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How to Generate Maximum Profit Across Top-Performing Retail Categories

By Doug Erickson, EVP Global Sales & Marketing, Galleria

The goal of every NFL coaching staff is to surround its franchise players with the right mix of position players and supporting characters. While the franchise players often garner much of the media and fan attention, without the right mix of position and special team’s players, the results would be poor no matter how dominant the team’s franchise player is.  In the same way, retailers need to identify their ‘killer’ categories – those which they will be known for – and also develop and support a variety of complimentary categories that will play a key role in their overall success.  Retailers generally assign each category a role such as ‘Destination’, ‘Core’, ‘Traffic Builder’ and ‘Profit Generator.’  Each category’s role will then determine the strategy for the category, the amount of time and resources that will be invested and the measures by which it will be evaluated.

A retailer’s objective for category management should be to balance the investment of time and resources inline with the contributions that each category provides.  To understand how categories are impacting the business, retailers can apply Pareto’s Principle, more commonly known as the 80-20 rule. Typically, 20 percent of a retailer’s categories represent 80 percent of its sales. Because some products and categories provide significantly more profit than others, retailers should prioritize their categories to ensure they are allocating ample resources and time to optimize their top performing categories in order to yield the largest returns.

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Upon identifying the top-performing categories, retailers can then optimize them by utilizing an automated customer-centric merchandising solution to create store-specific merchandise plans. Doing so ensures the right products are in the right place, in the right quantities, at the right time to achieve the desired outcome. Additional benefits include a higher level of customer satisfaction across the chain, increased sales, margin improvements, reduced wastage and improved compliance.

Three Main Category Levels
As a general guideline, after assigning each category a role, we recommend classifying them into three levels – Basic, Variable and Dynamic.  This will enable retailers to identify and prioritize which categories will provide the most return on investment (ROI) from store-specific merchandise plans.

Basic Categories
Basic categories are characterized as those in which one similar product mix can be successfully executed in each store. They also tend to have consistently lower sales volumes.  Retailers often carry basic categories because they believe customers expect them to be present or because they are complimentary to other more lucrative categories.  An example might be the broom and dust mop category in a fast moving consumer good (FMCG) chain.  Because these static categories do not vary substantially and turn slowly, retailers do not need to optimize them on a store-by-store basis.

Variable Categories
Moving up the ladder, the next category level is variable. Many of these categories contain products that would benefit from additional management attention. Typical categories in this group have some variability in demand or would benefit from cluster- level assortments. For example, hair coloring products will vary substantially depending on the age and ethnicity of shoppers by store, but they are not typically sold at a high volume. These categories benefit greatly from assortment strategies tied to a strong store clustering methodology and product allocations based on case pack requirements and store-specific fixture sizes.  However, another type of variable category is one in which the volume changes dramatically, but the product mix remains relatively consistent across all stores. Because the rate of sales varies considerably, this type would benefit from automated store-specific merchandise plans.

Dynamic Categories
Dynamic categories are defined as those in which both the product mix and sales volume vary dramatically from store to store.  Examples may include ready-to-eat meals, beer and fresh produce. These categories tend to have shorter shelf lives, making decisions regarding product mix and inventory allocation even more critical.  Due to these factors, dynamic categories benefit greatly from automated store-specific merchandise plans. The plans enable retailers to allocate each store with the optimal product mix to generate the most profit across these critical categories.

Learn from the Leaders
There has been buzz in the industry that retailers interested in managing their categories should take a linear approach, beginning with a manual space planning solution – a solution that has been on the market for more than 20 years. While this baby-step methodology may initially seem appealing, users will experience the same issues that other retailers have over the past two decades – out-of-stocks, a high level of overhead and low merchandise plan compliance. The problem with this approach boils down to the fact that these pre-dated solutions do not enable retailers to localize their merchandise to meet their shoppers’ needs on a store-by-store basis where it’s needed most – the top-performing, dynamic categories.

In order to yield the long sought after value of store-by-store localization, several of the world’s leading retailers including Tesco and Wal-Mart have opted to implement an automated customer-centric merchandising software solution that contains the scalability to seamlessly optimize merchandise plans across their chains.

Getting Started: Key Questions to Evaluate Categories
Because a category’s importance varies from retailer to retailer, below are five key questions that retailers can ask themselves to determine the appropriate planning level for each category.

  1. What are your highest value/volume/profit categories? In retail, the higher the value, profit and unit sales volume, the more important they are to plan and execute correctly.
  1. How much should the assortment vary from store to store? By evaluating assortments, retailers can determine what level of planning is needed for each category. One generic enterprise assortment for a basic category may be profitable for all stores across the chain. However, if a category’s performance varies significantly by store, it should be managed on a much more granular, store-specific level.

  1. What is the shelf life of the product? Products with short shelf lives benefit greatly from store-specific planning as wastage will be much higher if the optimal amount of product is not allocated to each store.
  1. How much does sales unit volume of each product vary across stores? Products that sell quickly will benefit more from store-specific planning than slow moving products where presentation standards and case pack rules often drive allocation.
  1. How much does the category space vary across stores? Categories that have a different size of space allotted for them in each store will benefit more from store-specific planning than categories that have the same fixed amount of space across the chain.


Doug Erickson is the executive vice president of global sales and marketing for Galleria. He has more than 15 years of industry experience. For more information, please visit
www.galleria-rts.com.

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