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Issue Date: Vol. 42, No. 10 / August 25, 2002 - September 24, 2002 , Posted On: 8/25/2002


Category Management Enhances Route Profitability


Tim Sanford
Editor@vendingtimes.net

PITTSBURGH - Vending operators, like all retailers, always have used rule-of-thumb methods to match machine menus to patron purchasing patterns.

Four decades ago, alert vendors running nine-column candy machines allocated four or five of those columns to "core" items, best-selling branded confections that would be offered in every location. The remaining slots were available for items chosen by the route driver to meet particular location preferences. Vending warehouses inventoried about 15 products , stock-keeping units or SKUs, in modern parlance , to give those drivers a good variety of options for the non-core selections.

What was a good variety in 1962 would be hopelessly inadequate today. The advent of glassfront multiproduct machines and the proliferation of snack choices has driven a tenfold increase in the SKUs an operator must warehouse. And the multiplicity of options has made it much more difficult for drivers to remember and to act upon specific location preferences.

What's more, experience has shown that the products people ask for are not always the products they buy. Conversations with customers and intuitive beliefs about product popularity seldom correlate well with actual machine sales.

For the past five years or so, the vending industry has been hearing about the new science of category management. Leading suppliers with extensive experience in grocery and mass-market retailing are eager to see vending operators adopt this technique, which originally was developed by those fiercely competitive channels to take advantage of the continual flow of information from electronic cash registers to central computers.

As the vending industry deploys more sophisticated tools for collecting line-item sales data from each machine in the field, these systems generate a similar flow of accurate sales data, and this can be applied to maximizing per-machine sales volume.

Thus, major consumer packaged goods (CPG) marketers have offered vending operators a variety of insights into the principles of category management and the advantages of using the feedback provided by sales records to improve profitability. Category management allows operators to make periodic adjustments to menus, replacing the slowest-moving items with others likely to please more customers and thus yield more sales dollars. It also permits rationalizing inventories, reducing the total number of SKUs in the warehouse, and so increasing purchase efficiency and inventory turns.

The premise upon which category management is based is that the very diverse universe of snacks (or any other broad classification of product) can be analyzed into a manageable number of categories (e.g., chocolate candy, potato chips/crisps, meat snacks, cookies). Every population of consumers will include a certain percentage of purchasers of each category, so an initial goal is to make sure that some items from each category always are available.

The task of the category manager, then, is to determine the relative popularity of categories and the number of items that are to be offered within each. Ongoing sales analysis permits fine-tuning the mix within each category, and ongoing attention to market trends will prompt occasional adjustment of the relative sizes of the categories.

An immediate question that operators long have asked, and answered variously, is what degree of control to exercise over the menus of machines in the field. At one extreme, each route driver is given almost entrepreneurial discretion over menuing, limited only by the number of items it's practical to keep in the warehouse. At the other, every machine is stocked according to a standard load plan.

As a practical matter, the great majority of operating companies combine a requirement that core items appear in all machines with more or less latitude given to drivers in choosing the noncore selections.

A traditional tool developed by candy distributors more than half a century ago is the "plan-o-gram," and this has been updated and applied to the task of designing and implementing category management programs in vending. A vending plan-o-gram depicts the machine and identifies the items, or type of items, to be loaded into each column. It can be printed and issued to route drivers, or downloaded to their handheld computers for display while loading the machine. In either case, it also may be used to record necessary substitutions and discretionary choices made by the driver in the field. The plan-o-gram thus is an important management information tool and a communications medium.

Category management has been the subject of extensive discussion for half a decade; plan-o-grams of one kind or another have been around for decades. Operators have a wide range of opinions about their nature and importance.

PLAN-O-GRAM PIONEERS

A wider perspective on these issues is provided by organizations with long experience in collecting and analyzing sales information. Management Science Associates (Pittsburgh, PA) has been doing this for leading CPG manufacturers since 1963, and has applied this experience to the vending channel through its "VendScape" online sales analysis and reporting service, developed in conjunction with Validata Computer & Research (Montgomery, AL).

