1. CATEGORY MANAGEMENT & PRIVATE LABEL PROFITABILITY W. Frank Dell II, CMC DELLMART & Company May, 2001

2. DELLMART & COMPANY2 Agenda Category Management –Introduction –Distributor Program –Supplier Program Private Label Profitability –Introduction –Activity Based Costing –Net Profit Applications

3. DELLMART & COMPANY3 Objectives Provide an overview of category management and its process Identify strengths and weaknesses Outline a suppliers approach INTRODUCTION

4. DELLMART & COMPANY4 Definitions Category A distinct, manageable group of products/services that consumers perceive to be interrelated and/or substitutable in meeting a consumers needs. Category Management The distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value. INTRODUCTION

5. DELLMART & COMPANY5 Charter for Change From Push Salesperson Buyer/Seller Cost Averaging Deals Sales Drivers To Pull Business Team Account Management Cost to Serve Pay for Performance Profit Drivers INTRODUCTION

6. DELLMART & COMPANY6 Charter for Change From Data Protection Data Shelf Management Win/Lose Fast To Data Sharing Knowledge Assortment Management Win/Win Fastest INTRODUCTION

7. DELLMART & COMPANY7 Does Category Management Work? Copps Corporation - Wisconsin, USA Snack Category 3 year increase 87% –Year 1 33% –Year 222% –Year 315% Candy Category 2 year increase 111% –Year 160% –Year 232% INTRODUCTION

8. DELLMART & COMPANY8 Brand Management Started in the 50s & 60s Brand General Manager Product Development Promotions Advertising Profit & Loss Responsibility Brand Management INTRODUCTION

9. DELLMART & COMPANY9 Supplier Migration Brand Management Snap, Crackle & Pop Vs Tony The Tiger Vs General Mills Category Management Kellogg Vs General Mills & Breakfast Alternatives INTRODUCTION

10. DELLMART & COMPANY10 Components Strategy Business Process Scorecard Collaborative Trading Partner Relationships Information Technology Organization Capabilities DISTRIBUTOR

11. DELLMART & COMPANY11 Elements Manage the category as a strategic business unit Develop strategic category plans based on category goals, competitors and market conditions Determine price, merchandising, promotion and product mix Collaborate with suppliers DISTRIBUTOR

12. DELLMART & COMPANY12 Process Activities Category Definition Category Role Category Assessment Category Scorecard Category Strategies Category Tactics Plan Implementation Category Review DISTRIBUTOR

13. DELLMART & COMPANY13 Definition What products are in a category? How will categories be grouped? Source: ECR Category Management Category Sub-Category Segment Sub-Segment DISTRIBUTOR

14. DELLMART & COMPANY14 Category Role Destination To be the primary category provider and help define the retailer as the store of choice by delivering consistent, superior target consumer value. Routine To be one of the preferred category providers and help develop the retailer as the store of choice by delivering consistent, competitive target consumer value. Occasional/Seasonal To be a major category provider, help reinforce the retailer as the store of choice by delivering frequent, competitive target consumer value. Convenience To be a category provider and help reinforce the retailer as the store of choice by delivering good target consumer value. DISTRIBUTOR

15. DELLMART & COMPANY15 Assessment DISTRIBUTOR Share & Efficiently Contribution & Productivity Market Share & Benchmarks Buyer Profile & Purchase Behavior Distributor Market Consumer Supplier Category Sub-Category Segment Brand SKU

16. DELLMART & COMPANY16 Distributor Scorecard ConsumerCurrent Target Retention Level______________________________ Purchase Incidence______________________________ Satisfaction Rating______________________________ Share Category of Department______________________________ Category of Market______________________________ Sales Category $______________________________ Growth______________________________ Sales/Sq. Ft/Week_____________________________ Profit Gross Profit $______________________________ Gross Margin______________________________ Gross Profit Sq. Ft/Week______________________________ Private Label Sales______________________________ % of Gross Profit______________________________ Gross Margin______________________________ Product Supply Days of Supply______________________________ Inventory $______________________________ Turns______________________________ GMROI______________________________ Service Level______________________________ DISTRIBUTOR

