European Category Management: Look before You Leap

Sluggish demand and powerful retailers have long been the twin banes of Europe's consumer goods manufacturers. But many manufacturers hope salvation is at hand. They have been captivated by what is variously referred to as efficient consumer and category a theory that manufacturers and retailers should stop squabbling over who grabs the biggest chunk of value added, and start working together to maximize profits in any given product category. So far, category management has received a good press in Europe. Benefits are estimated to include cost savings of more than 2 percent of the industry's sales and substantial increases in volume and market share - more than enough to divide equitably between the two sides of the industry, most manufacturers say. To prove the point, a series of pilot studies is under way. Scratch deeper, however, and the news is not all good. Though enthusiastic in public, many manufacturers are deeply skeptical in private. And some retailers think they can get most of the benefits of category management without any input from manufacturers. So what is going on? We believe a dose of realism is in order. Carefully controlled pilot studies may well indicate substantial profit opportunities. But having interviewed European manufacturers and worked closely with manufacturers and retailers in Europe and the US (where category management was invented more than five years ago), we feel there is need for caution. Although it can bring benefits, it is certainly not a panacea. Indeed, in some circumstances, category management can be risky for manufacturers, and the hype surrounding it may actually divert them from addressing their real challenges. The reality Joint category management, in its broadest sense, is about manufacturers and retailers managing product categories as strategic business units in order to enhance consumer value. The focus is on the five key demand-side levers: product assortment, promotions, pricing, placement and space allocation, and new product development. Much of this is familiar to European manufacturers and retailers, although the degree of progress varies by country [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. Manufacturers already tend to organize themselves around categories (breakfast cereals or laundry products, for example) rather than individual products or brands as in the past, because they believe a broader approach gives them a better chance of meeting consumer needs. Increasingly, they are also creating cross-functional account teams, bringing together marketing, finance, logistics, and sales personnel to give a full business perspective to each account. More advanced grocery retailers have also begun to organize themselves around categories, with the aim of increasing overall profit rather than just cash gross margin. In addition, the dialogue between manufacturers and retailers has for some time embraced many category-management principles. In the UK, for example, suppliers and their retail customers have worked together for at least ten years on projects to optimize pricing, space, and promotions in stores. But the proponents of joint category management argue that it should extend its reach still further. Full-blown category management will involve a close, trusting partnership between the retailer and a chosen manufacturer in each category. By pooling their complementary skills, insights, plans, and information, they will uncover new opportunities to meet consumer needs and so expand the industry's total profit. Manufacturers will no longer profit at retailers' expense, or vice versa. Everyone will win - manufacturers, retailers, and consumers alike. Yet the theory behind full-blown category management remains largely untested, as few manufacturers have struck this kind of relationship with their retailers. Certainly in the US, where the principles of efficient consumer response (ECR) have been followed for many years, full-blown partnerships remain rare. …