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Category Management vs Trading, a comparison

Background

This brief blog explains some major differences in the category management mindset vs trading in the supermarket industry. For ease of use, Coles decision to sell 2 litres of P/L (private label) milk for $2, in 2011, will be used as an example. The same results are analysed with a different mindset to highlight the difference between a trading and category management mindset.   

Internal vs External Focus

The major difference between trading and a category management mindset is how practitioners view ‘success’. Trading has in internal focus, e.g. person / company achieving their KPIs. Category management has an external focus, e.g. satisfied shoppers, business partners. This fundamental difference in thinking leads to different business decisions of traders and category managers.

Example: Coles decision to sell 2 litres of P/L

For traders this was a success. As reported in Wesfarmers 2011 annual report Coles Group (includes petrol and liquor) sales grew 6.9% and profit grew 21.2% in FY 2011. During the year Coles lowered the prices of over 6,000 grocery items.

Category managers focus on the shopper first. They would use shopper measures to determine the success of the lower pricing. For example, Aldi won the Roy Morgan Customer Satisfaction Award for Best Supermarket in 2012. So, the aggressive pricing was not successful.

Financial vs Shopper Focus

Traders will often evaluate category performance by financials. They will focus on numbers such as $ sales, $ profit, market share etc. This is partially due to their internal focus, i.e. their KPIs are these numbers. Some people will describe this mindset as ‘transactional’.

Category managers have a different focus. They are customer centric and focus on building long-term relationships with shoppers. They focus more on shopper behaviours and insights to evaluate the overall performance of a category. Some people will describe this mindset as ‘strategic’.  

Example: Coles decision to sell 2 litres of P/L

For traders this was a success. Coles increased their sales of P/L milk due to a lower everyday price.

Category managers would analyse shopper behaviours. They would argue the lower price of P/L milk devalued the category. Due to the lower pricing shoppers switched from premium branded milk to the cheaper P/L offer. This will decrease overall $ sales for the category. Analysis by SMH suggests branded milk sales from Lion and Parmalat declined by $175M.

Adversial vs Collaborative

Due to an internal focus, traders will often have adversarial relationships with others. For example, the manufacturer will try to increase their prices to maximise their sales / profit. The supermarket will have an opposing goal of trying to decrease the manufacturers’ sell price to maximise their sales / profit. So, the relationship becomes adversarial and the focus is on achieving internal goals.

Due to an external focus, category managers will try to create satisfaction for all members of a value chain. They believe mutually beneficial relationships will create the greatest financial results. For example, manufacturers and supermarkets can share their different data / insights to get a greater understanding of shoppers. This information can then be used to create a category plan to maximise both the manufacturers and supermarkets sales and profit.  

Example: Coles decision to sell 2 litres of P/L

Traders would have been thinking a lower retail price would increase volume sales of P/L milk. This volume increase would lead to a lower cost price. So, the retailer $ margin would have been maintained, i.e. the supplier would have funded the price decrease.

As reported in ABC this did not eventuate. Coles agreed to pay WA farmers, working with processor Brownes Dairy, an additional 5c per litre. Also, the ABC reported that Ian McLeod, then Coles managing director, informed a Senate inquiry that Coles ‘fully funded the retail price cut from our own profit margin.So, in this example a trading approach did not maximise the short term financial results of P/L milk.

Category managers would focus on how the change in retail price could affect the business relationship. They would focus on the strained relationship between Coles and their suppliers. For example, as reported by SMH (Feb 11) dairy farmers were at war with Coles after they changed the retail price of P/L milk. So, category managers would suggest the change in retail pricing was detrimental to the business relationship.

Short term vs long term

Traders have a short-term focus. For example, if supply is limited manufacturers will increase their sell price to maximise the short-term profit. In some very rare cases manufacturers may even cease supply if the supermarket will not pay the higher price. Supermarkets will also try to negotiate cheaper cost prices, request additional funding etc, to increase their profit also.

Category managers have a long-term focus. They consider the long-term ramifications of their decisions. It is normal for category managers to consider what will happen in the next 3 to 5 years. Senior executives will often focus on longer timelines such as 5 to 10 years.

Example: Coles decision to sell 2 litres of P/L

Traders would have thought that lowering the retail price of P/L milk would have maximised $ sales and profit for the current and possibly the next financial year for Coles. So, this was a good decision.

Category managers would have considered the long-term ramifications to the business partners. For example, why would farmers and processors invest in the fresh milk category if pricing was not sustainable in the long-term? Today, they would note that in 2013 Murray Goulburn signed a 10-year deal to supply Coles P/L milk with an expected retail price of $1 a litre for P/L milk. In 2017 Murray Goulburn was bought by Saputo as they struggled to remain financially viable. So, for category managers this was not a good decision.

Power and Trust

Traders will often negotiate from a position of power. They believe that it is normal business practice to use power to generate the best results for their business. In the supermarket industry power is normally due to the sales / share of a business. Traders would prefer to have numerous manufacturers, that they could trade with, to ensure they received the best offer. The logic is that this approach would create the best cost price and thus profit.

Numerous studies / research papers had highlighted that a trading mindset does not generate the best long-term results. For example, Kumar (The Power of Trust in Manufacturer – Retailer Relationships, Nirmalya Kumar, Harvard Business Review, November – December 1996 Issue) noted that ‘Exploiting power may work in the short run, but it is self-defeating in the long run.’ Kumar also noted that co-operative relationships, based on trust, would often generate greater financial results. For example, Kumar stated ‘By working together as partners, retailers and manufacturers can provide the greatest value to customers at the lowest possible cost.’

Category managers focus on building trust between members of a value chain to create long-term mutually beneficial relationships. They believe this approach will create the greatest long-term financial results for manufacturers and supermarkets. Also, they will highlight that shoppers’ have an increasing amount of power today. So, it is logical for manufacturers and supermarkets to work together to meet the demands of shoppers.

Example: Coles decision to sell 2 litres of P/L

Traders would assume that Coles had the market share to lower the retail price and then achieve a lower cost price from the manufacturer. This lower pricing will help maximise Coles $ sales and profit.

Firstly, category managers would question whether manufacturers would support Coles in this decision. If the relationship is not mutually beneficial then why would manufacturers support the retailer? Secondly, category managers would question how this decision could increase sales and profitability in the category. They would suggest a lower P/L milk price would devalue the category as shoppers switched to the cheaper P/L offer. This would lead to a situation where the manufacturers would not trust that the supermarket will deliver a mutually beneficial relationship.

Summation

This brief blog has explained some major differences in a category management mindset vs trading in the supermarket industry. The key message is that practitioners will make different business decisions depending on their mindset. This is why category management is a way of thinking, not a process.

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.