Sluggish demand and powerful retailers have long been the twin banes of Europe’s consumer goods manufacturers. But many manufacturers hope salvation is at hand. They have been captivated by what is variously referred to as "demand-side efficient consumer response" and "joint category management," a theory that manufacturers and retailers should stop squabbling over who grabs the biggest chunk of value added, and start working together to maximize profits in any given product category.

So far, category management has received a good press in Europe. Benefits are estimated to include cost savings of more than 2 percent of the industry’s sales and substantial increases in volume and market share—more than enough to divide equitably between the two sides of the industry, most manufacturers say. To prove the point, a series of pilot studies is under way.

Scratch deeper, however, and the news is not all good. Though enthusiastic in public, many manufacturers are deeply skeptical in private. And some retailers think they can get most of the benefits of category management without any input from manufacturers. So what is going on?

We believe a dose of realism is in order. Carefully controlled pilot studies may well indicate substantial profit opportunities. But having interviewed European manufacturers and worked closely with manufacturers and retailers in Europe and the US (where category management was "invented" more than five years ago), we feel there is need for caution. Although it can bring benefits, it is certainly not a panacea. Indeed, in some circumstances, category management can be risky for manufacturers, and the hype surrounding it may actually divert them from addressing their real challenges.

The reality

Joint category management, in its broadest sense, is about manufacturers and retailers managing product categories as strategic business units in order to enhance consumer value. The focus is on the five key demand-side levers: product assortment, promotions, pricing, placement and space allocation, and new product development.

Much of this is familiar to European manufacturers and retailers, although the degree of progress varies by country (Exhibit 1). Manufacturers already tend to organize themselves around categories (breakfast cereals or laundry products, for example) rather than individual products or brands as in the past, because they believe a broader approach gives them a better chance of meeting consumer needs. Increasingly, they are also creating cross-functional account teams, bringing together marketing, finance, logistics, and sales personnel to give a full business perspective to each account.

More advanced grocery retailers have also begun to organize themselves around categories, with the aim of increasing overall profit rather than just cash gross margin. In addition, the dialogue between manufacturers and retailers has for some time embraced many category-management principles. In the UK, for example, suppliers and their retail customers have worked together for at least ten years on projects to optimize pricing, space, and promotions in stores.

But the proponents of joint category management argue that it should extend its reach still further. "Full-blown" category management will involve a close, trusting partnership between the retailer and a chosen manufacturer in each category. By pooling their complementary skills, insights, plans, and information, they will uncover new opportunities to meet consumer needs and so expand the industry’s total profit. Manufacturers will no longer profit at retailers’ expense, or vice versa. Everyone will win—manufacturers, retailers, and consumers alike.

Yet the theory behind full-blown category management remains largely untested, as few manufacturers have struck this kind of relationship with their retailers. Certainly in the US, where the principles of efficient consumer response (ECR) have been followed for many years, full-blown partnerships remain rare. And even the companies that have moved furthest towards establishing integrated, strategic, and exclusive relationships with their retailers keep certain areas, such as joint development of new products, out of bounds.

More typically, US manufacturers have found their initial rush of enthusiasm tempered by reality. Many have found they underestimated the costs of developing joint-category plans—notably the additional people and research required. Others have found that despite the talk, few retailers have built the necessary commitment and competences throughout their organizations, from senior manager down to junior buyer.

In Europe, where category management has only really taken off in the past year or so, many of the publicized partnerships between manufacturers and retailers fall short of the real thing (Exhibit 2). Some manufacturers also admit to skepticism. "Cooperation rarely extends beyond supply-chain management," was one interviewee’s response. "We run many one-off projects, but nothing like a full category-management partnership," said another. Even many of those whose PR machines proclaim them as converts concede that, in fact, all they are implementing is good key-account management.

So why the hesitation? The reason is that, unlike supply-side cooperation, demand-side partnerships pose many risks—but less certain rewards—for manufacturers.