MSA has formed a strategic alliance with Renaissance Information Technology (Grapevine, TX), a leading developer of sales and marketing software, which introduced a category management "planogramming engine" in 1998. Called "MarketPlace Proview," this is the basis for five industry-specific packages including "vendView" for the vending channel.

Recognizing the continued strong interest in category management on the part of operators, and the growing sophistication of the information-gathering tools available to operators, MSA's Information Management Solutions division vice-president Suzy Silliman and Renaissance IT founder and president Don Levings recently offered an overview of category management, both as it applies to vending and in a wider context.

Category management in its modern form was developed over the past 10 years, by and for supermarkets, they explained. Since a vending operation seems very different from a supermarket, some operators have wondered how the technique, developed for one retailing channel, applies to the other.

The application becomes apparent if one considers that supermarkets and vending operators face very similar challenges, the experts explained. These include:

· Providing customers with the products and prices they want;

· Dealing with manufacturers who want the retailer to sell more and more of their products; and

· Running the enterprise as profitably as possible by maximizing the contribution of each outlet (vending machine or store), warehouse, and sales representative (clerk or route driver).

"Supermarket operators deal with price-conscious consumers, eager manufacturers, limited space, and the need to make a profit," Levings emphasized. "So do vending operators!"

Supermarkets represent an extremely competitive, highly concentrated retailing channel, and those characteristics have both impelled and enabled the supermarket industry to drive technological change in the interest of greater productivity. Well-known examples include uniform barcodes on retail packages and standards for electronic data interchange.

Another is category management, Silliman pointed out. The technique was made possible by the development of computer technology able to provide fast, accurate data on product movement.

"When you focus on the similarities instead of the differences between vending operations and supermarkets, you will find some exciting opportunities," the marketing information experts emphasized.

Vendors can take advantage of the experience gained by CPG manufacturers since category management took its modern form, in 1995-'96. They thus have the opportunity to benefit from "efficient assortment" and planogramming software written, and steadily improved, for application to category management. And they can learn from, and avoid, the mistakes made by supermarket retailers and manufacturers implementing category management.

Silliman observed that the question, "Will category management make me more money?" usually is the vending operator's first question when the subject comes up. "While the answer is a hands-down 'Yes!', education and a business philosophy shift are required to get that result," she emphasized.

"By definition, category management is a collaborative process between a reseller and a product supplier," the market data experts explained. "This process manages categories as strategic business units, and produces enhanced revenues by focusing on delivering consumer value."

Operationally, this means "having the right products at the right prices in the right places, so that the vending operator maximizes the profitability of each machine by providing maximum satisfaction of consumer demand," they added.

This, of course, involves paying attention to the famous "Four Ps" of retailing: Price, Promotion, Product assortment and Placement. For a variety of reasons, pricing and promotion have tended to play secondary roles in influencing consumer purchase behavior in the vending channel, unlike other retail environments, Levings observed.

Which is not to say that price is unimportant, but rather that it plays a different role in vending. "As competitive items are 'line-priced', the vend shopper is not selecting one standard candy bar over another because of a price differential," Silliman explained. "However, that does not imply that understanding the optimal price-point is not an important part of CM, or of growing the operation's profitability."

In vending, "optimal price" is a moving target because technology and consumer expectations continue to change. "Today, 'optimal price' requires an understanding of the location and the alternative purchase options that exist at or near that location," Silliman continued. "As an example, if there is a soft drink machine in front of a convenience store, and inside the C-store a 20-fl.oz. bottle is selling for $1.09, should the vending machine price be $1.00 or $1.25? Likewise, should a vending operator offer a candy bar in a hotel vending machine for the line price of 50, if the only other purchase options are the gift shop, which charges $1.00, or the minibars in the rooms, that charge $2.50?"

