Over the past few decades the balance of power within retailing has shifted from the manufacturer to the retailer. The rise of Walmart and Target along with consolidation within the grocery and drug channels has significantly consolidated the US retail market. The practice of category management among retailers was a direct outcome this consolidation. Prior to category management, retailers most scarce resource – shelves - was often the battleground between competing brands and products with little or no gain for the retailer. For example, an advertising or price promotion of Crest could result in 10% increase in sales for Crest, a 10% decrease in sales for Colgate and no net gain for Walmart. There were also diminishing returns in price negotiations with manufacturers and a realization that profit growth for the retailer was linked to growth of the entire category.

This led to the modern practice of category management. All related or substitutable products in the portfolio are grouped together into a “Category.”  Each category is run like a mini-business, managed by both the retailer and suppliers, with its own joint P&L targets. The relationship between manufacturer and retailer becomes more collaborative and open where suppliers are expected to propose initiatives that add to the total category sales and the satisfaction of the shopper.

Over the last decade, major consumer goods organizations have reoriented their Marketing, R&D, Innovation and Sales processes to align with the retailer category management approach. This shift was in response to the increasing power of retailers but also a realization that contributing to category growth led to better performance than the historical zero-sum competitive battlefields on the shelves. Simply put, in the modern retail environment, category growth creates more ROI for both retailers and suppliers while, at the same time, enhancing consumer value.

We interviewed innovation and marketing professionals at Georgia-Pacific, Kraft, The Home Depot, Unilever, Colgate-Palmolive, Hasbro and General Mills to better understand the advantages for a manufacturer to reorient from the historical brand-centric approach to a category-centric approach. Each had a unique perspective but several common themes emerged:

•    Consumer Insight Capability. Developing a deep understanding of consumer needs across an entire category can lead to a portfolio of offerings targeted to the needs of diverse user segments, occasions and needs. For example, Georgia-Pacific manages both Quilted Northern and Angel Soft bath tissue brands. Rather than being cannibalistic, a broader understanding of consumer needs within the category has led to a portfolio targeted to specific needs.

•    R&D Capability. An investment into a category approach, with a broader, more robust understanding of the fundamental science behind the category and the emerging technologies that can meet consumers’ needs, leads to more effective R&D investment. For example, Colgate’s investment into understanding teeth and gum biology led to a pipeline of industry leading oral care products that closed the share gap with Crest.

•    Assets and Equities Development. Category-focused consumer insight and R&D also lead to a more robust development and management of brand equities as well as improved technology and the patents to create a sustainable advantage from that technology. Brand equity, as an asset, can be leveraged to create growth with a category. General-Mills recently introduced its Simple brand of cookie mix and has already built enough equity around the brand to leverage it to drive growth of multiple brands across the entire baking category.

•    Innovation and New Product Development. Capabilities and assets are only advantages if they translate to viable and sustainable growth. P&G has become an innovation leader by truly understanding consumer needs within the category, investing in R&D to develop (and patent) products and developing strong brands with appeal across categories. Swiffer is an example of a successful innovation that could only have been the product of a category approach to insights, R&D and asset development. P&G had several cleaning brands but it was a broader category insight and R&D capability that led to the development of an entirely new cleaning system – one that none of P&G’s individual brands would have developed independently. Within ten years of launch, Swiffer is likely to become P&G’s next billion-dollar brand.

•    Growth. Ultimately, the primary rationale for a category strategy is growth. Innovation and new product development lead to organic growth but a category is a defined space with a profit pool and set of consumer needs that can be satisfied through acquisitions as well. Mattel, the world’s largest toy maker, acquired American Girl as part of a broader strategy to dominate the doll category. Rather than building the equity of its Barbie brand or developing a new brand in the category, Mattel acquired the successful brand and made it immensely more valuable by folding it into Mattel’s existing distribution system.

A category approach is more holistic than a brand-centric approach.  It does not assume that a brand is well positioned.  It identifies a space – a potential profit pool and an area of consumer needs - and then develops innovations that meet both the internal financial hurdles and the consumer needs.

Innovating in categories does not constrain the organization to thinking narrowly about a brand’s equities, targets or distribution. Category innovation allows the company to find the best brands (internally or externally) and to build, buy or partner to deliver on consumers’ needs. A brand-centric focus leads to more line extensions and increasing brand affinity to drive sales. A category focus can broaden the thinking to developing new breakthrough products, capabilities or sub markets to grow share within the category, or grow the category itself.

In the end, marketing and sales must deliver on customers’ needs and, in the modern retailer environment, retailers are demanding an approach that aligns with their category management philosophy. So a category approach is increasingly a mandate rather than a choice. But it is a mandate within which manufacturers can develop the consumer insights capabilities, R&D capabilities, brand equity and IP assets to create organic growth by leveraging existing brand equities and/or new product development across the entire category. It can also lead to brand-adjacent acquisition to capture a greater share of the category.

The modern retail environment has shifted power from manufacturers and suppliers to retailers but this shift offers significant opportunities for growth by focusing on the consumer needs across entire categories and partnering with retailers to deliver brands and products to serve those needs.

Image source: SpringsBargains