So you’ve heard that to be competitive as a retailer, you need to get into the category management game. You’d be right. That said, you may have also heard that it’s complicated to understand. That’s definitely wrong. If you follow a few simple steps, you’ll be on your way to not only adopting category management but also reaping the rewards.
Of course, it’s one thing to say it’s not complicated and another to show it. As a side note, this piece isn’t so much for category management veterans as it’s for anyone new to the game and who doesn’t know where to begin.
In short, you’ve recently bought our software, the DotActiv application is sitting on your desktop, and you’re unsure of what to do next.
Step 1: Complete the data integration
While data integration should take place before you begin with category management software, it’s still worth having a brief look at this. After all, if you don’t integrate your data, you can’t think about beginning with category management.
In essence, data integration is the process whereby your retail data (Sales, Stock, Market, and Product) is pulled from different sources. These sources include a POS database, ERP or SAP, for example. This data is then pulled into a staging table from where a solution (DotActiv’s software in this instance) can access it and begin processing it.
Of course, that might make this all sound complicated, but it’s even more so if you don’t integrate your data with software. Not only will you reduce the complexity of processing your data this way, but it’ll also make your data that much more accessible.
As a result, every other action you take will be more straightforward. More importantly, you’ll get the results you want.
Step 2: Classify your data into a display structure
Once you’ve completed your data integration, it’s now time to classify your data into a display structure.
For the sake of clarity, when we say ‘display structure’, we’re simply referring to the arrangement of how you’re going to display your products in your stores. It’s also known as your product hierarchy or consumer decision tree (CDT).
Essentially, all you are doing here is figuring out the logical grouping of your products to give your customers a pleasant shopping experience.
Let’s say, for example, that you’re an FMCG retailer. In that case, right at the top, you’d have Groceries, which you’d split into Edible and Non-Edible. Within Edible, you’d have a Cereal category, which you could then divide further into your various sub-categories, segments and sub-segments.
Just a note of warning here, while we haven’t got to the step where you create planograms yet, it’s essential that you strive to have one category per planogram in preparation for it. For the Cereal category, you should aim to have one planogram with all of your cereal products on it.
The reason for that is simple: if you have multiple planograms per category, it can lead to unnecessary shopper confusion. Your categories also determine the scope of your ranging or assortment planning tactics.
Let’s say that you sell Alcohol and you’ve created multiple planograms, one for Beer, Wine, and Spirits. That can cause chaos. It would be better to reclassify your data and break down Alcohol into three separate categories - Beer, Wine, and Spirits, and then create a planogram for each.
That said, once you have your structure in place and you’re happy with it, it’s difficult to go wrong. Let’s go back to the Cereal category under Edible. You can set up criteria for this category to ensure that whenever any new products enter your store, if they fit the pre-approved benchmarks, they’ll place automatically in this category.
At this stage, it’s also vital to input your product dimensions. In fact, you should strive to include as much information as possible. That’s because this information will aid all of your assortment and space planning decisions later on down the line.
Step 3: Conduct a clustering exercise
Once you’ve cleaned your data and set up your different product hierarchies, it’s now time to consider how you want to cluster your stores.
As we’ve noted in another article on this blog, there are two different clustering exercises. There is store-based and category-based clustering.
That said, a clustering exercise can become very complicated very quickly if you don’t approach it carefully.
Since a mistake will affect your product assortment and everything else after that, we’d recommend you start simple. That means starting with two or three clusters per category with their appropriate size options.
Let us explain.
Let’s say you sell Baby Accessories products. That would be your category. Along with that would be your Format and your Size Option. In the case of ‘Format’, this would include both your grouping of stores as well as the range of the products for your stores. Meanwhile, Size Option refers to how many drops you have in your store.
Thus, for any given cluster, you could include either a five-drop or a six drop planogram in-store. While you could have 30 stores as part of a five-drop, another 60 stores could be part of your six-drop. While both stores get the same products, the six-drop store will get more since it’s larger.
That said, when deciding on how many clusters you want, you need to keep in mind that your Range combined with your Size Options makes up the number of planograms that you must produce.