Even if the location had no say in the vend price, which it probably would, these questions might be answered differently, for several reasons. "Understanding the dynamics of the location is essential in determining optimal pricing today," she emphasized.

However, Silliman added, the role of price in vending may be very different in the future. "Technology has advanced to allow vending operators to efficiently manage the machine at the item level," she pointed out. "This means that pricing for competitive items could be implemented and managed effectively. Will manufacturers restructure incentive programs to expect differential pricing? Will consumers practice similar price-sensitive decision-making on immediate-consumption items as they now do for planned retail purchases?"

Promotion, too, plays a different role in vending. "It is not a 'deal' that drives the consumer to the vending machine; it is the patron's desire to instantly satisfy hunger or thirst," Levings noted. "However, a promotion can influence a consumer's decision once he or she is actually at the machine.

"Today, there is little consumer promotion occurring in vending machines," Silliman observed. "Some manufacturers and operators have made use of static-cling transparencies as point-of-sale aids, and there has been some trial of bonus packs (e.g., 10% more for free). While both of these promotional vehicles do appear to drive incremental sales, the frequency and penetration of such activities have not been sufficiently widespread to permit drawing any firm, statistically sound conclusions."

Again, technology surely will influence vendible product promotions, the market analysis veterans predicted. The use of card-based cashless systems allows price-off promotional offers to targeted consumers at specified times; increasing use of smart cards by large retail stores has permitted extensive experimentation with the promotional possibilities that inhere in a payment medium that can identify the consumer who is using it. Also, there has been some trial of talking vending machines offering a promotional discount on selected items.

"Again, with technology enabling machine/item route management, measuring such activities is now possible," Silliman and Levings reported. "It will become increasingly important for vending operators to understand the impact of promotions, and to manage in the overall context of category management."

PRODUCT RANGE

However, at present, the name of the game in vending is product assortment first, and product placement second, they stated. "The greatest challenges in vending revolve around servicing machines on the most efficient frequency, increasing sales by preventing out-of-stocks, and providing the greatest number of consumers at each location with the type of products that they're looking for.

"The really good news is that, by zeroing in on product assortment, the operator can have a significant impact on sales revenue and profit," Levings reported. "Service frequency, out-of-stocks, days of supply and product availability are all interrelated issues that can be addressed effectively with the right combination of product movement data and 'efficient assortment' software."

Product placement is crucial in vending, but (again) not in the same way as in other retail channels. In most retail environments, the science of product placement has to do with where items are placed on the shelf, and in the store. "For example, eye-level placement is generally reserved for the fastest-moving items, and the placement of secondary displays is vital for promoted items. This is because the size of the category and the large number of items available create visual clutter, often making it difficult for the consumer to find the product that he or she wants," the experts explained. "And, of course, the retailer wants the more profitable items to be easier to find than the slower-moving, less profitable ones."

It is easier to find products in vending machines, of course; and consumers will buy if they can see the desired product, or an acceptable substitute, in the machine. "It is not critical that the fastest-moving items be at eye level," Silliman and Levings noted. "The spirals in the machine just need to be organized in a logical manner.

"Product placement in the vending channel has more to do with taking into consideration the location of the machine: is it in a factory, an office complex, or a school? Offering a product assortment well-suited to that market segment will improve sales, and can reduce the likelihood of out-of-stocks," they pointed out.

Of course, tailoring the assortment to the location, like optimizing service frequency and gauging the effectiveness of promotions, depends on having fast access to line-item sales data, and good analytical tools that can process that data to produce immediately usable recommendations.

"The first step in implementing category management is having the right information," Levings and Silliman emphasized. "How else would you know what the right products, prices and places are?

"For nearly a decade, retailers have been driving bottom-line growth through category management practices," they reported. "For over a decade, the traditional food, drug, and mass-market channels have had an abundance of item-level consumption data, and they've turned this into information that has empowered them to make such profitable decisions.

