Category Captains: Who's in Charge?
Increasingly, Kurtulus finds, “category captains” are chosen to drive retailer profit
Who decides how to display the toothpaste at your favorite supermarket or drugstore? How many different brands will the store carry? How many different types of toothpaste (regular, mint flavor, whitening formula, maximum whitening) will you see from one particular maker? Which brands get premium shelf space, and which wind up in somewhat less visible positions? Where will they display the toothbrushes, floss and other oral hygiene products?
PHOTO: Mumin Kurtulus, Assistant Professor of Operations
To the extent that you’ve given the matter much thought at all (and most people probably haven’t), you might guess that such decisions are made in the company’s corporate offices. And to some extent, you’d be right. Increasingly, however, chain retailers have come to rely on the makers of products themselves to provide guidance on the merchandising questions of what, how much and where. These “category captains,” as they have been called, engage with retailers to manage the selection and display of entire product categories, such as dental hygiene. As part of that process, captains also have a say in how much shelf space (if any) their competitors should receive.
Professor Mumin Kurtulus, assistant professor of operations at Owen, traces his interest in this subject to a summer job as a clerk in a small grocery store in his native Istanbul. “I was fascinated by the operational side of it,” he says. “How much to order of the various products? How to arrange them on the shelves?”
That fascination grew stronger during his graduate studies at INSEAD in Paris, where he met Professor Marcel Corstjens, who co-authored the highly influential book Store Wars, about the changing dynamics between manufacturers and retailers. Kurtulus’ subsequent research on category captainship won a gold medal in the ECR Student Paper Competition in 2004 and the Wickham Skinner Best Paper Award in 2006. Since arriving at Owen three years ago, Professor Kurtulus has continued to focus his scholarship on this area — contributing, among other things, a chapter on category captainship to a book on retail supply chains. “The practice of category management has been around since the 1990s,” he says. “However, category captainship is a more recent phenomenon, and there are many facets of it that research has not closely examined.”
Traditionally, stores managed their products on a brand-by-brand or SKU-by-SKU (stock-keeping unit) basis. But that was back in the days, Kurtulus notes, when “manufacturers such as Procter & Gamble and Unilever were the main players in the consumer goods industry, and retailers were primarily a means of reaching consumers.” All that changed in the early 1990s, which witnessed an influx into the market of a number of new, high-quality products and the emergence of other strong manufacturers. The increasing number and variety of products, naturally, led to increasingly fierce competition for shelf space.
The increasing complexity of product categories also led retailers to recognize that managing these categories also would be increasingly complex, time-consuming and expensive. So they began partnering with suppliers for recommendations about which brands to stock, where to locate each brand on the shelf, how to display them, how much space to allocate to each brand, which new brands to include (and which old brands to exclude), and how to price products in each category. Since then, the practice has grown to include even the largest retailers, including Wal-Mart, Safeway and Kroger.
“There’s no consumer awareness of this at all,” Professor Kurtulus says. “But the practice has proliferated throughout the grocery and consumer products industries and now has begun making inroads into apparel retailing as well.”
In a typical arrangement, Kurtulus writes, “the retailer shares all relevant information, such as sales data, pricing, turnover and shelf placement of the brands with the category captain.” In turn, the captain analyzes category dynamics and trends and submits a detailed plan to the retailer. Generally, the captain assumes responsibility for achieving target sales and profit levels in their categories.
In practice, retailers handle these recommendations in ways that cover a broad spectrum. Some — who are most likely to be smaller retailers — will accept and implement captains’ recommendations in their entirety. Others will carefully review recommendations from category captains for appropriateness and to ensure that all competitors in that category (including, often, their own private-label house brands) are treated fairly.
For retailers, the immediate benefits are obvious and compelling. By outsourcing the management of product categories, they can draw on the superior knowledge of manufacturers, who, as Kurtulus points out, “already have lots of data on consumers. Retailers just don’t have the resources to keep close tabs on sales trends for so many different products. Wal-Mart has roughly 120,000 different SKUs in their superstores. A typical Kroger has around 50,000 SKUs, and grocers operate on very low margins. They have to be efficient to be profitable. Outsourcing category management is one way to manage better with the same resources.”
Captains’ deep knowledge of their categories also can yield higher sales. For example, Carrefour — one of Europe’s largest retailers — engaged Colgate to manage its oral care category. Following Colgate’s recommendations, Carrefour rearranged its merchandise displays, placing toothbrushes above toothpastes instead of next to each other. After making this simple change, the retailer reported sales increases ranging from 6% to 16% in this category.
On this side of the Atlantic, Safeway engaged Ross to be its captain for infant formula. Ross’ analysis determined that products in this category were under-merchandised; they contributed 34% of the dollar volume in the baby care category but received only 11% of the shelf space. After revising both the pricing and shelf space positioning based on Ross’ recommendations, Safeway saw sales growth of 9.2%.
But there are potential downsides, too. If category captains attempt to exclude competitors, they can violate antitrust laws. A number of cases, Professor Kurtulus says, are under investigation, but one that already has been litigated is sharply instructive. In a suit brought by Conwood — the second largest maker of smokeless tobacco products — a court levied a $1.05 billion judgment against U.S. Tobacco. The court agreed with Conwood’s claim that U.S. Tobacco had abused its position as category captain to exclude competition and provide an unfair advantage for its own brands. Retailers — who, Kurtulus says, are generally not included in antitrust claims against their category captains — can reduce the possibility of anticompetitive behavior by carefully reviewing captains’ recommendations. But many small retailers, lacking the expertise to analyze recommendations, follow their captains blindly. What’s more, Kurtulus says, anticompetitive behavior can take many more subtle forms than outright exclusion. Simply placing a competitor’s product in a less favorable location (above or below eye level, for example), can create a big advantage for a category captain.
This dynamic highlights a sobering reality about the concept of outsourced category management: The interests of retailers and manufacturers do not inevitably coincide. In fact, Kurtulus notes, category captainship is only the latest evolution in the decades-old jostling for dominance between these two forces in the marketplace. With the flowering of so many new products and new manufacturers, the competition for shelf space — combined with the realization by retailers of the importance of connecting directly with customers instead of merely serving as conduits for manufacturers — shifted the balance of power in favor of retail store operators. The savviest retail operators, like Wal-Mart, capitalized on this shift to grow rapidly. Now, Kurtulus says, because category captains gain such power that “in most cases they can effectively control outcomes in the category,” the balance could be shifting back the other way.
One threat to retailers is that, in delegating category management to manufacturers, store operators may, from lack of use, lose their ability to analyze their customers’ needs and adjust product mixes accordingly. Another risk is that, over the long term, prices might increase and selection decrease as captains achieve “effective monopolization.” In the not-too-distant future, Kurtulus predicts, we might see exclusive arrangements in certain categories; one retail giant, for example, might sell only Coke products, while another offers only Pepsi.
How do retailers optimize the advantages of category captainship without losing control? “Some,” Kurtulus says, “realize that they risk returning power to manufacturers, so they try to keep flexibility by limiting contracts to 1-2 years and by switching captains occasionally.” Others, he says, engage a secondary captain to study the primary captain’s recommendations and then offer their own suggestions.
But the best policy may be for retailers to apply to themselves the age-old consumer warning, caveat emptor. “Retailers,” says Kurtulus, “are free to use captains’ recommendations or not. The smart ones use them selectively.”
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Reported by Randy Horick
Published 6/25/08 in OWENintelligence
© 2008 Vanderbilt Owen Graduate School of Management