PITTSBURGH - Vending operators, perhaps more than other retailers, have been engaged in "category management" for well over half a century. The first multiple-column candy machine created the opportunity to increase sales by appealing to a wider variety of tastes. To take advantage of that opportunity, vendors had to choose among chocolate and a range of non-chocolate candies, and soon had to deal with vertically packaged cookies, bagged nuts, crackers and snack cakes.
Even when machines could sell only at a single price, there were far more products available than columns to hold them. Customer tastes differed from one location to the next. A fast-moving item might return a lower margin than a slower-moving one, so it was necessary to pay attention not only to velocity, but to the total dollars falling to the bottom line.
Vendors in the 1960s found themselves in a situation not unlike that of innovative mass-market retailers two decades later. They could not offer everything that anyone might possibly want. They needed to assemble the most efficient assortment of a limited number of items to best meet patron demand and maximize machine profitability.
Vendors soon recognized that a rather small number of very popular items constituted a core assortment that always would sell well. Surrounding that core with a variety of products that could differ from location to location, and from week to week, kept customer interest up and satisfied the human desire for novelty and a change of pace.
An operating company warehouse that offered route drivers 15 products, more than half of which were core items available during every inventory cycle, was an early example of "efficient customer response," and it worked well.
However, it soon had to deal with fragmentation of consumer demand, a proliferation of products developed to address the emerging market segments, vending equipment designed to merchandise a much wider range of items and to accommodate multiple package formats and price points, and the transition away from direct purchase of a limited range of products in large quantities. A tier of vend-specific brokers and product distributors emerged, and vendors found themselves inventorying 150 line items rather than 15. Other retailers underwent a similar evolution.
"Category management" is one response to the challenge that all of this has presented. Management Science Associates, which has spent more than 30 years developing information synthesis techniques to analyze consumer purchase data, points out that "category management" has become something of a buzzword, a seldom-defined promise of increased profitability. What, in fact, is it?
THE BIG PICTURE
"Category management is simply managing a group of products that the consumer perceives to be interrelated," MSA's Mary Jo Kirchner explained. Dealing with that product group as a unit allows the retailer better to satisfy consumer needs, thus improving profits. It also benefits the producers and distributors of the goods, delivering efficiencies that control costs for everyone.
"Have you been managing your categories? Of course you have," she assured operators. Switching to a larger sized item, replacing a shelf of wide spirals with narrow ones, or adding peanuts to a machine menu all are examples. "Category management didn't appear overnight," she pointed out. "It has simply evolved with technology."
The consumer is the focus of category management, and thus the technique centers on selection and pricing. Kirchner recalled the advent, or discovery, of "efficient customer response" and the efficiencies it offers in Replenishment, Assortment and Promotion. Category management, she noted, "wraps itself around each of the efficiencies of ECR," and also helps create the demand that drives the supply logistics that are streamlined by ECR techniques.
"Some consumer packaged goods experts are calling the new learnings from category management 'next generation', while others are using the available tools to 'get back to basics'," she added. "Either way, correctly implementing category management into your business can help you gain and sustain a competitive advantage."
The steps required to do this are simple, but each requires some thought and study. The first is defining the categories and the space.
VENDING IS DIFFERENT
"Research indicates that the key is category definition," the MSA expert reported. "Categorizing products for vending is extremely different from categorizing for supermarkets or mass merchandisers." In those high-volume channels, 99% of sales are destined for in-home consumption. In vending, sales primarily are for immediate enjoyment.
"Winn-Dixie and Wal-mart have salty snacks in a different aisle from candy, and from pastry," Kirchner instanced. "In vending, the choice is right here, right now, in front of the consumer. Is the leading salty snack manufacturer competing with the number one confectionery company?"
The answer is yes. "Even though a customer may intend to purchase a salty snack, he or she may opt to spend the money on a cinnamon roll, or licorice," she pointed out. "Every brand is competing with every other 'snack' in the vending machine. At the segment level, sweet products also are competing against one another, as are salty snacks..."
In vending, more than in other retail channels, space is critical. "Machine capacity mush be considered," Kirchner pointed out. Within a given machine, the only capacity adjustment is afforded by changing the spiral size. "And spiral size leads to the much-debated question, how many of each , candy, salty snacks, and baked goods?"
