Category Management
&
Company X
A study into the possibilities for the category management
method within Company X
MSc Business Administration Business Development
C.K. Thye
Student number: 1583050
Preface
After having studied for several years I thought it was important not only studying literature for my master graduation in which theories will examined in depth. After all I already wrote a theoretical thesis for my bachelor graduation. On one hand, this meant for me not only to write a thesis on a theoretical basis, but also to take the opportunity to apply theory into practice. On the other hand, this meant to have a taste of the nearing 'real' working life. COMPANY was the perfect place for me to develop myself and to become acquainted with the Dutch Fast Moving Consumer Goods (FMCG) which every person in the Netherlands is dealing with every single day.
The Dutch FMCG is an industry which is characterised by dynamism and innovations where stagnation means decline. The industry is still struggling with uncertainty due to price wars. COMPANY is continuously looking to improve in many different areas. Initially it seems easy to find a subject for the thesis because of this description. But when all subjects are new and interesting, the choice of a suitable subject is quite difficult.
However, my supervisor at COMPANY has given me every opportunity to become acquainted with many different facets COMPANY is dealing with and he let me participate into daily activities and different projects. Eventual we chose category management as subject because it was a hot topic within the company and it covers a big part of the company’s activities in the Netherlands. In the first place I would like to thank my supervisor at COMPANY, because I gained a lot of knowledge through him during my six month internship. I also would like to thank all other employees within COMPANY. Despite that COMPANY is a large company worldwide, the organization in the Netherlands is small and the atmosphere is very informal which made it easy for me to feel comfortable. Asking questions and gather information was never a problem within the company. It have been a great experience.
My thanks from the University of Groningen goes out to my supervisor dr. L. Maruster because of her critical feedback and great guidance. This ensured that I evaluated my writings from different perspectives. Also my second supervisor dr. J. Kratzer should be thanked. Finally, I would like to thank my girlfriend, family and friends who supported me moral during the internship and the writing of my thesis.
I wish you much pleasure to read my thesis.
Contents
I
Introduction ...4
1.1 Background ... 4 1.2 Company worldwide ... 5 1.3 Company Netherlands ... 5 1.4 Dutch market ... 51.5 Outline of the thesis... 6
II Research Methodology...7
2.1 Management Dilemma ... 7
2.2 Conclusion diagnostic research ... 8
2.3 Problem statement ... 8 2.3.1 Research questions: ...8 2.4 Research constraints... 9 2.5 Methodology ... 9 2.5.1 Data collection ...9 2.5.2 Plan ...9
III Category Management...11
3.1 Background of CM ... 11 3.2 CM Model... 12 3.3.1 Category definition ... 13 3.3.2 Category role ... 13 3.3.3 Category assessment ... 14 3.3.4 Category scorecard... 15 3.3.5 Category strategies... 15 3.3.6 Category tactics ... 16 3.3.7 Category implementation ... 16 3.3.8 Category Review... 16
IV Analysis ...17
4.1 Management problem ... 17 4.1.1 Food vs. Drug ... 174.2 COMPANY’s Current situation ... 19
4.2.1 Category assessment ... 19 4.2.2 Assessing performance of CM... 20 4.2.2.1 Promotion... 20 4.2.2.2 Product (assortment) ... 21 4.2.2.3 Placement ... 21 4.2.2.4 Pricing ... 22
4.2.2.5 Presentation (Instore visibility)... 22
4.2.3 Conclusion ... 23
4.3 Possibilities of implementing CM ... 23
4.3.1 Promotion... 23
4.3.2 Assortment & Placement ... 25
4.3.3 Pricing ... 27
V Discussion of the results ...30
5.1 Performance measurement ... 30
5.1.1 Promotion... 30
5.1.2 Assortment & Placement ... 30
5.1.3 Price ... 31
5.1.4 Presentation (Instore visibility) ... 31
5.2 Organizational capabilities ... 32
VI Conclusion & recommendations...33
6.1 Conclusion... 33
6.1.1 Conclusion ... 35
6.2 Recommendations ... 35
6.3 Limitations and directions for further research ... 36
Literature ...37
I Introduction
1.1 Background
Nowadays you will find stacks of leaflets in your mail box every week or even every day. The consumer is continuously overloaded with products that are offered by retailers. Each day there appear more and more new products on the market that replaces existing products quickly. This is the reason that every company must change and innovate to survive. New discoveries and inventions quickly replaced the standard way of operating (Daft 2004). Successful organizations are constantly moving to remain successful and adapt to new developments. This short description fits entirely to the world of Fast Moving Consumer Goods (FMCG) because this industry is often characterized to be very rapid and competitive. The past years the Dutch FMCG was also on the move. Due to different price wars the prices were under pressure. Not only the prices of the retailers but also of the manufactures.
FMCG manufacturers are continuously looking for market improvements and expansions. Non-profitable products will be discontinued or sold and existing products get a new internationally recognizable name. Who wants to survive in the world of FMCG, must act and respond quickly, because the lifetime of products is becoming shorter. The amount of products in assortments also increased tremendously over the past decades. To manage big assortments is difficult, so a good assortment management program is essential.
Category Management (CM) is an assortment management program by which manufacturers and retailers have to collaborate. Today, manufacturers directly help retailers with product quality choices and CM. CM can be used to manage assortments with the consumer as the central focus on the level of a product group, rather than on the level of single products. The potential results of a CM program, in terms of increased sales and reduced costs, can be substantial (Krum 1994), and the expectation is that organizations without a good CM strategy will fall behind.
Lindblom and Olkkonen’s research (2008) revealed that large manufacturers had a relatively strong role in CM collaboration, while the small manufacturers had a weak role in CM decision-making and were easily excluded. Besides, manufacturers with stronger or equal roles compared with their competitors were also more capable of influencing the most CM tactics. Furthermore, the effects of CM were perceived more positively among suppliers who were more capable of providing tactical input than among those with a weak collaborative role.
Besides developing new products, organizations need to adapt and adjust their organization to this dynamic world. Many theories are developed to create the optimal organization structure that is aligned with their environment. They try to gain advantage compared to their competitors but also consolidate any advantage. In practice you can see that more and more organizations are dealing with changes. In the study of the results of organizational change of Worrall, Cooper and Campbell (2001), 1300 British executives, consisting of CEO's, directors, senior, middle and junior managers were asked if they faced organizational changes. Between 1997 and 2000 the percentage increased from 65% to 72% of managers that came in contact with changes in their organization. Organizations need to structure their organizations so a CM program can be implemented.
provides a description of the COMPANY organization and Dutch market. Furthermore the structure of the report is outlined.
1.2 Company
worldwide
Because of confidentiality agreements, this part is not published in the public version.
1.3 Company
Netherlands
Because of confidentiality agreements, this part is not published in the public version.
