Tuesday, April 12, 2011

The Case Against Category Management – The Reinvention of Retail

CM, in all its glory does not support item level control which is becoming even more important as inflation begins to take its toll on our ability to save ourselves from drowning in a sea of red ink… which brings up the subject of a new book:  Islands of Profit In a Sea of Red Ink by Jonathan L.S. Byrnes, a senior lecturer at MIT. In his book, Mr. Byrnes says 40 percent of a business is unprofitable by any measure, and 20 to 30 percent is so profitable it is providing all the reported earnings and cross-subsidizing the losses. The rest is marginal.

When I read the description of that book on Amazon, I almost fell out of my chair because that is the way I see inventory performing in small to medium-sized retail categories. Mr. Byrnes claims to have come up with a strategy to solve this problem by first understanding… now get this: we are experiencing a new era of business and a transition from ‘mass markets’ to ‘precision markets.’ (It just keeps getting better all the time.) He further contends, ‘most of the management processes and control information in business were developed in a prior era, and are no longer appropriate.’ Wow, and all that was on the first page. I had to have this book.

Of course, we find most interesting the ideas that contain assumptions we have always held to be true, but one of Mr. Byrnes’ ideas is so important, I want to state it verbatim: The key factor that allows a supplier to remain is to increase the customer’s profitability on the supplier’s products.

Hmm… So, your profitability has more to do with your supplier’s ability to increase your profits than on any action you might take on your own. The problem is, the smaller you are the less important you are to your supplier. Look around you. What have your grocery, beer, tobacco and soft drink suppliers done for you lately to increase your profitability? Announce promotions that increase sales of low margin items to the detriment of sales of products producing greater profits? Stuffed your coolers with new and unproven items that take months, in some cases years to move?  Filled you aisles with displays that impede traffic in your stores?   

As James Unruh, Jr. so aptly wrote in a comment to a previous post, he said, “They [the suppliers] have Contracts, Exclusives, Rebates, Multi-Level Pricing, Trips & Special Events all in the name of ‘Cost of Doing Business’ and when somebody doesn't pay, they can’t play.”

So, if you’re not one of the “large chains within this industry”, you get left out of the game.  Is this fair? Of course it’s fair. No one ever said it wasn’t. You spend the big bucks, you get the perks. Then, the question arises, “If your supplier is doing little to increase your profitability, why does he remain your source for products?” I don’t get it.

Suppliers should take heed: There are many more small operators than there are large chains, and that segment of the market is growing every day. Almost ALL suppliers deliver in eighteen wheelers, in fact their entire operations are set up to provide products for the big boys. As large suppliers experience more pressure from the larger retailers to give them better deals, trips and rebates, they should at least look at the possibilities of providing better services to the greater majority of retailers in the industry.

It’s absurd to have several hundred days of product in your stores. The shorter the delivery cycle, the less inventory you have on your books, and the more capital you have to do other things, like expand your product lines to fill the spaces all that excess inventory is occupying in your stores. But in order to do this, you have to get away from managing categories and start managing items. The advantages are enormous- everything from lowering your investment in unneeded stock, to offering customers a wider range of choices.

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