Analyzing "VendScape" data based on machine observations over 13 weeks, nearly 78% of machines carried more confection items than snack items, she reported. On average, 56% of the selections were confections and 44% were snacks. "Interestingly enough, when looking at sales volumes, snacks outsell confections two to one," Kirchner added.
"VendScape" statistics also indicate that the separate section for gum and mints incorporated into many glassfront machines are not as profitable as the other spaces. This may provide an opportunity for suppliers to repackage other products in a suitable format for sale through these sections.
The "VendScape" analysis, based on a 45-select snack machine with five dedicated gum-and-mint slots, shows the average product mix as (category/number of spirals): Chocolate/10; Non-chocolate/4; Gum/3; Mints/2; Salty Snacks/12; Crackers/4; Baked Snacks/8; Nuts/1; and Other/1.
This chart details the average number of spirals devoted to each category. It certainly does not imply that the mix is an optimum solution for every machine, even if it may be optimal for some, Kirchner emphasized. Geographic location and the demographics of the account should guide the product mix, which in turn determines the percentage of wide and narrow spirals.
"Category management" is accomplished by analyzing the machine's sales, making sure that every category is represented in proportion to its popularity as gauged by sales volume, then identifying the slowest-turning items and deciding whether replacing them would increase turns.
Kirchner urged suppliers, when introducing category management to their operator customers, to bear in mind that machines must be stocked with an appropriate mix of products. "Every supplier is approaching the same vending operator with a different planogram , in his or her favor, of course , and the contradictory information is incomprehensible," she complained.
The way for operators to make sense of all of this is to know their customers, the MSA expert emphasized. "Know what's not turning, and whether something often sells out," she advised. "When working with a manufacturer on a category management tool, insist on a few spirals to be filled as you see fit. Change a machine or two, then determine the payoff before implementing a new load plan across similar machines and locations."
Kirchner cited a 10-point summary of the steps required for getting the best results from managing categories, compiled by Dechert-Hampe & Co. after a panel discussion held at the Professional Marketers Institute convention in May. Dechert-Hampe has been developing "marketplace management" techniques for more than half a century.
These key recommendations include:
* Get into category management , really. Get commitment from the top.
* Give it time.
* Accept and deal with the changes that category management requires.
* Let the consumer drive the process.
* Invest in technology and training.
* Keep learning.
* Know how to keep score.
* Stay focused on the long term.
* Be willing to share and to establish better relationships.
When evaluating the effects of category management, Kirchner said, operators need sufficient "savvy" to assign weight to the several variables that affect machine, and location, profitability. The money in the coinbox is not the whole story; "net profit is what needs to be evaluated, not net sales," she pointed out. This not only requires taking margin into account, but also the effect of rebate programs and promotional allowances on the net profit contribution of each item. Objectives should include always attaining the goals of any rebate program in which one participates, and figuring in the turn rate when computing the net profit returned by each brand offered in the machine.
"Finally, complement category management with 'customer management,'" the MSA executive recommended. "The information will lead you to mounting profits."
Benefits realized by operating companies that have implemented effective category management programs include not only greater machine (and thus route) productivity, but also more efficient inventory control. A mechanism for identifying slow-moving products that get reordered for reasons related more to tradition and sentiment than to present customer demand helps to rationalize ordering, usually reduces the number of SKUs (stock-keeping units) in inventory, minimizes losses associated with staleage, contributes to more productive use of warehouse space, and allows operators to weigh the sometimes conflicting benefits of volume purchasing to reduce unit cost, and optimized ordering to maximize inventory turnover.
Information on the "VendScape" data service can be had by calling Management Science Associates at (800) MSA-INFO [672-4636] "VendScape" was developed by MSA in conjunction with Validata Computer & Research (Montgomery, AL).
MSA, founded in 1963, has a history of firsts in using information to optimize sales. In the late '70s, it pioneered the compilation of syndicated retail scanner data, almost a decade before the "scanner revolution" was widely recognized. The company employs more than 650 people in its offices around the world.