Category management is a retailing and purchasing concept in which the range of products purchased by a business organization or sold by a retailer is broken down into discrete groups of similar or related products, known as product categories (examples of grocery categories might be tinned fish, washing detergent, or toothpastes). It is a systematic approach to managing a product category as a strategic business unit. The phrase "category management" is attributed to Brian F. Harris.
Each category is run as a business unit in its own right, with its own turnover and profitability targets and strategies. The introduction of category management tends to change the relationship between retailer and supplier, moving from a traditionally adversarial relationship toward one of collaboration, with exchange of information and joint business planning. Supplier proposals, such as new product introductions, a revised planogram, or promotional activity, are assessed by their expected effect on the category as a whole rather than on an individual product.
The concept originated in grocery retailing and has since expanded to other retail sectors such as DIY, cash and carry, pharmacy, and book retailing.
Category management lacks a single agreed definition, which can lead to some ambiguity among practitioners about its exact scope. Two commonly cited definitions are:
The Nielsen definition, published in 1992, included customizing product offerings store by store, which is logistically difficult and is no longer regarded as a necessary part of category management; that idea is now referred to as micromarketing. Most grocery retailers nonetheless segment stores at least by size and select assortments accordingly. Walmart's "Store of the Community" program in North America is one example in which offerings are tailored to the individual store.
Several reasons are given for adopting category management. One is the retailer's wish for suppliers to add value to the retailer's overall business rather than only to the supplier's own sales; for example, where a promotion by one brand simply shifts sales from a competing brand in the same category, the retailer sees no net gain.
A second is that only a finite amount of margin can be gained through price negotiation, so greater returns may come from growing total category sales.
A third is that collaboration lets the retailer draw on the supplier's market expertise and delegate part of the work of developing the category.[citation needed]
Under Nielsen's widely used definition, a category consists of products that meet a similar consumer need or that are inter-related or substitutable, and that can be managed together logistically in store (for example, room-temperature and chilled products may be difficult to combine in one category). In practice, demographic or marketing considerations may also influence how categories are drawn. Retailers often analyze how shoppers decide within a category, through in-store observation and surveys, and may represent the result as a customer decision tree.[citation needed]
A widely used model for category management in retail is the 8-step process developed by the Partnering Group. The steps are:
The full 8-step process has been described as thorough but time-consuming, and many suppliers use shorter processes adapted to their own products. Nielsen has promoted a similar five-step version: reviewing the category, targeting consumers, planning merchandising, implementing the strategy, and evaluating results.[citation needed]
A supplier in a category is often nominated by the retailer as a category captain. The category captain will be expected to have the closest and most regular contact with the retailer and will also be expected to invest time, effort, and often financial assets into the strategic development of the category within the retailer. In return, the supplier will gain a more influential voice with the retailer. The category captain is often the supplier with the largest turnover in the category. Traditionally the job of category captain is given to a brand supplier, but in recent times the role has also gone to private label suppliers.
In order to do the job effectively, the supplier may be granted access to a greater wealth of data-sharing, e.g. more access to an internal sales database such as Walmart's Retail Link.
In the UK, the Groceries Code Adjudicator found in her 2015-16 investigation into Tesco plc that some suppliers paid "large sums of money in exchange for category captaincy or participation in a range review". She found some evidence of benefits which suppliers derive from these arrangements but also recorded a concern, to be investigated further, as to whether the purpose of the Groceries Code was being circumvented by these payments.
Competition authorities have viewed closer collaboration between suppliers and retailers as a potential source of antitrust issues, such as price fixing or the softening of interbrand competition. In the United Kingdom, the Competition Commission examined category management within its inquiries into the groceries market, and British competition authorities took action against price-fixing in the supply of milk.