1.4 Dutch
market
FMCG generally include a wide range of frequently purchased consumer products such as food, toiletries, soap, cosmetics, teeth cleaning products, shaving products and detergents. The world of FMCG is mainly determined by multinational manufacturers such as COMPANY that produces products under different brands. As described in the introduction, the FMCG industry is continuously on the move, also in the Netherlands. Image, innovation and change are the principles which commercial companies in this industry are facing. Marketing is very important for manufacturers, so they invest a lot in marketing.
To analyze the market, manufacturers buy data about product and market information. In the Netherlands there are two big providers of enterprise market information: Information Resources Inc. (IRI)1 and AC Nielsen. PROVIDER is the provider of COMPANY and uses scanner sales
data.
The Dutch market can be divided into two retail environments: Food (mainly supermarkets) and Drug (mainly drug stores). Retailers (customers for manufacturers) within these retail environments are also an important party because manufacturers do not sell their products directly to the consumers. Important customers for COMPANY within food are Albert Heijn, C1000, members of Superunie whether Etos and A.S. Watson are the important customers for COMPANY within drug.
The retailers are selling many different products. These products are clustered into categories so an average supermarket has 125 categories. Manufacturers have a lot of expertise about their categories while retailers have less expertise about the separate categories because of the high amount. However retailers have a lot of knowledge about the consumers. So manufacturers and retailers have to collaborate to optimize the categories. Categories at retailers are managed with the help of manufacturer’s knowledge about the specific category. For retailers it is not possible to collaborate intense with a high amount of manufacturers because the available time. Therefore retailers collaborate with category leaders.
1GfK Panel Services Benelux is part of X. It is a specialist in the monitoring of trends, product and market developments
1.5
Outline of the thesis
II Research
Methodology
De Leeuw (2003) distinguishes two phases within a research: diagnostic research and the main research. The first phase phases can be considered as exploration of the management problem and the second as problem solving phase. The management dilemma will be described in this chapter.
The goal of this diagnostic research is to give direction to the research. Based on this diagnosis the scope of the research will converge to a relevant problem statement which can researched.
2.1 Management
Dilemma
Due the economic recession in 2003 the consumer’s confidence was under pressure. The supermarket leader in the Netherlands Albert Heijn, was the most expensive supermarket according to the perception of the Dutch households in the summer of 2003, especially the households that are price sensitive like the households with children. Because of this perception, Albert Heijn lost a lot of customers. On 20 October 2003 Albert Heijn started a price reduction of 1.000 premium brands that caused a long lasting price war which affected the entire FMCG industry in the Netherlands.2
Due to the price war the price gap became smaller, as a consequence the FMCG sector has not grew for a few years in food although this changed in 2006. NAME, commercial director at PROVIDER reviewed year 2007 in December 2007. The ascending line of 2006 continued in 2007. Sector food grew with 4,1% compared with 2006, where sector drug only grew with 0,4%. Based on estimations of IRI and AC Nielsen, experts are expecting that the growth will continue in 2008 with 3 to 4 percent.3 The forecast for drug is less positive. Drug is improving 1 to 2
percent but less than food. Besides, the difference between the growth before the price war is still very big whereas growth over 7% was quite normal.4 Currently, the price gap is becoming bigger
again, so manufacturers are anxious that retailers will start a new price war.5 The FMCG is still
not stable and very fanciful. In the first place these developments are not a direct problem for a manufacturer, but mainly for retailers. However, indirectly it is also a problem for manufacturers because they are under pressure by retailers.
The sector drug lost territory to sector food in general, but COMPANY also performed worse within drug compared with COMPANY’s results within food. For example: COMPANY’s net sales growth year to date (YTD) March: + X% vs. 07 according to numbers of PROVIDER. When we zoom into this number and separate it into food and drug, you can see that food is performing much better than drug: food + X% and drug + X%.
Historically, the main business for COMPANY worldwide is CATEGORY with BRAND as brand. However, the share of market in the Netherlands is very low (X% to X %) compared to the share of market in other countries. For instance BRAND has approximately X% share of market in Mexico. Besides BRAND barely grows in The Netherlands. BRAND share gains were achieved in nearly every country through strong sales in 2007. BRAND increased its CATEGORY business in Europe/South Pacific through market share gains in France, Germany, Italy, Spain, Greece,
2Appendix II: Pricing Image Albert Heijn 3Appendix III: GfK: Growth supermarkets
Austria, Norway, Romania, Denmark, Belgium, Poland and Australia. So in almost every surrounding country the brand BRAND is growing. Within COMPANY no one can directly list the causes. Because there have never been extensive studies devoted to the CATEGORY, it is necessary to enlarge the knowledge about the categories separately.
To encounter the problems within drug and within CATEGORY, COMPANY would like to set up Category Management studies to gain more knowledge. Category Management is a concept that is becoming popular within the FMCG.
2.2
Conclusion diagnostic research
At COMPANY, the need has arisen to know how a CM study can be set up and what organizational changes has to be made according the management. COMPANY will use the CM studies to gain more information about the different categories separately and to advise their customers and enhance the collaboration between COMPANY and their customers. The CM study eventually could help customers to improve their position towards each other but could help COMPANY as well.
Like described in the introduction, it is important to gain a relatively strong role in the CM collaboration as large manufacturer (Lindblom and Olkkonen’s 2008). Therefore it is important to set up a CM study accurately to strengthen the collaboration between COMPANY and their customer so a win-win situation could be created. For instance, drug customers would like to regain share of market compared with food retailers while COMPANY would like to gain a higher share of market (especially within oral care) compared with their competitors.
2.3 Problem
statement
The introduction and diagnostic research has led to the chosen research direction and a clear management problem. The problem consists of the research objective, logical research questions and applicable conditions (Jonker and Pennink, 2000). The answer to the problem statement should lead to a business case.
In the first chapter it is discussed how drug is performing compared to food and what role COMPANY has with the other parties. It is important to know for COMPANY which factors have to be analyzed so COMPANY can set up a CM study and put the results down to experience. COMPANY is interested to initiate CM studies in the future for all categories and customers. This leads to the following main question:
Is the CM method a suitable method for COMPANY to improve their current activities and encounter problems within the COMPANY categories?
2.3.1 Research questions:
RQ1 Which controllable performance indicators are essential to implement a CM study for COMPANY?
RQ2 How are these performance indicators related to each other?
RQ3 Is drug really performing worse compared with food in the COMPANY categories?
RQ4 How does COMPANY measures their performance currently?
2.4
Research constraints
De Leeuw (2003) differentiates two kinds of constraints for a scientific research. Both constraints regarding the result and constraints regarding the research process are discussed underneath.
