Wednesday, August 11, 2010

Disruptive Technologies

  • In 1978 IBM viewed small computers as electrical toys, a fad that would never be accepted by the mass market.
  • Edison clung to his direct current (DC) model for electricity as he claimed Telsa's alternating current (AC) model was too dangerous to be accepted in the market.

The above are two examples of 'disruptive technologies'; also known as 'paradigm shifts' for your guys that survived the techno-bubble. Venture capitalists love disruptive technologies because they present unlimited opportunities for making hay at the expense of someone else's grief. But we're not concerned with why Microsoft stole the small business computer market right out from under IBM's nose, or why the compact disk laid waste to the phonograph industry. What we are concerned with is how disruptive technologies affect you the convenience store operator.

'Category Management' is more of a methodology than a technology for the reason that it is generally concerned with a method of managing inventory rather than a device to assist in inventory management. However when you consider that companies like Walmart and other large retailers use an entirely different kind of methodology to manage their inventories, it can be described as being disruptive.

The definition of Category Management is a marketing strategy in which a full line of products (instead of the individual products or brands) is managed as a strategic business unit. It is based on the concept that a marketing manager is better able to judge consumer buying patterns and market trends by focusing on the entire product category.

Millions of dollars are at stake in the battle to save Category Management, as it places the emphasis of control directly onto the supplier. In the convenience store industry the general belief is that the lowly, store manager is incapable of managing their own inventory, so the supplier will decide what and how much inventory is placed in your stores. The problem with this way of thinking is that your suppliers do not know your customer's needs any more than I would, as customer needs are constantly changing based upon a plethora of parameters that are unique to your specific location, the time of day, the day of the week and the season.

Some examples are:

  • How can a supplier know about a specific store's competitive situation?
  • How can a supplier take into account the fact that a store located near a high-school enjoys an influx of teenagers every day at 3:00?
  • How does a supplier know that for whatever reason, some products simply do not sell in your particular neighborhood?

If a supplier possesses any knowledge whatsoever, it is generally related to a wide geographical area.

Having given up on controlling their own inventories, large convenience store retailers are moving toward becoming more like restaurants. This is unfortunate because they haven't exhausted the opportunities that convenience stores offer. I guess they think it's too hard, above their capability, too time consuming to be profitable, etc., etc.

Using scanning to build an environment of just-in-time inventory control is the disruptive technology that will destroy the category style of management. It focuses the analysis down to the item level, not the category level, and forces each product to justify its position on your shelf.

Take tobacco for example. While many brands are offered for sale in a convenience store, less than ten probably deserve to be there — about 10% or less. It is not in the interests of the tobacco suppliers to have you scrutinize items. That's the reason we have buydowns and rebates on cigarettes. Cola suppliers don't want you to track items. That's why they demand 75% of your cooler to offer you a decent discount on products.

The problem is these poorly selling products are crippling your sales. It would be like suppliers firing 90% of their pre-salesmen (not a bad idea) yet keep them on the payroll. Their overall sales would plummet but their payroll would stay the same. That's insane, but that's exactly what they expect you to do.

Suppliers do not want to change, but they have no choice. Either they must find better ways to help you manage your inventories or they will have to expand into other areas – like the restaurant market — because in order for the convenience store industry to survive it will have to change, and if it changes, so must the suppliers.

Individual product control will happen sooner or later. It will one day force Category Management completely out of the picture. When suppliers finally realize that their customers are going broke because of it, they will be forced to change as well.

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