Selling space is a key resource in retailing. It will be finite and of specific shape and dimension. Airlines and hoteliers apply yield management techniques to their seats and rooms.
With a view to maximizing profitability, retailers seek to optimize the use of selling space. The retail offer is perishable. Unsold merchandise at the end of a trading day is lost for ever. So, the category offering has to be managed to maximize sales and profits.
Meaning of category management
It is related to decisions over groups of products that are selected and placed to satisfy use occasions or consumption patterns. This is dependent upon strategic retailing principles that attempt to increase sales and profits. It may also include trade partnerships.
Features of Category Management
1. Category management has a direct impact on the success of the business. For example, the retailer may unveil “electronic zones” exclusively for smartphones and home entertainment products in a particular which were previously spread throughout stores.
2. Profitability is a function of both profit margin and the rate of sale or rate of stock turnover. The retailer dealing in a single line of merchandise should trade off between the two. The retailer sets the selling price which in turn sets a profit margin. The way the customer perceives that price and the product category determines the rate of stock turn.
Discount retailers set prices with lower margin in anticipation of greater sales volume. A premium retail offers is set at higher selling prices with a healthier gross profit margin.
3. Retailers have developed techniques to account for the different cost structures of product lines.
Direct product profitability: Direct product profitability is the technique which supports space allocation decisions from absorption costing. For example, labour intensive products bear more of the labour special temperature requirements or security measures. So, product of these kinds should bear more of overheads.
4. The merchandising policy takes a holistic view of product groups. A given category of products should meet the range needs of the target customer without unnecessary duplication. Product line proliferation deviates from the operating efficiency of the retail business.
Too much of similar products on the shelf are likely to impact on each other’s rate of stock turn. Each individual product line has to justify its place in terms of meeting customer needs. However, there is the conflict between the retailer and supplier. The objective of the supplier is getting his own lines onto retail shelves. But the retailer favours only those lines which really add to the offer.
5. If sales volume remains constant over time, category management would be straight forward. When retailers want to promote customer expectations efficiently, the promoted lines need to be available in the market.
6. Effective category management takes a holistic view in planning promotions. It intends to meet customer expectations without creating unnecessary inefficiencies in the system.
7. Category management is followed within a supply chain partnership. Partnerships between retailers and key suppliers recognize substantial common interests shares by each. They are both serving the same consumer. Partnerships have long term perspective leading to an increased trust between retailer and supplier. In such situations, the key suppliers seek to involve themselves in category management.