That’s why we recommend you start small. If your retail business stocks 120 categories and has three different cluster types and size options, you’d have 1080 planograms across your entire business. By adding cluster types and size variations to this, you’re upping your planogram count and increasing the workload.
More than that, you’d be overcomplicating this process at a time when it doesn’t need to be complicated.
Of course, we’re not saying that you can’t create more clusters. As your retail business matures, you may find that you need to develop additional clusters to cater for demand and maximise your profits, and you should do that. However, when starting out, it’s all about building a solid foundation.
Step 4: Begin your assortment planning
There are two routes you can take when approaching assortment planning for your retail business.
On the one hand, you can decide to start from scratch and cull all your stock without thought. The problem with that is you could end up sitting with hundreds of thousands of dollars of inventory sitting in your storeroom with nowhere to go. Thus, unless you’re a small retailer who is starting out, and you can afford to make such a drastic cut, you can’t get away with it.
Also, cutting too much too soon can do long-lasting damage to your business.
The other route is to take the range that you already have in-store and tweak it until it’s fully optimised. In DotActiv, that includes doing what is known as a range review. Looking at the data around each product to establish which is performing well and which is performing poorly. You can then make a decision about which products to derange.
It’s also worth noting that when we talk about deranging, you need to do it slowly. That includes informing your replenishment engine to stop ordering stock so that your shelf can deplete naturally.
That said, another aspect to keep in mind when looking at your assortment is to remember your Category Roles as well as the strategies and tactics you want to use to supplement that role.
As a side note, you need to choose your roles before beginning with category management software. As much as DotActiv is a practical solution, it’s best used to enable your specific strategies.
Moreover, you need to ensure that you communicate your strategies to anyone who is using our software.
For example, if your strategy for every category in-store is to go for high unit movement and not worry if there are low margins, it needs to be communicated. If not, you might find that whoever is planning your assortment is dropping all the high unit movers because they are low profit.
Step 5: Start producing data-driven planograms
The net result of going through all of the steps above is that you’ll end up in a position where you can start placing your products on the shelf.
Of course, that’s if you’ve followed all of the above steps precisely. If you have, for every category, you’ll have a cluster and a size option. Since you’ve already integrated your data with the software, you’ll also have the necessary sales and product data to inform you.
Now it’s merely a matter of analysing the data and giving each product the space they deserve according to their sales contribution. On top of that, you can decide on the flow of your products.
Deciding on your flow includes asking yourself a series of questions. Here’s one: What are some important factors about a category that influences how it’s packed a shelf? These factors could include the size of the product to the different types of product segments.
Another question to ask yourself is this: Are your products classified correctly? Another is: What is the flow of the category? Lastly, What are the merchandising guidelines for this category? We answer each question in-depth in this article.
As for the consequences of not asking and answering these questions, that’s simple. Your customers walk into your store and shop a certain way. Thus, if you present your products in a way that isn’t in line with what they expect, you’ll confuse and frustrate them. They won’t know where to look for what they need. While you might have the product they want, they won’t know that.
This could also cause disconnect between planograms for different stores, and thus make the shopper feel alienated when visiting another store in your retail chain.
In fact, doing this often enough and they might even avoid your shop in future when they next need that product. All because you haven’t thought about how best to present your products.
Step 6: Optimise your floor plan where necessary
As we’ve mentioned in another article about creating floor plans, building such a plan for your business is about more than just placing your categories wherever you want. Instead, you need to be deliberate about your approach to floor planning.
That said, unless you’re a retailer who is opening a store or starting from scratch, floor planning only comes at the end, after each step detailed above. That’s because floor planning is only enabled and becomes genuinely useful once you have built planograms.
But let’s say that you have a set of planograms that you’re reasonably happy with and you want to maximise your sales and profits. This is where floor planning comes in.
For example, if you’re using DotActiv’s software, you can look at a heat map, which tells you which of your categories are high performers. If there are too many fast-moving categories next to each other, you’d want to tweak your floor plan and spread them out.
As a result, you can reduce any possible floor congestion during peak shopping hours and encourage additional purchases. That’s because by sending your customers to different parts of your store to find what they want, you’re exposing them to more of your merchandise.