Retail Value Transformation

Category management survey North American retailers

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Category Management Survey

Oliver Wyman is conducting an ongoing, international study of retail Category Management. The goal is to uncover the processes, tools, and techniques that distinguish the market leaders from their peers. This document summarizes the first results of our North American study in which we compare a set of twenty major retailers operating in seven retail sectors on the dimensions most relevant to merchandisers. In the near future we intend to provide a more comprehensive view of the results and their implications in a White Paper.

Oliver Wyman

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RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

Contents

Executive summary

Survey methodology

Benchmarking results

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Oliver Wyman

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RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

Executive summary

Oliver Wyman

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RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

Current category management processes are hindering retail progress Most companies have processes in place to review each category periodically, but weaknesses in these processes are acting as a barrier to better category management
Complaints about the traditional approach Selected interview responses As % of total
Is your company strategy
given in actionable terms?

Planning processes are tedious, rigid, and too narrowly focused on the previous year One retailer spends 20 weeks per category gathering data used to populate templates 50% of firms thought the planning process inhibited strategic thinking
Percent of companies

Does the planning process

interfere involve midwith strategic year review or rethinking? forecasting?

clearly articulated?

tied to your KPIs?

100 90 80 70 60 50 40 30 20 10 0 65 45 20 50 35 35 55 80
No Yes

The current approach offers poor support for decision making 60% of firms surveyed did not track competitors prices and 90% lacked data on their promotions Most CMs have no analytical support to inform strategies and lack time to do analysis themselves Category management seldom ties into the overall company strategy Category KPIs rarely reflect strategic metrics Process does not provide a way to sort out conflicts between strategic and financial goals

50 65

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Leading retailers have overcome many of these problems Certain retailers have developed an increased level of sophistication that is evident across all category management levers

Sophistication levels at three different retailers

Process 10 Increasing sophistication Data Vendors Pricing Promotions Assortment Private label

1
Each color represents a different retailer

This level of sophistication is typically a cultural trait of the organization which cuts across all of the category management levers

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The benefits are substantial Leading retailers derive many benefits from their approach to category management, not least better financial performance

Benefits for leading retailers

Value at stake
OW benchmark value per $1bn of revenue

The leaders have simpler and more effective category management processes A lower-effort and higher quality category planning process A more direct link between the company strategy and category-level decisions Less reliance on vendors for strategic decision-making Higher quality decision making across all of the category management levers

The leaders higher level of sophistication drives significant margin upside Optimal pricing decisions Optimized promotions Better assortment and space allocation Supplier negotiations and sourcing Total value at stake
(per $1bn of revenue)

$5-10m $8-12m $5-15m $5-30m* $23-67m

* Potential margin gains from vendor negotiations vary significantly across retail sectors
Oliver Wyman www.oliverwyman.com RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

Survey methodology

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RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

Scope of the first round of interviews We cast our net widely in our interviews in order to get a broad perspective across several major retail sectors
Interview summary By retail sector
12 10 8 6 6 4 2 0
y IY el as s on ve ni en ce rs G ro ce r pa r en t ki lle rtm D M

Areas of focus in conducting the interviews

Interviews Companies

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Our interviews covered 20 of the largest retail operators in North America across various retail sectors In sectors where individual firms can have internal variations in category management processes (e.g. grocery), we have conducted multiple interviews We have chosen to speak directly to category managers so as to get the clearest view of the category management processes

5 4 4 3 2 4 3 2 2 2 1 4

Ap

ry at eg o

ep a

Sector

This provides us with an unvarnished view of the varied approaches taken to category management

Oliver Wyman

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RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

A few words on methodology Our interviews have focused on the four major areas where we see clear, practical differences in the execution of Category Management

Link to overall company strategy

Assess the strength of the connection between category plans and overall company strategy Is the direction top-down, bottom-up, mixed, or unclear?

Category management organization

Understand strengths and limitations of varied team configurations e.g. skill-centered expertise vs. productcentered expertise

Data availability and usage

Appraise the organizations relative sophistication in terms of data capture, usage and deployment Does analysis play a fundamental or auxiliary role in decision making?

Category management levers Main focus of the interviews

Compare approaches to: Pricing, promotions, visual merchandising, assortment, private label, and vendor management

Oliver Wyman

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RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

Details of category management levers Our interviews focused on the business levers that merchants use to drive their categories
What we cover Strategy and category management process Data quality / availability and tools Pricing How company strategy is translated into specific category targets and plans What infrastructure / processes govern the category planning process; what are its outputs Which data sources tend to be the most widely used or available What decision support tools exist and how extensive are their capabilities How pricing decisions are made, and who makes them What tools and support is available to inform these decisions Promotions How promotions are planned, and which stakeholders are involved How the effectiveness of a given promotion is evaluated Assortment, space & visual merchandising Visual merchandising On what basis items are added to or deleted from the range, and how space is allocated To what extent assortment varies locally What criteria are used to configure planograms How far stores are allowed to deviate from standard planograms Vendor management How negotiations are handled and who is involved What information can be leveraged to get the most favorable cost position Private label How great a role private label plays in the overall merchandising strategy How developed are stores own-label brands