17. DELLMART & COMPANY17 Consumer Strategies Category Roles Attract Strategy - Traffic Building - Image Enhancing Build Loyalty Strategy - Transaction Building - Turf Protector Micro marketing DC/Store Receiving - Auto Replenishment Transportation - DSD, Backhaul DC/Store Handling - Cross Dock - Sale-Ready Packaging DC/Store Receiving - Auto Replenishment Transportation - DSD, Backhaul DC/Store Handling - Minimize Handling - Reduce Shrink Transportation - Reduce Transit Time DC/Store Handling - Reduce Shrink - Sale-Ready Packaging DC/Store Receiving - Auto Replenishment DC/Store Handling - Minimize Handling - Reduce Shrink Acquisition Strategy - Best Quality/Reliability - Best Cost & Terms Transaction Strategy - All EDI & EFT Acquisition Strategy - Best Quality/Reliability - Best Cost & Terms Transaction Strategy - Majority EDI & EFT Acquisition Strategy - Best Quality/Reliability - Best Cost & Terms Transaction Strategy - Some EDI & EFT Acquisition Strategy - Low Cost Full Service - (If Necessary) Differentiated - (From Competition) Build Loyalty Strategy - Transaction Building - Turf Protecting Cluster Marketing Semi-Service - (If Necessary) Non-Differentiated - (From Competition) Attract Strategy - Traffic Building - Excitement Creating Cluster Marketing Build Loyalty Strategy - Transaction Building Uniform Marketing Self Service - (If Necessary) Non-Differentiated - (From Competition) Self-Service Non-Differentiated - (From Competition) Category Roles Category Strategies Procurement DistributionMarketing In-Store Service Destination Routine Occasional/ Seasonal Convenience DISTRIBUTOR

18. DELLMART & COMPANY18 Distributor Strategies Traffic Building Transaction Building Profit Contribution Cash Generating Excitement Creating Image Creating Turf Defending Higher Ring-up, Impulse Purchasing Higher Gross Margin, Higher Turns Higher Turns, Frequently Purchased Impulse, Lifestyle-Oriented, Seasonal Category StrategiesCategory Strategies Characteristics Frequently Purchased, Highly Promoted, Impulse, Unique Items, Seasonal Used by Retailers to Draw Traditional Customer Base High Share, Frequently Purchased, High % of Sales DISTRIBUTOR

19. DELLMART & COMPANY19 Distributor Tactics Prime Store Location - High Traffic - High Exposure Time High Cube Allocation (Cube to Time Supply) Leadership - Best Value (Per Unit or Use) - Entire Category Competitive/Consistent - Equal to Competition (Per Unit or Use) - Sub-Categories - Segments - Major Brands/SKU - Reduce Shrink Competitive/Seasonally - Close to Competition (Per Unit or Use) - Sub-Categories - Segments Non-Inflammatory - Within Reach to Competition (Per Unit or Use) - Major Brands/SKUs Complete Variety - Sub-Categories - Segments - Brands - SKUs Broad Variety - Sub-Categories - Segments - Major Brands - Major SKUs Timely Variety - Sub-Categories - Segments Select Variety - Major Brands/SKUs High Level of Activity (If Necessary) - High Frequency - Long Duration - Multiple Vehicles Average Store Location - High Frequency High Cube Allocation (Cube to Time Supply) Average Level of Activity (If Necessary) - Average Frequency - Average Duration - Multiple Vehicles Good Store Location - High Traffic Average Cube Allocation (Cube to Time Supply) Available Store Location Low Cube Allocation (Cube to Time Supply) Seasonal/Timely Activity (If Necessary) - Multiple Vehicles Low Level of Activity - Multiple Vehicles Category Roles Category Tactics Assortment Pricing Shelf Presentation Promotion Destination Routine Occasional/ Seasonal Convenience DISTRIBUTOR

20. DELLMART & COMPANY20 Retail Category Portfolio FlagshipCash MachineMaintain/Grow Core TrafficUnder FireRehab Sales Dollars LowHigh Low Gross Margin Percent DISTRIBUTOR

