Through a shopper’s eyes Adopting a customer-centric approach to category management A report from the Economist Intelligence Unit Sponsored by SAP Through a shopper’s eyes Preface Through a shopper’s eyes: Adopting a customer-centric approach to category management is an Economist Intelligence Unit report sponsored by SAP The findings and views expressed in the report not necessarily reflect the views of the sponsor The Economist Intelligence Unit’s editorial team conducted the interviews and wrote the report Rob O’Regan was the author of the report and Gilda Stahl was the editor Mike Kenny was responsible for layout and design Our thanks are due to all of the interviewees for their time and insight © Economist Intelligence Unit Limited 2009 Through a shopper’s eyes Introduction C “Our job is to introduce consumers to things they’re not looking for while they’re in the store, without it being an intrusion.” Mark Heckman, vice-president of marketing and advertising, Marsh Supermarkets onsumer attitudes about the goods and services they purchase were shifting long before recession gripped the global economy G Robert James, vice-president of strategy and insights for The Great Atlantic & Pacific Tea Company Inc (A&P), the US-based supermarket chain, coined a term for this new group of consumers: “the iPodian Society” “We saw a dynamic shift in consumer expectations in around 2000 to, ‘everything a retailer does has to be configurable so that it suits my lifestyle,’” he says The challenge for retailers attempting to win over the iPodians, he admits, is that “many of us are still in an 8-track world.” Retailers have not transformed their strategies to address effectively this new consumer mindset It’s not for lack of effort, however In order to drive sales, many retailers have adopted a strategy called category management, a concept introduced in the early 1990s that involves the grouping of products into strategic business units, or “categories”—for example, deodorant or canned vegetables—and customising their placement and presentation on a regional or local basis to meet shopper needs Category management requires a higher level of collaboration between a retailer and its manufacturing and distribution partners, who must share insights and information as they work towards a common goal: increased profits for the entire category, not just a particular brand In the years since its inception, category management has been standardised around an eightstep approach, which ranges from defining the category to developing the strategy to devising and implementing specific tactics, then reviewing (and responding to) the results Some retailers, however, view this framework as too unwieldy in an increasingly dynamic, consumer-driven environment Now, more retailers are looking to take a more consumer-centric, solutions-based approach to category management in order to improve the category mix and influence buying decisions at the point of sale “Our job is to introduce consumers to things they’re not looking for while they’re in the store, without it being an intrusion,” says Mark Heckman, vice-president of marketing and advertising for Marsh Supermarkets, a US grocer with 104 stores in Indiana and Ohio Marsh has seen sales increases of up to 15% in some categories since revamping the layouts of about three-quarters of its stores to expose shoppers to more grocery products © Economist Intelligence Unit Limited 2009 Through a shopper’s eyes Declining sales, discerning shoppers D espite advances in such sales strategies, many retailers and product manufacturers find it difficult to deliver a consistently strong return from in-store sales According to the Grocery Manufacturers Association (GMA), a trade association that represents the food, beverage and consumer products industries, more than 70% of consumer goods categories had lower sales increases from promotions in 2008 Launching new products is not necessarily the solution; Nielsen, a media research company, estimates that the success rate for new products is only 20-30% Compounding the challenge is that recession-weary shoppers are more circumspect than ever in their purchasing decisions Global retail sales are expected to decline 3.7% in 2009, according to the Economist Intelligence Unit The Economist Intelligence Unit also expects faltering consumer confidence to fuel a rise in discount products and private supermarket labels at the expense of branded items, further eroding profit margins “Consumers are exercising basic economic smarts,” says Mr James “They’re looking for smarter ways to stretch their budgets, so they’re buying more items off the ad than just straight off the shelf.” Retailers, for their part, are attempting to gather as much information as they can about consumer trends They understand that these trends will help them develop category-management strategies that focus less on products and more on solutions that reflect consumer behaviour What they’ve found, however, is that while the data sources are plentiful, it’s often difficult to separate useful insights from the clutter Marsh Supermarkets collects a vast amount of shopper and consumer data from transaction logs and its loyalty card programme at the point of sale It also conducts primary and syndicated research “When I first got here, our chairman said we were information rich and insight poor,” says Mr Heckman, who joined Marsh in 2006 “My job was to take that and turn it into something actionable.” The problem for Marsh and many other retailers is that the spirit is willing, but the infrastructure is weak Much of the data companies collect are isolated within departments rather than shared across the organisation “From a data architecture standpoint, we’re very limited,” says Mr Heckman “We’re working to change that.” “Consumers are