"Item-level consumption data is now available within the vending channel to enable category management," the experts reiterated. "Many product suppliers analyze syndicated vending machine sales data, such as 'VendScape' or 'InfoVend,' to provide a road map of category management to the vending operator. This road map is commonly known as a plan-o-gram."

This sort of vending plan-o-gram, unlike earlier, often ad hoc menuing diagrams, is a computer-generated picture of the assortment of products that shows how they are placed in a particular vending machine, or vending machine configuration. There may be several different plan-o-grams for one vender configuration, based on some criterion such as the type of location each machine is in.

"The most obvious advantage of having a plan-o-gram is that you make it easier for the route driver to get the right products into the right spirals, by providing a picture," Silliman and Levings noted. "And, when that picture is based on analysis of product-specific data, not only does it show the contents of each machine, but those contents will generate more sales from each machine.

"When you bring product-specific data into plan-o-gramming software, that software can process the data and automatically recommend an assortment of products that, logically to the computer, at least will increase sales," they explained. "You then can look over that picture of recommended products and replace the ones that don't belong there, based on your own business logic.

"Plan-o-gramming software does not decide what the product mix should be," the experts emphasized. "It helps you decide, by crunching the numbers and making a recommendation."

A particularly valuable feature of well-written plan-o-gramming software is that it can use the product-specific sales data provided to it to produce estimates of how much sales will increase, Levings added. "It does this by identifying products that do not sell, and that therefore simply waste space in the machine, and products that sell out before the machine is serviced. Then it recommends that you stock more products that sell and fewer that waste space. By identifying the slow and the fast movers in each machine, it's possible to estimate how much sales will increase when the mix is changed."

Operators long have recognized the potential value of maintaining accurate, constantly updated sales histories for each machine, with line-item detail; but, until recently, the time and effort that would have been required to record this information manually made it impractical to do so. The computational power needed to perform the sales analysis has been available in office computers for two decades or more; the difficulty was in collecting the information at each machine.

"Today, plan-o-grams are incorporated into route automation software that enables vending operators to benefit from them," Levings and Silliman noted. "Optimized plan-o-grams can be programmed into the route drivers' handheld computers for display when each driver services each machine." The driver's input of the quantity of each item replaced during a service provides an electronic record of product velocity. Vending machines equipped to capture transaction data automatically can improve the speed and accuracy of the process further, by allowing the driver to upload that information to the handheld computer automatically, in a few seconds.

"As vending operators continue to migrate toward full route automation, and embrace category management practices, they will become less dependent on the computer-generated pictures provided by their product suppliers and more adept at determining the best deployment for each machine, specific to their own individual operations," the marketing analysis experts predicted.

So: "Will category management make me more money?" Silliman and Levings observed that this question is important enough to answer twice. At present, pricing and promotion are much less important to maximum turns in vending machines than making sure that the right items are in the right machines.

A case study demonstrates this point, they explained. It involved one Automatic Products international, ltd. 45-select glassfront machine in a 1,000-employee office building. The test was designed to measure the impact of optimal assortment on profitability.

The machine had been generating about $150 per week, with the driver determining the menu. "'Favorites' were often out of stock, and 'not-so-favorites' frequently ended up as stales or buy-backs," Silliman and Levings reported.

In the test, the machine was optimized for turns, using Renaissance IT's "vendView" software, based on product movement data from MSA's "VendScape" service, specifically the data for office locations in the Northeast. The machine configuration, pricing and category product mix remained the same that is, the same number of cookie items, etc., were stocked throughout the process.

"The new machine assortment was implemented, and generated a weekly sales increase of over 250%," the experts reported.

"Will category management make more money for operators? Yes!" the management information experts summed up. "The time is right for vending operators to get on board and reap the rewards of category management increased sales from an efficient assortment in every machine, a dramatic reduction in potential sales lost because a product is out of stock, and increased room in machines for fast-moving items. The data and the software are available now; it's time to hop on and go."


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