Academic journal article
By Dayal, Sandeep; French, Thomas D.; Sankaran, Vivek
The McKinsey Quarterly
Most general retailers have made huge investments in their on-line businesses but are still struggling to make money out of the World Wide Web. Yet their perseverance is more than justified. While off-line retailing is a mature, slow-growing business, the on-line market--albeit still fairly small--is expanding at double-digit rates. Moreover, customers increasingly demand an on-line presence from retailers.
The search for ways to make the Web profitable is therefore on. It is a considerable challenge, calling for skills that go well beyond those required to run an off-line business successfully. General retailers have always succeeded by striking a carefully calibrated balance between offering a wide choice of goods and the opportunity cost of offering each additional category. But customers in the savvy new generation who shop both on- and off-line have different expectations of Web-based retailing: they want greater depth of inventory as well as rich and relevant on-line product information.
For many pure e-tailers--and even for some retailers with substantial offline expertise--the cost of trying to provide that depth and content has proved insupportable. But help is at hand from an established off-line strategy: category management.
How category management works
General retailers tend to be masters at managing only three to five core categories. When a general retailer has established a loyal base of customers for those core products, it must determine which additional categories will make the most of its valuable shelf space--a decision that calls for sophisticated brand analysis and focus-group research. J. C. Penney's mainly middle-class customers, for instance, are not at all likely to shop for expensive Raymond Weil watches, unlike customers of Saks Fifth Avenue, at the luxury end of the retail market. The equally high-end customers of Neiman Marcus wouldn't expect to find compact discs (CDs) there, but the value-driven customers of Wal-Mart love the idea of buying them in its stores. Too often, retailers offer a wide product range to increase their share of overall customer spending without knowing enough about the noncore categories they stock.
This is the opening for category managers: wholesalers that develop specific expertise in managing stocks of a given type of product--snack foods, sneakers, CDs, or the like--for the stores they serve. A category manager decides what mix of brands a retailer should carry in a particular category, and in what quantity, and helps to promote the products. A general retailer can use this expertise to add another string or strings to its bow, thereby increasing its chances of capturing a higher proportion of its customers' total spending, and can benefit from the added value the category manager offers through the economies of scale achieved by serving many retailers.
Category managers are most useful when a category is relatively complex and customers demand deep selection from an array of many competing brands. Currently, category managers exist in 10 to 15 leading product categories, including financial services, music, sporting goods, and travel (exhibit). CDs are a good example: Handleman Entertainment Resources has built a billion-dollar business by managing the music aisles of chains such as Wal-Mart and Kmart. It decides which CDs to stock in individual outlets, arranges the shelves and displays, prices the CDs, and even designs newspaper advertisements for the stores. Since these stores carry as many as 3,000 different CDs on their shelves, it is easier for a category manager with specialized knowledge to get the selection right than it is for them: Handleman employs 20 or more music experts to track the music scene, for example, compared with the average retailer's one or two. This detailed knowledge means that even the most localized preferences can be picked up and reflected in a store's stock. …