exercising basic economic smarts They’re looking for smarter ways to stretch their budgets, so they’re buying more items off the ad than just straight off the shelf.” G Robert James, vice-president of strategy and insights A&P A consumer-based approach to category management R etailers understand the potential benefits of improving the pricing, packaging and presentation of products to make them more appealing to consumers at the point of sale More than 70% of purchasing decisions are made in-store, according to Shopping Behaviour Xplained Ltd, a UK research agency Furthermore, in a 2008 survey from the GMA and Deloitte, 86% of retailers rated “shopper marketing” programmes among the top four activities that deliver meaningful return on investment © Economist Intelligence Unit Limited 2009 Through a shopper’s eyes “As with any company, the challenge is making sure the right people see the information at the right time.” Chris Webster, head of space planning, John Lewis (ROI); half of the retailers ranked in-store activities as the primary ROI generators Capturing ROI begins with a solid base of consumer insights Data sources are abundant, both from the point of sale and the broader market, and retailers are using the full arsenal of information available to them Traditional methods such as primary and syndicated research and point-of-sale data are augmented by shopper loyalty programmes Some retailers are also tapping into emerging technologies like radio frequency identification (RFID) tags and virtual shopping, in which consumers “shop” in a simulated store online and record displays that capture their attention The combination of traditional and emerging research approaches is giving companies a better perspective of shopper behaviour The trick is what they with that insight “Our mantra is, ‘what, so what, now what?’” says A&P’s Mr James “What does it mean, and what we about it? We synthesise everything, assimilate the insight, and apply it to relevant actions.” For example, in anticipation of the economic downturn, A&P spent years modelling consumer behaviour to determine which items would be most affected by a shift in the economy It also rolled in other macro trends such as an increased interest in health and wellness “We anticipated which items consumers would flock to,” says Mr James “We sat with the manufacturers, went through the methodologies, compared our data with their numbers, and used that information to build programmes around for the next couple of years.” One beneficiary of this advanced scouting: canned tuna, which received a boost from budget- and health-conscious consumers Dollar volume in the canned fish category increased by nearly 15% and unit volume rose by 14% in early 2009, compared with the same period a year earlier “The growth projections”, says Mr James, “were amazingly on target” Innovating through collaboration and co-creation W hen UK retailer John Lewis was developing the concept for a new food hall inside its flagship Oxford Street department store in London, the launch plan became the shared responsibility of several groups: retail design, store operations, buying teams, finance, marketing and personnel As this was the firm’s first foray into food operations, it also collaborated with colleagues from its sister supermarket chain, Waitrose “Working across both businesses was unusual from how we had operated in the past,” says Kim Morris, head of retail design for John Lewis The combination of Waitrose’s food expertise and quality service and John Lewis’s reputation for customer care was a successful match: since opening in October 2007, the food hall has surpassed its sales targets and John Lewis is currently building a second food hall at its Bluewater location in Kent “The flow and access to information is widely shared across the company,” says Chris Webster, John Lewis’s head of space planning “As with any company, the challenge is making sure the right people see the information at the right time.” This type of collaboration is critical for transforming consumer insights into successful in-store tactics © Economist Intelligence Unit Limited 2009 Through a shopper’s eyes Some of these information-sharing methods can be automated; others may be as simple as initiating a telephone conversation “When we don’t have an answer on what the data shows, that’s when we talk to the managers in the stores,” says Paul Millar, head of operations for Pantaloons Fashion Retail, a division of Pantaloon Retail, which operates more than 1,000 retail stores across India through multiple chains “We have a lot of raw data, but we want to get more qualitative data from the stores,” says Mr Millar This collaboration increasingly includes suppliers and brand manufacturers Historically, these groups have been reluctant to share data, but the ever-finicky consumer has led them to work more closely with retailers Consider how French retail giant Carrefour aligned with Colgate-Palmolive, the US consumer goods manufacturer, to re-group its oral-care products around Colgate’s four-step model for oral care: toothbrush, toothpaste, dental floss and mouthwash After Carrefour changed its in-store groupings to mimic that model, sales in the category increased by 25% over the previous year Smaller chains like Marsh are also developing relationships with suppliers to glean better consumer insights “We share some of our frequent shopper data with them,” says Mr Heckman “It’s much more open than it used to be A retailer of our size can use all the help we can get from the suppliers to compete with the larger chains.” Retailers and suppliers are also working more closely on supply-chain issues to ensure that the most popular merchandise stays in stock In emerging markets like India, that’s a major challenge “We’re still a long way from real-time