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Staircases of sophistication We can picture these levels of sophistication as representing different positions on a staircase, which progresses from basic competence to advanced capability
A Staircase model of sophistication Advanced capability
10 9 8 6 5 3 2 1

Basic competence

Relatively advanced retailer

Average or typical retailer

What the staircase represents Each step describes a certain level of development or sophistication for a given category management capability The staircase summarizes the current range of sophistication observed in the global retail marketplace Retailers extract greater value by moving further up the staircase

How progress is made Gradually, over time: Most retailers tend to climb up the staircase slowly, as their existing processes evolve and improve With bursts of concentrated effort: Step-change improvements can be achieved by investing to radically improve a given capability

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Benchmarking results

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Process and strategy A subset of retailers have created processes that link strategy to execution in a way that classic category performance reviews fail to do
Levels of sophistication 10 9 8 7 6 5 4 3 2 1
Basic example Each category is reviewed once annually - Standard, 40 slide template used for all presentations - Months of preparation go into populating these templates, often with granular, raw data Goal of the presentation is to think strategically about the category - CM the brain behind the category strategy - Templates meant to stimulate strategic thinking by ensuring nothing is missed End result is that more time goes into data collection than into analysis and interpretation - Amassing the data is laborious - Little discussion of strategies & tactics and no predictive component to strategy
Apparel Department Convenience

Relatively advanced example Annual category reviews focus on setting the strategy for the business - Discussion of one and five year plans - Preparation includes templates, but with focus on category tactics and financial impact - Process involves establishing and codifying category roles - Output is a set of tactics to reach strategic goals Category managers continuously update this strategy - Quarterly reviews track progress and redirect strategy as necessary - Monthly re-forecasts to reflect changes in the market/strategy - Category roles change to reflect shifts in underlying market conditions

Legend
Mass merchant Grocery Category killers DIY

Oliver Wyman

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RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

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Data and tools A large fraction of the retailers we interviewed still rely on detailed weekly sales reports, but the leaders take a far more proactive approach to mining their data
Levels of sophistication 10 9 8 7 6 5 4 3 2 1
Basic example Merchants are responsible for conducting most of their own analysis - Pricing support group provides competitive data but no predictive insights or scenarios Merchants have access to performance data, including sales, margin, costs, and inventory at a very granular levels of detail Where loyalty programs exist, card data collected but not used in category mgmt decisions Competitor data only on key item prices Analysis not forward looking on long-term - Focus on weekly performance vs. same period last year - No scenario modeling capability
Apparel Department Convenience

Relatively advanced example Separate support groups for each key category management lever - Groups provide category managers with concise answers to analytical questions - Because groups have narrow focus, they develop expert analytical capabilities Analysis is forward-looking and strategic - Scenario modeling capabilities - Focus on providing well-supported assessments of a range of strategic options Insight is rooted in detailed customer, competitor and performance data, including: - Credit card, shopping basket or transactional data - Competitor price tracking, surveys and demographic profiling

Legend
Mass merchant Grocery Category killers DIY

Oliver Wyman

www.oliverwyman.com

RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

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Pricing Most of the retailers in our study used basic, rule-of-thumb pricing approaches that do not leverage detailed knowledge of customer preferences or sensitivities
Levels of sophistication 10 9 8 7 6 5 4 3 2 1
Relatively advanced example Pricing support group provides expert guidance to merchants - Item set classification is based on price elasticity - Merchants can request more detailed scenario models to make specific decisions Competitive monitoring is key to the price strategy - Major emphasis on competitive entry price point - Competitors prices are tracked centrally - Merchants spend time in competitor stores to better understand relative pricing strategies Pricing decisions are based both on short-term goals and long-term strategy - Analytics used to optimize prices on non-key items - Focus on 5-year strategy and competitors ensures long-term implications are considered Basic example Item pricing decisions are made exclusively by merchants Process is driven by very simple rules - Pricing decisions are based on a margin target for all products - No pricing zones, so prices do not vary across stores Prices are not optimized according to customer or competitor intelligence - No consistent competitive price monitoring, though some key item prices are tracked - No insight on the relative price sensitivities of different product groups - No knowledge of customer implications of price moves
Apparel Department Convenience