• The research focused on COMPANY;
• The content of the report is confidential so a public version of the report has to be made as well. Content that will cause competitive risk will not be placed in the public version. • Data collection and interviews will be limited to COMPANY;
• The process and content of the research has to meet COMPANY’s compliance
regulations to ensure that personnel are aware of and take steps to comply with relevant
laws and regulations.
2.5 Methodology
The research is characterized as an applied research according de Cooper and Schindler (2003), because it has a practical problem solving emphasis. The result of the research can be classified as a business case because it will be used for a specific management problem; how to set up a CM study for a specific customer or category of COMPANY. The result of the research is seen as basis for CM studies for other COMPANY customers and COMPANY categories, such that the research has a exploratory character.
2.5.1 Data collection
This research does require primary data and secondary data. The data collection method corresponds to the Snowball method (Cooper and Schindler, 2003). First of all professional journals/literature about the FMCG and COMPANY is collected by desk research. Besides, interviews have been taken with different COMPANY employees. Notes are made during these interviews. Secondly, databases of PROVIDER are used to analyze the FMCG market in the Netherlands. These steps are used to increase the understanding of the various concepts of the FMCG sector, COMPANY as organization and COMPANY’s market.
2.5.2 Plan
This research will take place in five phases to answer the main question suited to COMPANY’s situation:
I Literature review; Theory description
II Research the problem;
III Translate theory into practice; Analysis
IV Discussion of results
V Conclusions, recommendations and limitations. Conclusion
I
Figure 3: schematic description of the research structure
In the figure above you can see how the research is structured. In each phase the corresponding research questions in the red oval figures will be answered. When the research questions are answered, the main question will be discussed in the final phase (last bold oval).
Needed resources
Available resources Missing resources Food vs. Drug Problem V Conclusion Category Management Controllable factors
RQ1 Which controllable performance
indicators are essential to implement a CM study for X?
Recommendations
IV III II
Discussion of the results
Theory description
Non controllable factors
RQ2 How are these performance
indicators related to each other?
RQ3 Is Drug really performing worse
compared with Food in the X categories?
RQ4 How does X measures
their performance currently?
Analysis
RQ5 Is X ready to implement the
CM method?
Overall aim Is the CM method a
suitable method for X to improve their current activities to encounter problems in the X categories?
III Category Management
Before starting the analysis, it is needed to describe the subject of the thesis; category management. Many interpretations are available nowadays. In this chapter the background, objectives and advantages of CM are discussed based on different interpretations.
3.1
Background of CM
The concept CM has its origin in the collaboration between Wal-Mart and Procter & Gamble (Kumar, 1996). The definitions of CM are numerous:
“Category Management is a process that involves managing product categories as business units and customizing them on a store-by-store basis to satisfy customer needs”. (X, 1992)
Thus, optimization does not take place (1) on a single product or brand level, (2) on an average market level (macro-marketing), (3) on the level of separate business functions or departments (3), instead it takes place, (1) on the level of a cluster of product, (2) on the level of stores (micro-marketing) and (3) on the level of integrated functional departments. This optimization process is interesting both for manufacturers as well as for retailers and retail chains (Verra, 1998).
The category is managed as a strategic business unit with the knowledge of the manufacturer, but the management of the shops remains in the hands of the retailer (Newman and Cullen, 2002)
Other definitions:
“Category Management is a distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value”.
(Joint Industry Report on Efficient Consumer Response, 1995)
Category Management is a method whereby vendor and retailer team up to manage their mutual product categories on a store by store basis”. (Joseph, 1996)
CM has two main strategic objectives (Dussart, 1998):
- To define the basic business unit as the product category, rather than specific brands of product lines.
- To customize marketing as closely as possible to local shopping patterns.
Such that CM studies are carried out by a collaboration between retailers and manufacturers. However it is not possible for retailers to collaborate intense with a high amount of manufacturers because of the available time. Therefore retailers collaborate with category leaders. Most of the time market leaders are category leaders.
3.2 CM Model
Now the background information about CM is discussed, it is needed to describe a CM model in order to analyze the controllable factors used in the CM method. The CM model is probably the most important and best known business process to emerge from the Efficient Customer Response (ECR) initiative.
The ECR movement effectively began in the mid-nineties and was characterized by the emergence of new principles of collaborative management along the supply chain. It was understood that companies can serve consumers better, faster and at less cost by working together with trading partners. ECR Europe is the organization that creates a platform that develops new methodologies for retailers and manufacturers.
This result into the following model:
1. Category definition 2. Category role 3. Category assessment 4. Category 8. Category scorecard Review Figure 4: CM model
Source: ECR Europe, Category Management Best Practices Report
This model is often used as a basis to explain the CM method in different literature about CM. The ECR model and some additional literature is used in this paragraph as basis to explain the eight components theoretically.
3.3.1 Category definition
The first step is to define the categories. Nielsen (1992) advises to gather information from all types of sources: manufacturers, market research bureaux, consumers and own staff. The views of all these parties could differ strongly and in case of doubt, choice given to the consumer’s view. For example: sandwich filling in the Netherlands. Products like peanut butter, jam and chocolate spread are products within that category, but does cheese also belongs to the category sandwich filling? Cheese mostly belongs to category dairy products.
Therefore it is important that manufacturers and retailers decide in consultation how to define the categories based on consumers point of view. In case of COMPANY categories, retailers defined the following categories for COMPANY and its competitors: CATEGORIES. These category definitions are common in the Netherlands and is used by most retailers and manufacturers.
3.3.2 Category role
To describe the role of different categories (or even further roles of specific products) there are several classification schemes available. The fact that many consumers complain that they can no longer find what they are looking for may be due, in part at least, to a misunderstanding of differences between category roles. This is probably due to large discrepancies between the two general approaches of role-setting (Dussart, 1998):
a) Consumer-based; b) Retailer-based.
a) ECR Best Practices Operating Committee (1995) mentions the following consumer-based roles that are widely used:
• Destination; • Routine; • Seasonal; • Convenience.
A destination category aims at being the primary provider of the products to the target consumer through consistent superior value. A destination category is very important from the consumers’ point of view (e.g. nappies for families with babies). Categories that establish the retail chain as the store of choice by providing consistent, competitive value in meeting consumers’ routine stock-up needs are routine categories. Seasonal categories also contribute to the “choice” element, providing consumers with products which consumers expect at particular times of the year (such as certain types of fruit and vegetables). Competition in these categories is primarily from specialist retail outlets (e.g. greengrocers, butchers). Finally, categories that reinforce the retailer’s image as a full service store by providing for the target consumers’ unplanned “fill-in” needs are convenience categories, which have a strategic role (Holmström, 1997).
• Destination/Traffic Builder; • Store Loyalty Builder;
• Cash Flow;
• Impulse;
• Transaction Enhancer;
• Margin Enhancer.
