Bringing the Consumer into Category Management: Making an Old Process New Again for Today's Retail Environment

Steve Kent
SVP, Retail Client Service

Spectra

The consumer—it’s what ultimately keeps a category manager up at night, wondering: Do I have the right assortment and merchandising mix for every customer that walks through my doors? And if I don’t, how much impact do the wrong product assortment and merchandising mix have on my bottom line?

The truth is, the impact could be enormous. After all the work that goes into a category review, it ultimately only addresses the “average” consumer; many consumers are actually under-served. When retailers take a more comprehensive approach, sales opportunities begin to present themselves.

The single solution paradigm is rooted in the type of data traditionally available. Until the early 1970s, shipment data was the primary information source. Point-of-sale data and the wealth of syndicated data developed from it allowed retailers to have a product-centric understanding of sales, right down to sales by store, by flavor and by size [See chart 1].

The outcome? A category review that yields significant early returns that diminish after the initial review of each category. Because the typical category review yields a single solution for all consumers, the payback potential is limited. However, a few enhancements to this accepted process can lead to incremental sales and newly satisfied customers.

Making Your Category Reviews Consumer-Centric
What if you walked in to your boss’ office today and told her that you think you could close the opportunity gap on those stores identified as under-performing? By simply changing the focus from products to consumers, marketers could close the gap today. Below, we will analyze the typical category review process and then account for consumer differences to yield better results.

There are critical differences between the traditional category review process and a consumer-centric category review process [See chart 2].

We have already stated that a single view of the diverse consumers you serve limits the ability to maximize category performance, but how does one identify consumer differentiation on a tactical, executional level? Step 3 of the consumer-centric process relies on clustering stores based on potential for sales using consumers’ actual buying preferences rather than the historical information (previous impact of ads, price zones, etc.) traditionally used to approximate sales potential.

But not all store clusters are created equal. Step 4 also challenges the marketer to choose the best store clusters to use in all remaining steps of the process—right down to targeting and implementation over the long term. Clusters are chosen based on demand gapping, which uses consumer demand and demographics to quantify opportunity gaps based on store size and sales potential. Finally, only the clusters with the greatest upside sales potential will need to have a unique marketing plan at the end of the category review.

Of the clients who use a consumer-centric category review process, a very large incremental ROI has been shown over the old one-size-fits-all method.

A Million Dollar Case Study
The retailer Joe’s Foods* was looking to use consumer-centric category management to increase sales. What they found was a million dollars in untapped sales. The following case study details the steps Joe’s Foods took to turn a million dollars of opportunity into a million dollars of sales.

Step One: Category Definition
Joe’s Foods conducted a category review for the cereal category. To start off, Joe’s Foods defined the category to be reviewed, identified the subcategories and established the scope of the review. Within this category, Joe’s Foods has decided to review the following cereals: ready-to-eat; hot; granola and natural; wheat germ and hominy grits.

Step Two: Consumer Decision Tree
A consumer decision tree (CDT) was then established for the category. This outlines the flow for the consumer’s decision-making process when shopping the category. The CDT is intended to reflect a consumer’s behavior about 80% of the time. Often, the CDT plays a critical role in positioning subcategories and items in the planogram for the category.

For Joe’s Foods, the first decision was that the consumer wants to buy cereal. The next decision was the type of cereal to buy. The “cereal type” decision is made before other considerations like brand and size and will be strongly influenced by the consumer’s household demographics such as income, presence and age of children, and age of head of household. Each of these factors will have a different degree of impact on the buying decision.

This decision process is important because Joe’s Foods’ current cereal section planogram was developed based on brand. Joe’s Foods will need to reset the planogram by cereal type rather than by cereal brand.

Step Three: Demand Clustering
Next, Joe’s Foods used demand-based clustering to identify and locate unique customer groups, clustering stores to reflect those groups. Using Spectra’s Lifestyle/Lifestage Grid, several unique groups of customers emerged [See chart 3].

If Joe’s Foods markets to just the “average” consumer, Joe’s will not be able to capitalize on the sales opportunities of their more diverse customer groups. More than a third of their stores can experience incremental sales and profits by building strategies specifically for consumers outside the average.

