeancontext
Joint Category Management (Jcm) programsare the focal point of Efficient Consumer Response (ECR) implementation. It is here thatmanufacturers and retailers learn how to coordinate their activities in order to take fulladvantage of the efficiencies that flow from the four basic ECR strategies.
Both manufacturers and retailers were askedabout their involvement in such programs. Figure 1 shows the results.
Fig.1 – Involvement in Joint CategoryManagement programs
Category management as a Europeancustomer strategy
Barriers to trade being taken down acrossEurope do not present an opportunity to relate to customers in such a different way.However, the trading arena is becoming characterized by a concentration of distributionchannels ownership and retailing strategies. As large manufacturers face each other in allthe major markets and look for Europe-wide consumer marketing and production strategies,it becomes important to develop a consistent customer strategy which offers differentialbenefit to major retailers.
Category management could be the kind ofinterface your UK and European customers are waiting for. The proportions of respondents -both manufacturers and retailers – reporting involvement in JCM programs indicates thatEurope is making good progress in ECR development. The response shows that moremanufacturers than retailers were involved. See Figure 1. The increase since the previousyear’s survey was greater among manufacturers than retailers – 55 percent versus 30percent respectively. Actual levels in terms of numbers of programs underway are notrevealed from the responding survey sample.
Respondents were asked to say how theirexperiences with implementing JCM programs measured up to their initial expectations. Theresults are shown in Figure 2 below.
Fig.2 Perceived performance in Joint CategoryManagement programs
In both sectors, 60 percent reported thattheir experience either met or exceeded their expectations. Approximately 40 percent ofrespondents’ implementations did not meet expectations. This indicates that expectationscan be improved. Among both groups, there was a rise (over 1995) in those whose experienceexceeded expectations: four percentage points (28 percent) for Manufacturers and fivepercentage points (62 percent) for Retailers.
These are encouraging results and show anoptimistic trend. However, in both sectors, a significant proportion found theirexperience fell below their expectations. This indicates that expectations were set toohigh or that implementation efforts were ineffectual. This finding appears somewhatcontradictory, when set against high levels of satisfaction in change management. Thereason for this contradiction may be that levels of satisfaction may be high on generalstrategy, but lower when it comes to the practical implementation of the strategy.
When it came to quantifying the results oftheir JCM efforts in terms of business performance measures, both manufacturers andretailers reported encouraging results, as shown in Figure 3 below. An average increase inretail sales of 5.73 percent has been experienced with a 1.90 percent increase in GrossMargin as Retail inventory levels have fallen by 4.21 percent and category spaceallocation has increased on average by 4.59 percent.
Fig.3 What changes in category management atretail level have been experienced
Therefore, while the JCM process appearsfrom the survey results to be operating quite well, there is some level ofdissatisfaction. The conclusion is that the work and effort required setting up a goodcategory management relationship is underestimated by both groups.
Retailers were asked to say which criteriawere most important to them in selecting a supplier to work within a JCM program. Figure 4shows the top five selection criteria among respondents.
|Fig.4 Retailers’ five most important criteria for selecting a supplier for Joint Category Management
1. Demonstrated capabilities with other (non-competing) distributors.
2. Breadth of product offering category.
3. Capabilities and personalities of team members.
4. Involvement/accessibility of top management.
5. Overall feeling of trust and openness in relationship.
There is an interesting and importantomission from this list. ‘Supplier market share’ was not considered essential. This goesagainst the perception that JCM programs favor large manufacturers in relationships withretailers. None of the top five factors discriminates against medium and smallmanufacturers. Here, there is clearly a need to educate small and medium-sizedmanufacturers on this point.
The interesting point emerging from thecriteria list is that ‘demonstrated capabilities with other distributors’ has risen to thetop. This indicates that retailers view expertise and experience in category managementprograms as the most important criterion. Finally, the benefits of category management canbe maximized with the synergies of Enterprise Resource Planning (ERP) approach datasharing providing real control to members of the supply chain.
Kurt Salmon Associates
Kurt Salmon Associates (KSA) is a leading international consulting group that specializesin the retail and consumer goods industries. An innovator in supply chain breakthroughs,KSA developed the original concepts for Quick Response in fashion and general merchandiseand Efficient Consumer Response in grocery and Fast Moving Consumer Goods (FMCG).
Glendinning Management Consultants specialize in sales and marketing strategy assignmentsdesigned to provide competitive advantage to their clients by aligning manufacturer andretailer objectives with consumer needs. Glendinning have a team of highly trainedconsultants providing actionable solutions to the complexities of doing business in theFMCG industry across Europe. The company has offices in London, Brussels, Dusseldorf,Milan and Zurich.