Destination Categories or Traffic Builders bring shoppers into the store if the ad is right and the price point is hot. In general, purchase cycles are short and predictable, consumers are loyal and broadly aware of item costs. Common examples include feminine hygiene and men's razors, disposable diapers and hosiery. These categories are often "loss leadered" or hot featured with margins sacrificed for turns and foot traffic.
Store Loyalty Builder Categories are believed to be core shopper motivators and are managed to maximize choice, quality and value (although not necessarily price). Examples include meat in the food channel and cosmetics and skin care in drug and mass merchandiser.
Cash Flow Categories provide operating revenue for the store, although not necessarily high margins. They are super high-velocity categories like dairy and bakery. A smart category manager tries to maximize "float" (through extended terms and other credit mechanisms) rather than spending much time promoting or merchandising.
Impulse Categories are not generally planned purchases and will provide incremental "ring" if properly placed and merchandised. Typical examples include some beverages, confections, cookies and snacks.
Transaction Enhancement Categories can contribute to improved register ring because they generally feature clear segments (e.g., frozen entrees); opportunities for related item sales (hair care); or specialty uses (household cleaners).
Margin Enhancement Categories include items that consumers "need when they need them" and will pay what it takes to satisfy the need. Margins can be maintained and help pay for loss leaders and hot features in other categories. Examples might include spices/condiments, some medications or seasonal specialties, such as stuffing at Thanksgiving.
Many category roles are described above. It is all about the understanding of consumer’s and retailer’s point of view. Whatever category roles are based on, whether from consumer or retailer points of view, the key objective is to combine them (Dussart, 1998). So do not only pick categories that are for instance profitable. Because a category is not financial interesting, does not mean that it have to be eliminated. When item reduction is needed, deleting extraneous sizes is preferred instead of deleting products to which consumers might be loyal.
3.3.3 Category assessment
The goal is to determine the potential of the category to let achieve better results. It is focusing on the obtaining, organising and analyzing the information that is necessary to clearly understand the current performance of the category and to identify the areas of greatest opportunity for improved results in turnover, profit, and return on assets in the category.
Figure 5: Category Assessment: Data Elements
Source: ECR Europe Category Management Best Practices Report
3.3.4 Category scorecard
Within this step the target objectives will be determined on the basis of a category scorecard. When a scorecard is well designed and used efficient, it will provide crucial feedback about the strengths and weaknesses about the categories. Retailer and manufacturer have to determine the performance indicators to assess the category and see if the targets objectives are achieved. This step has to be carried out periodically to see if the results meet the targets.
3.3.5 Category strategies
The are seven marketing strategies that are dominating the retail sector (ECR, 1995):
1 Traffic building: focuses on drawing consumer traffic to the store and/or aisle and
category;
2 Transaction building: focuses on increasing the size of the average transaction in the category, aisle or total store transaction (market basket);
3 Turf defending: aggressively positions certain parts of the category to protect the
retailer’s business in the category from targeted competitors;
4 Profit generating: focuses on using parts of the category to generate profit;
5 Cash generating: focuses on using parts of the category to generate cash flow for the retailer;
6 Excitement creating: used to communicate a sense of urgency or opportunity to the consumer;
7 Enhance image: used to help the retailer to communicate its desired image to the consumer, in one of more image areas (price/service quality/variety).
3.3.6 Category tactics
In the sixth step customer and COMPANY have to decide which tactics the parties would like to use that fits within their strategy. Category tactics are developed in the following areas:
1 Assortment/Ranging: the assortment tactic area establishes the product variety offered to consumers as well as the criteria for carrying and deleting the category’s SKUs.
2 Pricing: tactics in this area determine the prices the retailer offers to consumers for the products carried in the category.
3 Promotion: tactic promotion determines the retailer promotions to be offered to the consumer in the category, like advertised features, displays, sampling, contests, etc.
4 Shelf presentation: this tactic will determine how the category will be presented to
consumers at the point of sale, based on the shelf space, location in store and in aisle, category layout, etc.
3.3.7 Category implementation
Within this step retailers and manufacturers have to plan and implement the plan for the category based on a clear schedule and clear responsibility scheme for both parties. Key components of plan implementation are:
1 Approval Process: the management of the retailer and manufacturer must establish the criteria and process for approving the plan. This approval process ensures the commitment to implement the plan and that all parties are capable of providing the necessary resources to execute it;
2 Assigning Responsibilities: this involves each tactical action required in the plan to individuals in the retailer’s and manufacturer’s organization for execution;
3 Scheduling: the development of timelines and milestones for the tasks which are assigned within a detailed calendar.
3.3.8 Category Review
IV Analysis
In this chapter the analysis of this research is provided. It consists of three parts:
• Management problem
• COMPANY’s current situation
• Possibilities of implementing CM
4.1 Management
problem
Before applying the CM frame, it is necessary to deepen the management problem. Reports of PROVIDER and PROVIDER show that food is performing great compared with drug in the COMPANY categories as we have seen in the management dilemma. However the markets food and drug are not identical. Stores within food have different assortments compared with stores within drug. For instance supermarkets sells fresh products which are not sold by drug stores. So are the general growth numbers related to the COMPANY categories? But zooming further into the COMPANY categories, drug stores has wider and deeper assortments (more different BRAND brands and more variants).
The market shares are calculated based on the entire category assortment. So the comparison between market shares are not completely comparable for COMPANY. Is drug really performing worse compared with food in the COMPANY categories? Is this a general problem (compared with other brands) or is it a specific problem for COMPANY?
4.1.1 Food vs. Drug
The categories in food and drug are not equal. Drug stores have deeper and wider assortments in the COMPANY categories than supermarkets. This means that brands like BRAND (aims at different target groups) in CATEGORY are also included in the category CATEGORY. However supermarkets, do not sell these brands. Therefore we will take the average supermarket assortment as point of departure, because an average supermarket do not sell brands like BRAND.
In the following example we will check whether drug is really performing worse compared with food in the category CATEGORY. It will show if COMPANY has a specific problem within drug or it is a general problem.
Table 1: confidential
In table 1 we can see the market shares of different CATEGORY brands within the Dutch market, divided in sector food and sector drug. The first column shows the brands of an average supermarket in the category CATEGORY. The brands in orange (bold font) are mainly seen as base brands and the yellow brands (italic font) are mainly seen as premium brands (based on the average price of the items). Brands like BRAND and BRAND (both brands are available in supermarkets as well as in drug stores) are generally seen as base brands instead of premium brands. BRAND has few premium variants. The average price levels of COMPANY products are lower than the premium brands.
disregarded in the tables. The third column shows the market shares of the brands based on the average assortment of drug stores (including premium brands).