In principle, manufacturers can benefit in several ways. Better products and packaging (as a result of insights gained from retailers), more effective promotions, increased sales, and a higher share of their category are all possible rewards. Yet to date—apart from specific pilot projects implemented in somewhat artificial conditions—there has been little robust quantification of these benefits either in Europe or the US. What exercises the minds of several leading manufacturers most, however, is not the short-term cost benefits of these partnerships, but the longer-term risks.

Manufacturers and retailers undoubtedly have a common interest in maximizing the economic surplus generated by their combined business systems. But it is dangerous to ignore the fact that the two sides are likely to continue competing for their share of that surplus. Their objectives will never be completely aligned, and therein lies the rub.

Manufacturers may, for example, succeed in helping to expand the "pie," but fail to capture any more of it because the retailer’s bargaining power is greater. Indeed, several retailers are already demanding an additional discount (sometimes 1 to 2 per cent of turnover) simply for the "privilege" of participating in a category-management programme, and regardless of the ultimate benefits. Another problem is that the retailer is as interested in snatching business from a competing retailer as it is in enlarging the total industry pie. The manufacturer is interested only in the latter. If all a category-management partnership does is to shift market share from one retailer to another without increasing the industry surplus, then the manufacturer has gained nothing. And when the effort and costs involved are taken into account, the manufacturer is likely to end up worse off.

More insidiously, full-blown partnerships could, ultimately, undermine the strategic security of the branded manufacturer. Such partnerships may involve a degree of exclusivity with one retailer, either because the retailer demands it or because other retailers are not convinced that the manufacturer can uphold the Chinese walls between accounts. A partnership with one retailer might therefore be achieved at the expense of relationships with others. Alternatively, the manufacturer may give away unique consumer insights which the retailer could exploit through its private labels. It may even end up building the retailer’s capabilities to the point where the balance of power shifts further in its favor. Some manufacturers are already concerned that the evaluation and design of promotions—an area in which manufacturers have had the edge—will become something retailers do on their own, to their own advantage.

Yet despite their awareness of the risks, few manufacturers are prepared to voice their concern in public. The category-management bandwagon is starting to roll and they cannot afford to be left behind. As one executive of a US manufacturer, number four in its category, said: "In reality we still have very few full-blown partnerships, but we benefited broadly from our positive initial stance on the issue, while the category leaders’ public opposition ended up alienating the retailers."

The best performers therefore do two things. First, although they do not reject category management out of hand, they do set limits on how far they embrace it. Second, they recognize that from there on, the real challenges are organizational—both building the right internal skills and tailoring the actual category-management process to suit their particular circumstances.

Setting limits

Successful manufacturers are pragmatic about category management, seeing it as a means to an end rather than an end in itself, and recognizing where and when it can be useful. Consequently, the degree of their cooperation varies from retailer to retailer.

A manufacturer can choose from four roles in relation to a retailer (Exhibit 3), which one to choose will depend upon its own market position and that of the retailer. Exhibit 4 shows how manufacturers can classify their own market position. Retailers can also be placed in one of three groups depending upon their power relative to the manufacturer, and whether they wish to cooperate with manufacturers. These classifications will determine the appropriate role for a manufacturer (Exhibit 5).

Take the example of a manufacturer with a strong brand portfolio and distinctive consumer expertise, dealing with a relatively unsophisticated retailer whose buyers are still rooted in a confrontational negotiating style but which nevertheless has strong buying power. In such a case, extensive category-management cooperation (let alone full partnership) would be inappropriate. The benefits are likely to be small because the retailer probably does not have the skills or information to implement category-management principles, while the risks will be high because the retailer will probably take every opportunity to maximize its share of the pie. Here, the more appropriate role is likely to be that of "branded bastion"—perhaps participating in selected category-management pilots, perhaps supplying last-generation technology for private labels, but essentially preserving an arm’s-length negotiating style.

But when a relatively weak manufacturer is dealing with a strong or sophisticated retailer, the more appropriate role is that of "private-label partner." Such a retailer will only rarely choose a weak manufacturer as a category-management partner (or what is often called a "category captain"). It will prefer a company that can offer demand-side expertise. The weak manufacturer’s only option with a strong or sophisticated retailer is to meet the retailer’s product needs more effectively than anyone else—with full provision of private-label and exclusive brands (including latest-generation technology), coupled with outstanding responsiveness to its needs.

