reveries.com - paul kelly - category management

OCTOBER 1996

His favorite philosopher is John Dewey, inventor of the Dewey Decimal System. Bookish? Yes. Paul Kelly inhales written words so deeply it's impossible to separate the man from his ideas.

It's sunny in Westport, Connecticut. Paul Kelly shows up at the Longshore C

lub, apologizes for being a few minutes late, his tightly patterned necktie slightly loosened. What counts is that Paul J. Kelly is one of the nation's most frequently quoted authorities on consumer marketing issues.

Widely published in the consumer, business and trade media, Kelly's special expertise centers on the rapidly changing relationship between consumers, marketers and retailers. His Westport, Connecticut firm, Silvermine Consulting Group, advises major consumer products companies such as Johnson & Johnson, Pillsbury, Pepsi-Cola and Colgate-Palmolive on marketing and sales strategies.

Because of the retail trade's growing control over which products get on the shelves -- and how they are marketed to consumers -- Silvermine consults to brand marketers on how best to work with retailers as strategic marketing partners, as opposed to mere distribution channels. Consequently, a considerable portion of Silvermine's consulting practice involves major retail chains such as Wal-Mart, Kroger and Walgreen, among others.

Prior to forming Silvermine in 1990 , Kelly was with American Express, Hertz, Porter Henry Company and NeoDevelopment. He's the author of the book Situational Selling, published in 1988 by Amacom. He holds a BA degree from Fordham University.

Kelly is not reluctant to slice his way through industry dogma in his own soft-spoken way. Today's target of choice: Category Management, the process through which retailers and manufacturers determine what shoppers should see on the shelves, how they pay for products and how promotions should be structured.

You have to wonder about consultants who are jumping on the bandwagon of a management process that's -- if not patently wrong -- at least not optimally right. Category management is not a bad idea. To put a management process against a business that was so deal-oriented and really had no controls is not a bad thing. It's just that this process is not necessarily the right process.

The focus of category management has been almost entirely on the cost side. We’ve got a more efficient assortment, which is a good thing. Category management may include a little more rationalized pricing scheme, so maybe it produces a few extra margin points, which is also a good thing.

But there are very few examples of category management producing growth -- revenue, traffic. Retailing is still a business that requires a shopper coming into the store first. The best GMROI in the market is not a big traffic builder.

Category management is a very 90s kind of a program. This whole decade’s mindset is on zero growth, no population, no inflation, no price increases. We all have to live with no growth so let’s take the costs out. It's the same dynamic that makes Alfred Dunlop a hero. It's management in a box.

I think we ought to define the concept of category management. Managing the category as a business or as a strategic business unit is not the same thing as the Food Marketing Institute's definition of “Best Practices” in category management.

The FMI guidelines basically are not a management process; they are a strategic planning process. What they do is lay out a strategic plan for the category. The FMI says nothing about how to manage the category day-to-day, how to make adjustments to the plan or how to throw the plan out and start over again if that's what competitive conditions warrant. It's a totally static approach.

The FMI definition is also archaic. It's a model that was heavily used in the 1960s by conglomerates like ITT and GE. It's this whole idea of portfolio management, of managing companies -- and in this case categories -- as just a portfolio of assets as opposed to a vibrant business that poses daily challenges.

The FMI model has more or less been rejected by every major industrial corporation in the world. One of the first things Jack Welch did when he was chairman of GE was close down the strategic planning department, where people did quadrant analysis and matrices and so forth. It's a little shocking to me how little historical knowledge the packaged goods industry has in terms of how this approach has failed long-term.

Another issue youxd have to question is whether a particular category is really a strategic business unit. Very few categories exceed 2% of total store sales. To micromanage to that level, when you've got much broader competitive threats, doesn't strike me as the optimum way to manage the overall business, the overall store. Having the best pickle section won't necessarily stop people from going to Boston Market or Wal-Mart or the warehouse club.

You can aggregate it all up, get great category analysis on every one of the 108-odd categories, but you canxt assume that the consumer will notice the difference. It's not the answer to why consumers are leaving the Food Channel.
If you look at the way people shop, and create your strategic business unit around those behaviors, you will be far more focused on the consumer.

I'm single, so I go to Boston Market. I take out Chinese food. Ixm a certain kind of shopper. If I go to the supermarket, I want to be able to get in and out really quickly with hot meals, ready to go, ready to serve. I don't want to have to wait in line behind a person who's feeding a family of ten.

Now, the person who's feeding that family of ten has a whole different way of shopping. S/he is oriented to in-home as opposed to out-of-home dining.

You could designate six to ten strategic business units that are responsive to lifestyle and consumer preferences. Retailers could manage to that broader level, and have their suppliers know their goals in those areas and support them with the products, pricing and assortment that's going to make that retailer succeed with that shopper.

People don't go to Boston Market because they like Boston Market so much. They go there because it's consistent with the way they want to live and the supermarket isn't.

The supermarket is essentially an outmoded design that doesn't support a lot of people's lifestyles anymore. Those that it supports it supports very well, and those shoppers are tremendously loyal. They spend a lot of money in the store, but it's just not enough. Not that many people live that kind of lifestyle anymore.

McDonalds has been a competitive threat to supermarkets for 15-20 years. There's been this continuous erosion among food stores. They lost a lot of the household goods to warehouse clubs. They've lost a lot of the HBC business to mass merchandisers. Now they're losing some food business to meal solution providers like Boston Market.

Retailers have got to wake up to this sooner or later. They wouldn't even have to change format initially. They'd first have to designate merchandising and advertising managers around a limited number of strategic business units and start directing their ads and displays and features toward targeted audiences.

They could see if they got better response by putting a health food message, for example, out to a health food consumer in a very targeted way. Even in their existing vehicles, they could divide responsibilities along strategic business units. They could put somebody in charge who just thinks about that health food customer all day long. Consumers can still shop the store the way they already do.

Retailers can start strategic business units that way -- as an organizational structure rather than a massive reset of the stores. Then the retailers can align their suppliers the same way. They can tell manufacturers which products align with which strategic business units, outline their goals for the unit, and what they expect in the way of promotional and other support.

With more broadly defined strategic business units, you may go through much of the same analysis you go through now on the category level; it's just aggregated differently. It rolls up to something that can really have an effect on the business.