The fourth column is showing the recalculated market shares of the brands within drug based upon the food portfolio. This means that we reduced the average assortment of drug stores (equal to the supermarket assortment) to recalculate the market shares. Changes after the recalculation are expressed in a new index number in column five. Column three are the original market shares (index 100) while the column four are the recalculated market shares (new index number in column five).
Let us consider the BRAND example to make it clear, for instance: an average supermarket (sector food) sells ten different brands of CATEGORY. BRAND has a market share of X% (column 2) while the other nine competitors have a market share of X% (X – X) together. An average drug store (sector drug) sells 15 different CATEGORY brands. BRAND has a market share of X% (column 3), that results into a market share of X% (X – X) for the other fourteen competitors. Because an average drug store sells more different CATEGORY brands than an average supermarket, the market shares within food are not comparable with the market shares within drug. It is obvious that the market share of one single brand like BRAND is always lower when there are more competitors active. Therefore we use an average supermarket assortment (ten different brands) as a starting point for sector drug, the other five brands within drug are eliminated. A reduction of the assortment of a drug store causes a higher market share of X%. This is an increase from X% (original number = index 100) to X% (recalculated number in column five = X). By using the assortment within sector food for sector drug, the recalculation leads to an increase of X% (index X). Now the market shares of food and drug are comparable because the assortments are even.
Some conclusions can be made after this comparison by zooming in on selections of table 1. First of all we can see in table 2 below that every market share will increase (column three vs column four), but that there are no big changes (column five).
Table 2: Confidential
Secondly, we can see in table 3 that the market shares of all base brands (column one) within drug are still lower than the market shares within food (column four vs column two).
Table 3: Confidential
The premium brands (column one) are divided as have been shown in table 4. Some brands are performing better within drug (column four) like BRAND and BRAND. Other brands are performing better within food (column two) like BRAND and BRAND. However, this is not changed as before the recalculation.
Table 4: Confidential
Yet BRAND and BRAND are both brands of manufacturer MANUFACTURER. Only these premium brands of MANUFACTURER are performing better within drug than within food. These developments have to be followed narrowly.
4.2 COMPANY’s
Current
situation
As CM model have been presented in chapter 3, we can see that the CM process is an extensive collaboration between retailer and manufacturer. However, before this CM implementation starts, the manufacturer should to have enough additional knowledge for the retailer; the controllable factors for the manufacturer. COMPANY can carry out a step without the extensive collaboration with the retailer: Category assessment. The current activities are corresponding with this CM step which are carried out by the trade marketing team. The output is used by the marketing team and sales team.
In this chapter, we will only describe the current activities that are corresponding to step 3 of the CM model: Category assessment (figure 4). In the next chapter we will discuss the current activities.
4.2.1 Category assessment
As shown in the previous chapter, the category assessment consist of four data elements: market, retailer, consumer and supplier data (figure 5). Except retailer data all these data can be obtained by their provider of enterprise market information. For the retailer, turnover, profit and current shelf space management data are, at a minimum, required for category assessment. In addition, retailers have consumer loyalty card programs will begin to have access to highly valuable consumer purchase data.
To assess the performance of CM different departments of COMPANY are involved. First of all the traditional sales (focusing on customer) and marketing department (focusing on brand). The sales department consists of six sales managers which have different retailers in their portfolio. Marketing consists of four marketers divided in different brands. For sales and marketing the core task is not to assess the performance of COMPANY, it is for trade marketing. COMPANY´s Trade marketing departments consists of X persons of whom one is trainee.
Trade marketing is a discipline of marketing that relates to increase the demand at wholesaler, retailer, or distributor level rather than at the consumer level. To ensure that retailers are promoting COMPANY’s products against competitors, it is needed to market the product to the retailers, also. Trade Marketing is to have a lot of intelligence about formulas, customers and channels. Trade marketing is the pivot between sales and marketing and is connecting both departments.
COMPANY’s Trade marketing department gets market information data of PROVIDER every month (quantitative scanner data). From this raw scanner data manufacturers developed lots of own tools to interpret the data such that qualitative knowledge can be gained about the category. Therefore remaining data elements can be analyzed based on these scanner data.
When new general in-depth market information is available about specific subjects, PROVIDER will send these researches (qualitative developments in the market) to the Trade marketing team. These researches can range from specific consumer/retailer behaviour in a market, category or retailer to trends within price wars or specific brands. Professional journals/literature are read periodically within COMPANY such that trends are monitored.
4.2.2 Assessing performance of CM
In the current situation COMPANY is assessing the performance of categories by the marketing P’s. The origin of the marketing P’s lies with J. McCarthy in 1960. He suggests that marketers are essentially using four variables or ingredients when developing a marketing plan. These variables are price, promotion, product and place, often called the 4P’s. Throughout the world COMPANY is using the following five marketing P’s, a variant of the original 4 P marketing mix:
• Promotion;
• Product (assortment);
• Placement; • Pricing;
• Presentation (instore visibility).
With these indicators COMPANY can assess their categories, brands to specific SKU’s (stock keeping unit). In the next sub paragraphs we will see how COMPANY is using these five
marketing indicators to measure their CM performances. In order to illustrate COMPANY´s usage of the indicators, we use some sheets of an internal presentation that are shown at a visit of COMPANY´s Vice President Sales Europe in January 2008.
4.2.2.1 Promotion
Promotion is the effort to inform and persuade potential customers in order to accomplish the sale of the product, services, or ideas (Rathmell, 1969). An example of COMPANY promotions are giving a temporary value to a product through price (discount) or increasing the quantity. Other forms include, advertising, coupons, contests or providing premiums when buying a product or service.
Within COMPANY the effects of promotional activities are mainly measured (PROVIDER scanner data) by one indicator: Volume sales any promotion. According the measure guide of PROVIDER, the definition is: Volume sales any promotion measures the volume sales of a product when the product had a particular type of promotional support. Particular promotion types are price reductions, special packs, features (advertisements in newspapers, retailers brochures / folders / coupons) and displays within stores.
Let us illustrate how COMPANY is assessing their promotion with an example in figure 6 on the next page. In this figure the % volume sales any promotion is reported of CATEGORY in the Dutch market. This means that the percentages of different brands are shown when this brand had a particular type of promotional support of the total volume sales of the brand in 2006 and 2007 (year to date 47). The Dutch market (total market) is divided into Supermarkets (sector food) and Drug (sector drug). The first line (Douche) is the average of the total category. COMPANY’s brand BRAND is highlighted (line 10). COMPANY is comparing their number with the average of the total category. Their conclusion is: BRAND is in line with market promotional pressure.