At the other extreme—a branded manufacturer dealing with a weak and unsophisticated retailer—the appropriate role may be that of a "branded bulldozer." In such situations the manufacturer has little to gain—and everything to lose—from close category-management cooperation.

The only situation in which a true category-captain role makes sense is when a strong manufacturer is dealing with a strong, sophisticated retailer. This will involve extensive cooperation on demand-side ECR projects and, depending on cultures and personalities, a true sense of partnership to minimize the risks. But even here, manufacturers should limit what they share. Consumer audits, promotional reviews, and usage and attitude data may all be fair game. But none of our interviewees was prepared to share detailed information about cost structures, new technologies, or new products. The risks are simply too great, given retailers’ ability to brand new products in their own rights and to erode manufacturers’ margins.

Of course, the choice of role is not always as clear cut as our model suggests. Manufacturers operating in multiple categories will have to consider the feasibility of playing different strategic roles if they are strong in one category but relatively weak in another. And they will need to consider the implications for pan-European retailers. If these retail groups succeed in coordinating their activities across countries, manufacturers may need to make local tradeoffs in the interest of securing the right category-management role for Europe as a whole. Once the strategic choices have been made, manufacturers must move rapidly to confront the real challenge—how to turn the right strategy into tangible performance benefits.

The real challenge

To make any level of category-management relationship work, manufacturers need outstanding marketing and key-account management capabilities. Most leading manufacturers are already upgrading their marketing skills to compete in a world of demanding consumers and powerful trade intermediaries. Relatively few, however, have the necessary key-account management skills.

These will increasingly differentiate winners from losers. Without world-class skills in promotions evaluation or space planning, for example, manufacturers will struggle to add value to sophisticated retailers or to capture their fair share of value created by category-management cooperation. As one US manufacturer says: "At the end of the day, the reason we have earned the right to any of our retail partnerships is that we still know much more about promotions management than our retail customers and our competitors."

Building the desired skills is a difficult task that will require organizational transformation. But some manufacturers have succeeded. They have set out their performance aspirations; benchmarked their skills against world-class standards; used pilot projects to understand the changes required, test new approaches, and build momentum; and simultaneously redesigned all key organizational levers (such as structure, systems, training, and incentives).

Such action amounts to a change program of several years’ duration. But these manufacturers also knew that they could not afford to wait the three to five years it would take to build outstanding key-account management skills before embarking on joint activities with retailers. Instead, they used the very process of implementing category-management programs as an opportunity to learn.

A key lesson here is that the standardized category-management process prescribed by some (a series of "off-the-shelf" pilots and joint planning activities), is unsuitable in many circumstances. The UK division of a leading US international company, for example, identified itself as well positioned to play a category-captain role and leveraged its existing key-account management skills to become involved in a category-management pilot with a leading retailer. So far, so good. But the manufacturer’s category-management processes proved too complex and cumbersome for the limited resources of the retailer’s buying team, which simply let the manufacturer get on with it. When the results came back recommending more shelf space for the manufacturer at the expense of the retailer’s own-label products, the buyer rejected the pilot and the supplier lost its category-captain status.

In contrast, a local manufacturer with relatively lesser skills became involved in what turned out to be a successful pilot project precisely because neither partner followed a predefined process. Although the joint team made only slow progress because its objectives were hazy, its analytical skills limited, and its resources insufficient, it did eventually identify improvements in the retailer’s range, with some advantage to the supplier. Perhaps more importantly, the two sides learned how to work with each other—what would be shared and where their interests diverged. This has set them up for further cooperation.

Successful manufacturers therefore recognize that just as a category-management strategy has to be tailored to the circumstances of both manufacturer and retailer, so too does the category-management process. This in turn demands excellent key-account management skills.

The question of how to develop those skills is beyond the scope of this article. It is clear that category management and skill building must go hand in hand, however. Only that way will it be possible to keep the lid on Pandora’s box, and reap some category-management rewards.