Research reveals a fresh take is needed for tried-and-true merchandising methods in food-drug-mass channels, to adapt to enduring changes in omnichannel shopper behavior
The set of business activities commonly known as category management has long served food, drug and mass retailers well. The core methods are well known and proven by decades of experience.
Recent events in food-drug-mass retail require a fresh look at key aspects of category management execution, according to new research commissioned by Precima, a NielsenIQ company and conducted by Coresight Research: How Category Management Has Changed Forever. Specifically, there are two interlocking megatrends emerging from 2020 that are of paramount consequence for the year ahead:
- COVID Disruption. Demand spikes on key items, supply disruptions and outright product shortages created unprecedented challenges for category planning, with ripple effects on assortment, pricing, promotions and brand preferences. Shopper behaviors – and demand patterns – have been forever altered.
- Digital Commerce. The growth in digital commerce’s share of transactions was already accelerating before the pandemic happened, but fear of contagion and stay-at-home mandates created a sharp uptick in online trial among grocery shoppers. Some of these online and omnichannel habits are enduring, which necessitates a strategic response.
These events and their unfolding after-effects require food, drug and mass retailers to confront category management from a new omnichannel perspective, revisiting fundamental tactics like assortment, pricing, promotion and loyalty in collaboration with brands. They are witnessing changes in trip type and frequency, basket composition, brand preferences, price sensitivity and online-versus-in-store behaviors that require a fresh take on those category management activities and an evolving understanding of shopper behavior.
Quantifying the Shift to Digital
Analysts are still evaluating the shift to digital in food, beverage and CPG, and what it will mean moving forward. Recent data underscores the significance of this phenomenon in the past year:
- The number of shoppers who purchased groceries using Click and Collect methods more than doubled during in the 52 weeks ended Nov. 30, 2020 – an increase of 113%, according to data just released by NielsenIQ on behalf of The Food Industry Association (FMI).
- Overall online food and beverage sales (grocery and restaurant) in the U.S. increased by 125% during the same period, Nielsen IQ says. That represents a shift of 12% of food and beverage spending, or $106B, to online.
- Online grocery sales in the U.S. reached $55 billion for the full year 2020, research company Brick Meets Click reported. The growth continued in early 2021, reaching $9.3 billion in January 2021, up 15% compared with November 2020.
In this context, key findings from the Coresight Research study take on timely relevance. The research found 40% of respondents report “E-commerce gaining market share” to be “very challenging,” while 17% report it as “challenging” [Fig. 1]. This was the top-most challenge, followed closely by “Data analysis requirements due to data overload” (36%+20%), and “Omnichannel complexity – selling through multiple channels” (32%+25%).
Omnichannel Impact on Category Tactics
Digging deeper into these concerns reveals how the consequences of dramatic market change percolate down to the everyday practices of category managers as they make decisions across the store. Each of these fundamental tactics requires re-consideration in light of the steep gains in digital shopping, altered demand patterns and accompanying changes in shopper trips, baskets and consumption:
- Assortment. Shoppers experimented with alternate and new brands during the pandemic, in part due to item availability issues and more meals at home. Some of their habits have permanently changed. Basket analyses comparing in-store trips versus online orders reveals enduring demand signal differences that must be figured into the product mix. This will be new territory for many category managers.
- Space. Changes in category assortment are intimately linked to space requirements. In-store digital order fulfillment requires additional facings for high-demand items, while dark-store fulfillment relocates some inventory outside the store. If self-serve salad and hot bars lose favor due to sanitary concerns, there will be new calculations at the macro space level as well.
- Pricing. The baseline for prices has been reset in the past year, as the demand signals that category managers tracked for years changed dramatically. With most supply shortages and panic demand now resolved, shoppers are able to resume price-conscious habits – with the added wrinkle that online prices are easier to compare and remember using shopping apps. Retailers need to rebalance their pricing strategies across the total store. Aligning price perception across physical and digital touchpoints becomes a more critical skill.
- Promotion. The pause in price promotion during the pandemic was well documented. It made little sense to offer deals on products that were in low supply. On the one hand, with a return to supply normalcy, brands are renewing incentives to compete again for features and visibility. On the other, retailers are presented with rare opportunity to reset promotions from simply cycling last years’ plan to delivering promotions that truly serve customer needs and category objectives. Category managers are resuming the discipline of managing their promotional portfolios to achieve competitive goals, here again with a greater focus on customers and the digital part of the equation.
- Personalization. Digital shopping is fertile ground for personalized deals and curation of assortment presentation. As shoppers get past the initial surprise that digital shopping works well enough to use on a regular basis, they will start to differentiate among online alternatives based on the quality of experience and ease of use. Being relevant to customers on a fully personalized basis by serving them the right mix of products and deals are the key decision factors for them.
Critical Role of Automation
A majority of retailers surveyed indicate they are well on their way toward automating key category management processes in an effort to master the intricacies of omnichannel merchandising. Preparedness is greatest in the areas of price management and promotion selection, where three-fourths of respondents say they are ready or almost ready to move forward on this challenge [Fig. 2].
Of note, similar progress is also being made in automating inventory management – an operational skill set that was also severely tested by shopping and supply disruptions at the height of the pandemic. This capability is closely tied to the reliability of the demand signal used to support other tactical decisions within categories. Most retailers (72%) also indicate a readiness or strong readiness to tackle automation of their assortment discipline, while 60% have a similar self-assessment regarding their capabilities to improve demand forecasting through automation.
Retailers and CPG suppliers responding to this survey also indicated an awareness that evolved best practices around automation and analytics is required to master category management now and in years to come [Fig. 3]. Category managers see that access to analytical platforms helps derive actionable insights from data, with six in ten indicating this practice is important or very important.
Data analytics plays a key role in supporting the transition to a unified procurement structure that enables accurate decision making in an omnichannel retail environment. More than three-fourths of respondents (76%) expect this capability will be more important or much more important five years from now.
From Afterthought to Center-Stage
Two major, interlocking forces have been at work in the past year – the shopping pattern disruption due to the pandemic itself and the emergence of grocery e-commerce to the center-stage. The research excerpts cited make it clear that e-commerce has expanded to the point where it can no longer be an afterthought to category management decisions based primarily on in-store metrics. Core category tactics like space, assortment, price and promotion require more information-driven and timely collaboration with supplier brands, as their fortunes are affected just as much by recent market changes.
Retailers and brands are presented with the very real possibility that their commercial teams are not optimally structured for success. Some traditional category roles will be altered in the new omnichannel reality. For example, the meanings of destination category, margin-builder, core, convenience and seasonal are different in the store versus online. Redefinition is needed based on contemporary data about shopper response across the total store – physical and digital – as well.
Taking an Omnichannel view adds a layer of intricacy that defies intuitive decision-making and relies on advanced data analytics tools. Old assumptions die hard, but access to accurate data and analytics help category managers chart a path to insights that enable sound decisions. While typical digital and traditional category management skills are different, it is data and analytics that is the glue that bind them together… whatever the chosen structure.
About the Research Cited in This POV paper: Data is from December 2020 Coresight Research survey of global grocery/drug retailers and consumer packaged goods (CPG) suppliers in France, Germany, the UK and the US—which was compared against select findings from a separate March 2020 survey of a similar respondent base. These surveys had 110 respondents and 104 respondents, respectively, and asked the same set of questions.