Figure 6: % volume sales any promotion of CATEGORY
Source: COMPANY presentation January 2008
COMPANY is working on a new tool; X tool. With this tool distinctions can be made in promotions in the past based on PROVIDER data. It is possible to see which and how many promotions there have been within a category or specific store. Besides the X tool, COMPANY introduced a relative new internal tool to analyze COMPANY promotions: X2 Tool. The X2 tool can calculate the additional profit generated by a COMPANY promotion compared to not doing the promotion. So instead of measuring the volume sales, this tool can calculate the additional profit for COMPANY. So costs aspects are also included. The calculations are based on internal sales data instead of PROVIDER data. However, both tools are in a development stage. The tools are not ready for use yet.
4.2.2.2 Product (assortment)
Product marketing, as opposed to product management, deals with outbound marketing tasks instead of dealing with the product development within a organization. Product marketing deals with the marketing of product to prospects and customers. COMPANY’s products are developed at Europe’s headquarter in X and in the X. COMPANY within the Netherlands has little influence on the development process. COMPANY will focus on the marketing of their products (assortment) to their customers.
To evaluate their assortment within the categories, COMPANY measures the average items per store, so the share of assortment and shelf can be calculated. The PROVIDER definition of Average items per store selling is: For a given product in a particular geography, the average items per store is the average number of bar codes available for that product per store selling that product. Average items per store is a measure of the depth of the product’s distribution. COMPANY is calculating the share of shelves and compare those with their share of market to measure their performances within the shelves.
The next illustration of how COMPANY is assess their product (assortment) is shown in figure 7 below. It shows the different brands in the category CATEGORY with the average items per store in 2006 and 2007 (year to date 47). A big difference in 2007 can be found between supermarkets (sector food) and drug (sector drug) when we zoom into the first line. In an average supermarket 81 CATEGORY items are available versus 252 items within a drug store. In both sectors BRAND and BRAND have huge numbers of items available. COMPANY’s BRAND conclusion is to add more items within drug. They will inform at divisions which additional items are available.
Figure 7: average items per store of CATEGORY
Source: COMPANY presentation January 2008
4.2.2.3 Placement
Place represents the location where the products can be purchased. It is often referred as the distribution channel. For COMPANY it is interesting which products are available in which shelves. It is possible to compare the supermarkets shelves versus the drug shelves or compare the differences between particular retailers.
COMPANY measures the placement by comparing the weighted distribution of COMPANY’s own products but also competitor’s products. The weighted distribution is defined as: The percentage of the category value sales represented by store selling a particular product.
supermarkets. The number X will indicate that X percent of the supermarkets sells this variant and in X percent of the drug stores it is also available.
Based on this figure COMPANY decided to focus more on a few variants: variant 6 and 9 (BRAND), variant 10 (BRAND) and variant 11 (BRAND). These are rather new variants, therefore COMPANY would like increase the weighted distribution of these variants.
Besides, the BRAND variants are rarely sold in the Dutch stores. However, the selling number in Europe of the BRAND variants is negative. Therefore division decided to re-launch the variants with a new formula and new package.
Figure 8: Weighted distribution of BRAND variants
Source: COMPANY presentation January 2008
4.2.2.4 Pricing
The third P is the price of products. It is the amount customers pays for the product. It is determined by numbers of factors including share of market, competition, material costs, product identity and the customer's perceived value of the product. Discount is not part of the P of Pricing. It is about the base price, standard price of SKU´s without discount. With the comparison of COMPANY´s base prices with base prices of other brands, COMPANY can determine if the are in line with the market. Besides it is possible to compare the base prices between the different markets Food and drug.
To compare the base price with other products, the average base price in volume is used. Because the units can have different sizes a comparison between units is not valid, but is a comparison in volume needed. PROVIDER’s definition is: The product’s expected price when not on promotion. This is the price in non-promoted stores and the expected non-promoted price in promoted stores.
The base price of different brands in the category CATEGORY can be found in figure 9 below. The main difference is the base price of COMPANY’s BRAND within Drug, because the base price is very low compared with the average base price within drug (average X versus COMPANY X). Within supermarkets the difference is quite small.
Figure 9: Weighted average Base Price per volume of CATEGORY
Source: COMPANY presentation January 2008
4.2.2.5 Presentation (Instore visibility)
At this moment, COMPANY is barely using instore visibility items like displays. The reason is that Dutch stores are very small compared with stores in other countries.6 In figure 10 below we see the floor space of stores in the Netherlands classified into five surface sizes. The most stores are smaller than 1200 m2. In many surrounding countries, stores are at least 1200 m2. Therefore in Dutch stores less instore visibility items are used in general according to PROVIDER. However PROVIDER is expecting a growth in the number of bigger stores (800 m2 and higher).
Figure 10: Floor spaces and numbers of Dutch stores.
Source: COMPANY presentation January 2008
4.2.3 Conclusion
In the current situation COMPANY is continuously comparing their performances with the performance and behavior of their competitors to organize their marketing activities. All these factors are measured based on PROVIDER scanner data. An example is the comparison of the promotion pressure. Is it in line with the market is the only question on which COMPANY is focusing. But the promotions (type) that are held are standard promotions, so competitors are offering same types of promotions. Of course it is important to monitor the behavior of the competitors and adapt the strategy based on these results. But next to this adaptation, it is necessary to determine where the gaps are such that opportunities can be identified.
By making use of the opportunities that are left aside by competitors COMPANY can distinguish itself towards competitors and gain competitive advantages, instead of only focusing on the activities done by competitors.
Discrepancy arises when this desired behavior is compared with COMPANY’s current category assessment method. COMPANY’s activities/actions are based on standard PROVIDER scanner data that is also bought by competitors. Indicators are measured quantitatively instead of qualitatively. More focus on qualitatively information is necessary to distinguish themselves and gain competitive advantage. The start with the X tool and the X2 tool are good developments. With these tools, raw scanner data can be convert into tailor made in-depth knowledge.
Besides, these assessments are not carried out on a structural base. Trade marketing is carrying out this step when marketers or account managers are requesting. The comparisons only made occasionally despite the business is running continuously.
Like mentioned before, the question should be how to gain advantages towards the competitors.
4.3
Possibilities of implementing CM
The previous paragraph described COMPANY´s current activities corresponding to CM step 3 category assessment. However, these steps are not carried out on structural and qualitative way. In this paragraph we will discuss the current activities and list some new possibilities for new tactics.
4.3.1 Promotion
Despite PROVIDER makes distinctions within the indicator promotion, COMPANY is only focusing on the promotional pressure: volume any promotion. They do not make distinctions in types of promotions that have been held. COMPANY is starting to recognize the problem and developed the X tool. Besides it is developing the X2 tool. These developments are good initiatives to start with qualitative analyses. It is interesting to test if hypotheses from literature meet the Dutch situation in the FMCG. When the tools are ready for use, COMPANY can see if new promotional mechanisms are successful. We will list some of the assumptions from scientific literature of which the effect can be measured afterwards with the tools.