Legend
Mass merchant Grocery Category killers DIY

Oliver Wyman

www.oliverwyman.com

RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

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Promotions Many retailers run the same promotions every year profitable or otherwise to smooth out year-on-year sales comparisons
Levels of sophistication 10 9 8 7 6 5 4 3 2 1
Relatively advanced example Promotional analysis is done by a separate group - Full understanding of customer effects of promotions, including lift, switching, stockpiling, traffic and perceptual impacts - Ability to forecast expected incremental sales and margin contributions - Scenario modeling for discount optimization Promotional strategy is viewed as part of the overall category strategy - The companys overall strategic direction is a key driver of the ad planning process - Promotions viewed as one element of a total customer value proposition - Vendor funding does not drive promotional decisions Planning is done well in advance, ensuring buys are appropriate Basic example Promotion performance economics incomplete, based mainly on items sales uplift Critical effects of promotions, such as brand switching, impact on total footfall, stockpiling or pantry-loading effects, often go un-measured Promotional decisions are not customer driven - Heavy focus on repeats of previous promotions to ensure comparable sales spikes - Vendors often drive promotional programs by offering funding Promotional planning process is disorganized - Ad space allocated quarterly by category, but subject to constant shifts - Last minute changes in strategy lead to accumulation of unneeded inventory
Apparel Department Convenience

Legend
Mass merchant Grocery Category killers DIY

Oliver Wyman

www.oliverwyman.com

RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

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Assortment None of our respondents scored especially highly on assortment management, due in part to a consistent gap in understanding item-level switching
Levels of sophistication 10 9 8 7 6 5 4 3 2 1
Basic example Assortment is based on offering ~85% of SKUs available in the market - The overall degree of SKU coverage varies slightly between categories - Decisions on new items based primarily on quality of vendor presentations - No independent research to validate customer priorities Since merchants lack insightful analysis, vendors often win using a veil of sophistication - Item removal is based primarily on sales Some thought is given to substitutability, but no measure for this is used Relatively advanced example Assortment decisions firmly tied to category roles - SKU breadth - Private label share of the range - Range of price points / overall architecture Quality of the range is reviewed regularly during the year and roles are modified as necessary SKU performance is evaluated using up-to-the-week data on space productivity - Sales and margin per square foot are key assortment metrics - Customer decision trees used as a simple proxy for switching estimates

Legend
Mass merchant Grocery Category killers DIY Apparel Department Convenience

Oliver Wyman

www.oliverwyman.com

RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

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Vendors Leading retailers show a mastery of their vendors funding programs, and leverage this information for better negotiating outcomes
Levels of sophistication 10 9 8 7 6 5 4 3 2 1
Basic example Category managers rely heavily on vendors for information as - The main source for competitive pricing and promotions - The source of information regarding market trends and product innovation Negotiations are a significant focus of the category organization - Their preparation is the responsibility of individual merchants - No central or shared support Category managers have insufficient data to build a correct view of items net costs - Funding for promotions or markdowns is stored or evaluated separately from list costs Relatively advanced example Most negotiations with vendors handled by central support organization, with input from category managers - Focus on getting lowest costs across a portfolio of items - Clear understanding of funding programs - Private label sourcing issues are addressed centrally Category managers meet to discuss trends, new items, potential deletions or other assortment changes - Category managers views of trends are anchored in their own customer / sales data - Vendor analysis is used in addition to, not in place of, the retailers own view

Legend
Mass merchant Grocery Category killers DIY Apparel Department Convenience

Oliver Wyman

www.oliverwyman.com

RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

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Private Label Increasingly, retailers are pursuing tiered private label offerings, but only a subset spend significantly to create distinct or vivid PL brand identities
Levels of sophistication 10 9 8 7 6 5 4 3 2 1
Relatively advanced example Private label brands act as a store differentiator - Aim of PL is to foster an image of exclusivity - Strong store brand identity leveraged across all private label lines Internal design capabilities are strong - Customer research groups identify key product trends and feed this to category managers - Internal design teams create and source products to capitalize on trends Private label development is viewed as a core organizational priority - Development efforts command significant resources and executive attention Basic example Private label brands organized into tiers or hierarchies - Value tier (typically an entry price point item) - National brand equivalent tier - Premium tier - Increasing emphasis on specialty lines, such as natural / organic No internal product design facilities - Majority of private label items imitate established national brand products Some marketing support given to private label brands - Often have blocks allocated in the circular - Some categories given promotional funds to support discounting
Apparel Department Convenience

Legend
Mass merchant Grocery Category killers DIY

Oliver Wyman

www.oliverwyman.com

RVE00401\20080602 CM Study 1 - Benchmarking - Final.ppt

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Contact details

About Oliver Wyman Oliver Wymans Retail Practice has more than 20 years track record in helping clients deliver high-impact performance improvements using proprietary, state-of-the-art analytical tools and techniques. We help retailers deal with the full range of their challenges, including pricing and promotions strategies, space and assortment optimization, improved sourcing, store and supply chain cost reduction, inventory management, and capital efficiency. For more information To learn more about this survey or to find out more about Oliver Wymans capabilities in Retail Value Transformation, please contact: Paul Beswick + 1 617 424 3259 paul.beswick@oliverwyman.com Matthew Isotta + 44 20 7 915 9241 matthew.isotta@oliverwyman.com

Oliver Wyman

www.oliverwyman.com

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