Category Reviews with Insight
In the FMCG world, a large amount of time and effort already goes into the production of a Category Review. However, if it’s not delivering insights that will grow the buyer’s business then your message is not cutting through.
To deliver insights in a Category Review requires an understanding of the KPI’s the buyer is using to guide their expectations for growth. The challenge for the seller is to understand these KPI’s and use data that is available to them to support or challenge the strategy and tactics being employed.
Many articles have been written on the importance of evolving the relationship between the Key Account Manager (Seller) and the Key Account (Buyer) from a transactional basis to a strategically aligned partnership. Richard Ilsley has written excellent articles on this topic. However, we may be in furious agreement that this evolution would be a good thing, the question is, how to achieve it?
The level of communication between buyer and seller is critical in progressing the relationship. Good communication requires insight and alignment and less self-interest. But, as always, the elusive question is, how? I’ll be bold and suggest the first thing a seller should do to establish meaningful communication is ask a simple question, “how are you (buyer) going to grow your business”? Reasonably sophisticated buyers will already know their KPI’s and should be ready to discuss them with you. Common KPI’s are;
SKU reduction. And;
And, this is where the category review is important. If you are mindful of these KPI’s and reduce the focus upon your company and its offerings (the self-interest factor) to be more about the achievement of the KPI’s and mutual benefit then, you are more likely to be heard. The next step is to be heard with credibility.
A good category Review will move beyond presenting the performance on the presented KPI dimensions and will rather develop an understanding of the key parameters that are the foundation for the KPI’s. Put simply, the art of a good Category Review is the ability to tell the buyer what they may not be aware of.
The following discussion will explore the common KPI’s and provide thoughts on how they can be explored in a Category Review.
Volume Growth A relatively simple measure you would think. At the top line, it means more units sold over the prior year. However, is that inclusive or exclusive of new stores? It’s easier to grow volume when more stores are being added to the fleet[i] and that growth is greater if the stores are introduced earlier in the measuring period rather than later. So is the discussion about, like for like(LFL) or year on year (YOY) growth. The introduction of a measure such as Average Volume per store (AVS) establishes an understanding that the volume KPI is derived from the sum of sales from individual stores in the fleet. Although the volume KPI may be positive is it because the AVS is increasing or could it be the store number increases masks a decrease in the AVS.
A point to note is although the volume KPI may be a reason for high fives all round an AVS decrease is a concern that once brought to light may require an adjustment of strategy and tactics.
Value Growth Value and Volume growth KPI’s don’t necessarily move in alignment and the quantum of the difference is an indicator of the impact of the price and promotion strategy. Again, like Volume KPI’s, Value KPI’s can be influenced by store growth and so an Average Value (Dollars) per store (ADS) can provide insight into a weakness being masked by an overall store number increase.
GP% Possibly one of the least useful KPI’s ever created as it stifles discussion on the more important KPI which is Gross Profit (GP). However, if you know the Value and GP% KPI then a Category GP expectation can be deduced and importantly your contribution to the Category GP. SKU Reduction A relatively new KPI for some buyers and sellers but reflects a requirement to improve Working Capital (WC) in an organisation. However, although improving WC is good, it can’t be at the expense of Volume, Value, and GP which need to grow to provide a better WC measure. Analysis of SKU’s in a category needs to differentiate those that drive volume and value as opposed to those that provide only a marginal increase (or decreases) to the category. This is necessarily a deep dive on every SKU using Pareto logic to define the 20% that do 80% of the business in the category.
Customer Retention Lately, and none too surprisingly, some retailers have introduced Customer Retention or Loyalty as a seller KPI. I find the inclusion of this measure amusing as it as an aggregation of longitudinal data for the sellers' item range but, a KPI is a static measure... a representation of a result at a specific point in time. So, it is somewhat like a P&L statement for a company which shows whether a company is trading at a profit or loss at the time it is produced. A P&L may show a figure one day and a completely different one the next day by the inclusion of a sale or a cost not present in the prior report. In addition, there is a divergence in thought in data analytics circles on how this KPI is derived in the first place which is a topic for another day as it is beyond the scope of this article. For those interested, the article "The Targeted use of Sales and Marketing Resources" introduces methods to improve performance with this KPI.
Conclusion Although this has been a high-level discussion on Category Reviews it should highlight the importance data has in delivering insights for a Category Review. Fortunately, we live in an age where BI tools exist that transform vast amounts of detail into meaningful, interrelated insights.
If you need assistance in framing your Category Review presentation, Market Grunt, has developed Category Review models that will help you achieve insights into your data. [i] This is not always the case… refer to our article on, “Targeted use of Sales and Marketing Resources” for a discussion on region and store rank value