This means for COMPANY’s brands (especially the premium variants BRAND or BRAND) that these products can not be offered with too much discount because the qualitative image can be harmed. COMPANY products are worldwide seen as A-brand. COMPANY launched premium products because the economic confidence was increasing from the year 2006. Consumers would spend more money on premium products but also on A-brands in general. COMPANY’s sales numbers of these (premium) products are showing a gradually growth. Consumers confidence and spending behavior is also changing gradually. By focusing on a high growth in a small time interval, it is tempting to give a high discount such that consumers will buy the product. However, on a long term, the product will get a cheap image and consumers do not buy these products when consumer’s confidence in the economy will grow in the future. Discount rates are becoming less important, such that COMPANY can align the level of discount to the consumers spending behavior. During the price war discount rates of 30% considered as normal. Nowadays, a discount rate of 30% is huge. The discount rates are relative and have to determined precise. Sales managers within COMPANY are complaining that retailers do not want to stop the high discount rates, because they are afraid of competition of other retailers. However, for the long term it is better to align discount rates to the economic fluctuation trends to keep away from a decreasing image and decreasing sales for retailer and COMPANY.
According to Leeflang (1998) a big improvement is not necessary when the brand has a big share of market. When the brand has a low share of market it is necessary. Many managers are using a minimum price reduction of 15%. The study of Gupta and Coop (1992) is indeed showing that consumers only respond on price reductions from 15% till 40% / 50%. A bigger increase of price reduction does not have much impact because of the saturated effect. So for products within the category CATEGORY (BRAND is market leader within category CATEGORY) it is sufficient to offer a minimum price reduction. For products with a low share of market (BRAND within CATEGORY) a higher reduction is needed. However COMPANY have to be careful that the products are not offered with too much discount because of the value perception of consumers, a balance have to be found.
Several studies show that promotions have a higher effect when the promotion is supported like leaflets, displays or a combination. Van Heerde et al. (2002) studied the effects of promotions for four FMCG product groups (tuna fish, tissues, shampoos and peanut butter). They showed that the effect of only leaflets are higher than the effect of only displays. But price reductions have also impact on the effect of features and displays. Leaflets have a higher effect than displays when there are low or none price reductions. Conversely, displays have a higher effect along higher price reductions. Van Heerde et al. (2002)are supposing that the intensity of support have a strong influence on the effect of promotions. COMPANY can use a higher price reduction for products with a low share of market combined with displays. Displays can play even a higher role especially for specific products that are purchased in a impulse (see category roles). Like described in paragraph 5.2.5. X is expecting a growth in the number of bigger stores. These developments have to be followed narrowly. When there is a possibility to use visibility items because of bigger stores, COMPANY can use displays to enlarge the effect of a promotion. The effectiveness of a promotion will increase and will cause a better recognition of the brands and a higher volume sales.
that advertisements are not used on a regular basis. The impact of promotions also depends on the frequency (Shrinivasan, 2002). The effect of the promotion will increase when the frequency also increase due the improved recognition. However, it is a risk to promote the products continuously. Consumer’s image of the product can be harmed. Therefore it is important for COMPANY to find a balanced promotion schedule. At the moment COMPANY is using advertisements on a irregular basis. The result is that the effect of a new advertisement is minimal, because consumers do not recognize the product. Therefore a balanced promotion schedule is needed.
The effectiveness of promotions also strongly depends on the turnover trend of the brand (Floor and van Raay, 2002) Distinctions can be made between three stages:
- Promotions during a decreasing share of market. The downward trend will continue, even during a promotion;
- Promotions during a stable share of market. The turnover will increase with approximately 5% during the promotion. After the promotion the turnover will recover to the level before the promotion.
- Promotions during a increasing share of market. A promotion will cause a turnover increase of approximately 10%. The share of market will drop again, but remains on a higher level before the promotion.
When the share of market is declining it will continue declining during and after promotions. After the promotion consumers are not willing to pay the standard price and the value will continue to decline. The share of market trends of the separate products should be kept in mind when promotion decisions are made. Every type of product needs a different promotion mechanism. Products within the COMPANY category CATEGORY do not need any promotion, because the market share is decreasing. Within the category CATEGORY (stable share of market) or CATEGORY (increasing share of market) it is effective. COMPANY have to invest in categories with a stable or increasing share of market to have effective promotions.
With the X tool it is possible to select a retailer (customer) and review promotions in the past. Every promotion can be analyzed and eventually compare new dimensions like type of promotions on a detailed level. Dimensions like type of product, type of promotion and time are important factors that could analyzed for COMPANY promotions. These are internal dimensions that could be measured, based on performances in the past. Testing new types of promotions (for instance cross selling) can be used to distinguish itself from other promotions.
Besides the internal dimensions, external dimensions are important. Cannibalism will occur when there are several promotions of competitors on the same time. The chance that consumers will buy COMPANY products is higher when competitors do not have (same) promotions at the same time. To guard the effectiveness of the promotions it is necessary to plan the different promotions in consultation with the retailers.
4.3.2 Assortment & Placement
COMPANY is: will deletion from or adding to the assortment have a positive or a negative influence on consumer satisfaction and sales level. A high number of items in a category will cause a negative impact on the promotional strength. COMPANY is continuously considering how many COMPANY items have to be sold in the shelves. Many competitors have a higher number of items, such that COMPANY is focusing on the increasing of number of items as can been seen in figure 7. However, COMPANY have to be careful that the effect of their promotions will not be affected by increasing the number of items. On the other hand retailers also have to be informed about the effects of a high number of items in a category. Retailers often add items, because manufacturers will pay a compensation for the adding. Category leaders therefore have to guard the number of items because it can affect the performance of the entire category, thus also the performance of COMPANY. COMPANY’s sales managers often have consultations with retailers about categories. It is the task of the sales managers to inform retailers about the consequences of high number of items.
COMPANY is measuring the weighted distribution of the products. There is only focus of adding or deleting products based of the performance of particular products. Addition or deletion of the assortment is not only about the fact that the size of assortments have to be increased of decreased. It have to meet the consumer preferences. It is important what consumers need within a category. Different types of CATEGORY within category CATEGORY are necessary for instance: CATEGORY for X, X, X or X. When too much variants of the types of CATEGORY are available, consumers will get confused because they can not make a right choice. This may be a problem within drug stores because many variants are available such that it have a negative influence of the volume sales. A balanced assortment have to be created that causes value for the consumers. When value is present, consumers will spend more per visit, which causes a higher volume sales. Whether adding or deleting items, the key objective is to have a right amount of items that is value adding in consumers perspective.
