Partnership between Retailers and Manufacturers

“Every great business is built on friendship.” — JC Penny.

Consumers buy brands, not categories. In the context of consumers, therefore, category management is essentially the management of a collection of brands in stores. It works best as a collaborative process involving the retailer and the manufacturers who market the brands. Their engagement creates synergies that constitute marketplace equity.

Marketplace equity (see Exhibit) represents the incremental value a consumer derives from acquiring her repertoire of brands at a particular store. It is the outcome of brand and store equity and the extent to which they reinforce one other, and it serves the mutual interests of both the retailer and the manufacturers.

The foundation of category management, therefore, stems from retailers’ and manufacturers’ need to collaborate to pursue their mutual interests. It is the retailer/supplier process of managing categories to achieve superior business results by enhancing marketplace equity.

Retailers usually do not possess in-depth knowledge of category and brand developments, and rely on manufacturers for guidance on products and consumers. In developed markets, it has become an industry practice for major retailers to appoint category captains for some of their important categories, and count on these manufacturers’ expertise for advice on their category plans and strategies, and their retailing mix. While the category captaincy usually goes to one of the larger manufacturers, others participate as category advisors, collectively tweaking strategies in an effort to cohesively manage categories, so that retailers are better placed to attract and retain customers.

Manufacturers eagerly embrace category management as it affords the opportunity to collaborate with retailers to strengthen their categories and enhance the health of their brands. They recognize too that increasingly brand choices are made in stores. What is stocked, where, at what price and with what incentives has great influence on the consumers’ buying behaviour and ultimately their choice of brand. They realize that the need to engage in category management is greater than ever before.

Category captaincy is also seen as a source of competitive advantage; the manufacturers appointed to assume these roles benefit from their proximity with retail partners.

Structure follows strategy. As the practise of category management permeated retail organizations, “buyers” transformed into “category managers”. Their roles expanded to encompass operational and financial accountability for their categories. Besides purchasing, their responsibilities now encompass merchandising (assortment and space allocation) and marketing (pricing, promotions and in-store marketing). This ensured a better co-ordinated approach to category management with category responsibility and authority placed under one team.

Meanwhile suppliers embraced the practice of trade marketing, a form of business-to-business marketing intended to strengthen trade relationships and improve business performance.

One of the outcomes of this transformation, though limited to more progressive retailers, was change in purchasing orientation or the philosophy that guides purchasing-related decisions. Whereas traditionally buyers focussed on obtaining the lowest prices and maximizing power over manufacturers, progressive category managers now seek growth in sales and profitability through a more collaborative approach.

Trade Marketing

“If you control your factory, you control your quality; if you control your distribution, you control your image.”— Bernard Arnault, Louis Vuitton MH.

To fully appreciate the manufacturer’s role and priorities in category management requires a basic understanding of trade marketing.

Manufacturers rely heavily on their trade partners — a brand must first gain and hold distribution before consumers can buy it. To secure their trade partners support in procuring, distributing, promoting and merchandising, manufacturers need to market their products to them. This form of business-to-business marketing where manufacturers seek to grow their business with their retailers, wholesalers and distributors by building value added relationships is of growing importance especially for products where brand choice decisions are increasingly made at point-of-purchase. Trade marketers are devoting considerable time and resource to partner retailers in developing their brands and categories in their stores. This is an ongoing process with long-term commitment that yields business gains for both parties.

Trade marketing requires considerable business acumen as manufacturers and retailers strive to achieve the delicate balance between their shared goals and their distinct individual goals. On one hand these partners work together to enhance marketplace equity, and improve the overall performance and profitability of the category. On the other hand they are engaged in competition for the profit that can be generated from the sale of goods. They rely on different, sometimes conflicting, profit models. Manufacturers seek economies of scale and a return on investment, whereas retailers are interested in economies of scope and return on inventory.

That they share complementary resources and capabilities strengthens their bond and increases the likelihood that both achieve their respective goals. There is the need to ensure that the engagement does not hover solely on negotiating discounts and trading terms, and that attention is devoted to the development of brand loyalty, store loyalty and marketplace equity. To sustain and strengthen the relationship, it is important the partners continuously align and strengthen their mutual self-interests.

The process of category management has become a crucial component of the trade marketing process. It serves to bring manufacturers closer to their business partners in a constructive process that encourages sharing of plans and strategies, synchronizing activities and resources, as they jointly work towards building marketplace equity.