replenishment,” says Pantaloon’s Mr Millar “We’re improving; last year when we were selling out of products, we would be out for three or four weeks This year it’s down to a week We’re getting better turnarounds because we’re getting information to suppliers and getting reorders in quicker.” Retailers and suppliers are working more closely on supplychain issues to ensure that the most popular merchandise stays in stock Differentiating through localisation C onsumer insights are increasingly having an impact at the local store level National and regional retailers are moving away from standardised store formats and adapting their layouts, merchandise and presentation towards local lifestyle segments In general, stores are being given more autonomy to adjust their strategies to meet local consumer needs For example, Marsh’s efforts to revamp its store formats over the past two years is a significant move away from the chain’s traditional approach, where all stores sported similar layouts and displayed the same basic product mix Using psychographic, demographic and transactional data, Marsh teams adjusted foot traffic patterns to give shoppers more options on how to navigate the stores They showcased more products on end caps—popular display areas at the end of an aisle—and mixed in more privatelabel brands The result: 10-15% growth in popular categories such as paper products and carbonated beverages, and 5-7% sales growth in lower-penetration categories like bakery items and canned vegetables John Lewis is also focusing more on customer solutions with a new shop format it plans to launch later this year Targeting the home sector, the stores will be smaller than traditional John Lewis department © Economist Intelligence Unit Limited 2009 Through a shopper’s eyes “Consumer demand is making us decide which lifestyles we want to respond to and then put those [formats] in the right neighbourhoods.” G Robert James, vice-president of strategy and insights, A&P stores, and the category mix will reflect solutions over products For example, customers who want to make their own curtains will be able to browse a do-it-yourself area that features fabric, scissors and threads For shoppers who prefer to purchase higher-end, handmade curtains, customer-service personnel will be on hand to assist Other retailers are adopting similar strategies Italian grocer Esselunga experienced a growth rate double that of its competitors after changing its superstore format to reflect Italians’ preference for neighbourhood grocers and healthy food items Walgreens, the US pharmacy chain, is redesigning its stores to be more “solutions-focused” around essential items and discretionary needs “Consumer demand is making us decide which lifestyles we want to respond to and then put those [formats] in the right neighbourhoods,” says A&P’s Mr James At the same time, retailers are seeking new ways to measure success John Lewis tracks several metrics, including profit per square foot, gross margins and contribution profit across categories A key next step: a standard reporting mechanism to make sure the entire company is aligned around the customer-focused strategy “We need to make sure everyone understands why decisions are being made and how they support the customer journey,” says Mr Webster © Economist Intelligence Unit Limited 2009 Through a shopper’s eyes Conclusion R etailers looking to improve the effectiveness of their category management initiatives will need to continue to focus on enhancing a customer’s in-store experience As retailers such as A&P, John Lewis, Marsh, Pantaloon and others have demonstrated, positive results can be driven with an emphasis on three key strategic activities: l Collaboration: Co-ordinating activities, data and insights among sales, marketing, merchandising, logistics and operations, and collaborating with distributor partners to understand and meet the needs of target customers or segments l Business intelligence: Retailers need an infrastructure to organise, share and maintain the information they are collecting from consumers, partners and service providers; otherwise, key insights could be lost or overlooked l Localisation: Adapting packaging, pricing, promotions to address local and regional consumer demographics and psychographics; revamping store formats and layouts around lifestyle trends, not products; and expanding private-label offerings to offer more choice Exploring innovative ways to divine consumer insights from across and outside the organisation will help retailers improve category performance and attract and retain loyal shoppers Retailers that can balance short-term gains with long-term objectives—while adapting quickly as consumer attitudes shift—can gain some separation between themselves and the rest of the pack © Economist Intelligence Unit Limited 2009 Cover image: iStockphoto.com Whilst every effort has been made to verify the accuracy of this information, neither the Economist Intelligence Unit Ltd nor the sponsors of this report can accept any responsibility for liability for reliance by any person on this report or any other information, opinions or conclusions set out herein LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com ... sale and the broader market, and retailers are using the full arsenal of information available to them Traditional methods such as primary and syndicated research and point-of-sale data are augmented.. .Through a shopper’s eyes Preface Through a shopper’s eyes: Adopting a customer- centric approach to category management is an Economist Intelligence Unit report sponsored by SAP The findings and... traditional approach, where all stores sported similar layouts and displayed the same basic product mix Using psychographic, demographic and transactional data, Marsh teams adjusted foot traffic