Store clusters were then evaluated to see how many represented unique marketing opportunities. In this case, five store clusters were created with three very unique consumer groups. Income is one of the most important drivers of consumer purchasing for these groups. While the majority of stores have middle-income customers (to which Joe’s Foods stores are currently marketing), the other two groups have dramatically different income levels. There are clearly high- and low-income groups [See chart 4].

In fact, the high- and low-income groups will each buy a unique list of items. Each is very different from what the “total chain” consumers will buy. For the low-income group, hominy grits have the highest potential for sales in this cluster, and kashi has the lowest potential. For the high-income group, hominy grits have the second to lowest potential for sales in this cluster, and kashi has the highest potential. Clearly, each group would benefit from a tailored marketing program.

Step Four: Assessment
The next step was to choose store clusters with the largest upside potential in which to develop a unique marketing plan at the end of the category review. To do this, Spectra quantified the sales opportunity for Joe’s Foods by evaluating potential sales (based on consumer fit) vs. existing sales. In addition, due to Joe’s Foods’ resource constraints, only the clusters where the incremental upside significantly exceeded the incremental expense were chosen.

Of the five original clusters, two showed significant upside sales potential [See chart 5].

The high-income cluster has an upside of almost $1 million per year in only 13 stores, which is about 11 additional cases of cereal per day, per store. These are products that are not sold because they are under-spaced, under-promoted, or priced incorrectly today. The low-income clusters also have a significant upside that is focused on a few brands and will be cheaper and easier to address.

Since only the high- and low-income clusters had adequate upside, Joe’s Foods will only develop unique marketing plans for three clusters rather than five. The remaining assessment activities will be done only for each of the three selected clusters.

Step Five: Item Strategies
Item strategies are developed for each cluster. In this case, the high-, middle- and low-income clusters all have different “turf” items. Joe’s Foods stores will prepare very different planograms, promotions and pricing strategies by turf item, by cluster. Specifically, the turf protector items for cereal in each cluster for Joe’s Foods must be priced against the local competition, given the right shelf position, and contain enough facings to provide adequate holding power.

Step Six: Category Role
Once the item strategies for the category have been identified for each cluster, the category role can easily be determined for each cluster. In the low-income group fewer ready-to-eat cereals have high indices. The focus is really on hot cereal (grits). Consumers there have less money available for expensive branded offerings. The hot segment may need to be considered preferred routine (best in class) while the ready-to-eat cereals are only occasional (timely/seasonal). In the high-income group, ready-to-eat cereal may include significant organic and natural offerings and could be destination (best in the marketplace). In the middle-income majority of stores, cereal will probably be designated as routine (recognized consumer value).

Step Seven: Scorecard
Scorecarding adds three more dimensions, so that progress against goals can be measured for each of the targeted consumer groups that characterize the three clusters in addition to the usual tracking of the chain as a whole:

The middle-income cluster will have the traditional sales and margin goals.
The low-income group will have lower margin and sales expectations, with an expected upside in hot cereal.

The high-income group will be expected to have higher margins, lower units sold and higher dollars spent per customer, and a substantial sales and margin improvement.

Later, when results are evaluated, Joe’s Foods can determine which of the three strategies succeeded and which need adjustment.

Step Eight: Tactics
Next, promotional, pricing, assortment and product-placement tactics were developed for each store cluster. In this case, the low-income groups are much less likely to subscribe to or buy newspapers or read direct mail but are much more likely to listen to urban radio. By using print for high-income groups and urban radio for low-income groups, two completely unique ads with different items can be delivered in the same geography to exactly the right households. Store circulars can still be used to address the main body of middle-income consumers.

Step Nine: Implementation
Joe’s Foods is now prepared to implement these three unique marketing and merchandising strategies. The implementation stage has the added dimension of keeping track of which strategies are to be applied at which stores, and the new task of making sure vendors follow through on the different programs.

The results achieved at Joe’s Foods will be substantial, as traditionally underachieving stores are adjusted, one category at a time, to better serve the consumers who live nearby. The addition of unique tactics applied to marketing to diverse customer groups will yield incremental returns that will boost sales and add to the bottom line.