Shelves can be arranged by the share of market. This means that the share of shelf (divide item by total amount of items) can be determined on the basis of the share of market. COMPANY can identify if specific items in the current situation are over or under shelved. This is a good measure indicator to determine the number of items in shelves. The amount of products also depends on the size of the shelves. Next to the size it is a decision of the retailer how many products they would like to have in their shelves based on local characteristics; local tactics. COMPANY can gain local information by buying local scanner data. Consultations with the retailer are also very important, because local stores have a lot information of local characteristics.
In the past few years, supermarkets like Albert Heijn are focusing on the different target groups and trends within the Dutch market. Albert Heijn has introduced different store formulas like Albert Heijn XL or AH to go. AH to go is a store for people who are in the middle of the 24-hour economy. They look for quick, fresh and varied solutions when they are on the road. There have 40 of such stores in locations where many people gather: petrol, train and subway stations and in the city. The Board Chairman of Albert Heijn Dick Boer, ensures that in the near future the number of stores will certainly be 100. Albert Heijn wants to be more differentiate, local and target specific. The stores in the neighborhood have to meet the needs of local consumers. Good quality price proportion was also a trend (Moers, 2006). Due to this trend many supermarkets have own brands. COMPANY also have to anticipate on these growing trends. Travel packages of COMPANY’s products can be developed so it fits into the AH to go concept. COMPANY do not only have to think within existing frameworks, but have to think out of the box to make use of opportunities that are left aside by competitors. Philips also have a partnership with Douwe Egberts for the Senseo coffee machine. COMPANY could develop travel sets in cooperation with other partners such that it meets the needs of the AH to go consumer.
logo, is increased from 350 to 2700. Manufacturers may use the logo on a product, if they meet strict requirements for the amount of sugar, salt, saturated fat and sometimes fibers. Supermarkets are gaining advantages of these adjustments compared with the drug stores; because they fulfilling the consumer’s needs. However, A.S. Watson is also trying to adapt of the changing needs of the consumers. The assortment is changed tremendously the past years in drug stores Trekpleister and Kruidvat. Computers can be bought and even insurances can be concluded. They are also adapting like the supermarkets. Compared with competitor DA (consists of independent entrepreneurs), A.S. Watson was very successful in 2007 because DA had many troubles with the changing needs of the consumers. At the annual supplier day DA presented their new plans for 2008 to their suppliers (including COMPANY). Local entrepreneurship besides DA as strong brand was the main subject.
COMPANY also have to identify consumer’s needs, for example within the category CATEGORY. In the Netherlands SPECIALISTS advises to X on a day. However, this is difficult when people are working. This is a possibility for COMPANY to see what kind or product or service they can launch in order to X easily, because it is a trend to take care of our X nowadays.
Generally, drug (especially independent entrepreneurs) is performing worse compared with food like mentioned before. Reason is the enormously increased competition. Not only among themselves, but especially with other retailers such as supermarkets, perfumeries and pharmacies. Pharmacies and supermarkets sell more self care medicines and perfumeries became bigger competitors by selling more body care products. Drug stores have to distinguish themselves with an emphasis knowledge of these products according and knowledge of their local consumers. So the next step is to analyze the local needs of the consumers and adjust the assortment to them together with retailers.
Retailers have some insights of these local differences but additional knowledge of manufacturers is often needed because retailers do not have enough resources to analyze the shopper insights among all categories. Manufacturers have detailed information about specific categories. COMPANY can play an role to gain more in-depth knowledge about their markets and eventually also for their drug customers to advise them about the adjustments of assortments. It is all about to create an interesting assortment for the consumers so higher turnover per basket can be achieved.
4.3.3 Pricing
Like described before, the average prices of COMPANY products are quite low compared with the average price of the entire category (for instance category CATEGORY, see figure 8). However, COMPANY categories are mainly driven by promotions. A promotion can only be successful when consumer knows the initial value. When the consumer is aware that they can buy the product with advantage, they will consider to buy it. Of course the effect of promotions are low when the base price of products are also low. With a low base price, any reduction is a big part of the base price while the reduction in itself is not much. A reduction of 20% on three euro (0,60 euro) seems to be a lot compared with the same reduction on a one euro (0,20 euro). Consumers do not notice a small nominal reduction because the amount of reductions within the Dutch price wars.
It is important for retailer and COMPANY that base prices are not too low. Due the price wars consumers are not only focussing on base prices anymore, especially at drug stores.7 A good quality is the most important for the consumer. It is preferred to keep the base prices on a good level and try to raise the base prices such that promotions are still effective. Besides a too low
price can harm the image of the product. Low base prices are identified with non quality products. This do not suits the A-brand status of COMPANY’s products and what the consumers finds important. Therefore COMPANY’s sales managers have to convince retailers to raise the base prices of A-brands in order to raise their margins and promotions have more effect. Certainly if the economy is improved compared with previous years during the price war.
The goal is to increase the purchases of current users and to persuade new users. Because of a reduction that is in proportion, they can consider to try the product and will continue to buy the product when the quality of the product is good. Products of COMPANY are A-brands, so COMPANY can trust on the quality of their products.
4.3.4 Presentation (Instore visibility)
COMPANY is focusing on adding or deleting products based of the performance of products. However, retailers also have to pay attention for the way in which the products of the assortment are presented. Organized versus unorganized displays lead to different variety perceptions (Hoch et al 1999). Organization by either brands or products models can also affect perceptions and choice (Simonson 1999).
Suppose that type of product (X vs. X) is the most important attribute within CATEGORY. Retailers then have to order their products by this attribute. Brand can also be an important attribute. This second attribute is important because the Dutch shelves are often organized by brands within a category.
Within categories, COMPANY has different product lines, for instance in the category CATEGORY: BRAND VARIANT (3 products), BRAND VARIANT (3 products), BRAND VARIANT (2 products). These products lines have different designs. These designs are determined by division, because COMPANY uses a Global Branding strategy (Gabrielsson, 2005). The products and their packaging design do not vary from country to country; the only thing that changes is the language on the packages.
However, the average store in the Netherlands is very small compared with stores in foreign countries (figure 10). Big shelves with multiple rows of the same product are usual in other countries as we can see in figure 11. Because of the size of stores in the Netherlands, products mostly have one row as shown in figure 12.
Figure 11: FOREIGN SHELF Figure 12: DUTCH SHELF
Because of the big shelves in foreign countries, it does not matter if the different product lines have different packages and labels. Multiple rows of the same product will cause a organized perception. This is not the case in The Netherlands. Small spaces leads to single rows of products. Because of this reason the presentation of the products in the shelves are important. It is essential to advise retailers how they have to order their COMPANY products, because it is common that stores order the COMPANY products within a category randomly. The perception of the brand can be influenced on this way. Products within a product line should be ordered next to each other instead of a mix of products within different product lines.