21. DELLMART & COMPANY21 Retail Category Portfolio SleeperWinners Questionable Opportunity Gaps Market Growth Retailer Share of Market LowHigh Low DISTRIBUTOR

22. DELLMART & COMPANY22 Consumer Based Category Roles StaplesNiches NecessitiesFill-ins Reach Frequency LowHigh Low DISTRIBUTOR

23. DELLMART & COMPANY23 Before Organization VP MerchandisingBuyer AdministrationRetail PricingAdvertisingSpace DISTRIBUTOR

24. DELLMART & COMPANY24 After Organization Product Supply Space Allocation Retail Merchandising Category Analysis Retail Pricing Advertising Coordination Price/Data Integrity Marketing Services Allowance/Cost Control Category Management DISTRIBUTOR

25. DELLMART & COMPANY25 Responsibilities ResponsibilitiesRetailersWholesalers Negotiation with suppliers 84.6% Determine investment buys76.9% Determine promotions- items/schedule73.1% Sales/profit/market share goals57.7% Develop strategic alliances53.8% Budget development50.0% Strategic category planning46.2% Competitive store analysis34.6% Optimize by store clusters26.9% Develop shelf plan-o-gram 86.4% 83.1% 71.2$ 69.5% 66.1% 64.4% 61.0% 44.1% 42.4% 26.9% DISTRIBUTOR

26. DELLMART & COMPANY26 Category Definitions NUMBER OF CATEGORIESRETAILERSWHOLESALERS 1 TO 9920.0%16.7% 100 TO 19930.0%16.7% 200 OR MORE27.5%25.0% Average Number191148 DISTRIBUTOR

27. DELLMART & COMPANY27 Review Frequency DISTRIBUTOR

28. DELLMART & COMPANY28 Whats Really Happening? 1.Official approach leaves out consumer Merchandisers see CM to lift sales Executives see CM to raise margins Neither see it for what it was intended: framework for understanding the consumer 2.Wide gap between results and expectations Cornell study ranged from 3 to 8 point lift in EBIT 73% of CM practitioners rate experience somewhat or not at all successful Many of the few that claim success cant support it with metrics 3.Official approach is too complicated Only 15% claim to be following the guidelines CEO at large chain: Wed have to hire 14 full-time people just to fill out and maintain the templates. Personnel talent a problem 4.One-size-fits-all is not working 40% dont even see need to assign roles Half do not employ Activity-Based-Costing Industry current-state is too diverse. Take merchandising approaches: high/low, every- day low, premium, limited selection, semi- warehouse, superstore, etc.. DISTRIBUTOR

29. DELLMART & COMPANY29 Scope Category Leader Respected Supplier Preferred Supplier Cost Reduction Alliance SUPPLIER

30. DELLMART & COMPANY30 Sales Evolution AvailableSales Gross Margin Share D.P.P. Category Management SUPPLIER

31. DELLMART & COMPANY31 Perspective Differences Supplier Retailer Store Brands Check your bias at the door Bring your knowledge SUPPLIER

32. DELLMART & COMPANY32 Principles Consumer is the common focus Mutually agreed objectives, strategies, tactics and scorecard measures Rewards support collaborative goals Relationships and trust are earned, not given Information sharing is essential Win/win is critical for success Multifunctional access and communication Openness to change traditional attitudes and relationships SUPPLIER

33. DELLMART & COMPANY33 Supplier Steps PreparationExecutionCoordination Create team Develop plan Collect information Develop tools Package program Target customers Present plan Establish goals Organize team Develop scorecard Establish schedule Share information Perform analysis Develop plan Implement plan Monitor results Modify plan SUPPLIER

34. DELLMART & COMPANY34 Objectives Provide introduction to Activity Based Costing (ABC) Identify Net Profit Applications INTRODUCTION

35. DELLMART & COMPANY35 Why Net Profit? Gross Margin ineffective management tool Simple relationship - cost Vs retail price Not a predictor of profit INTRODUCTION

36. DELLMART & COMPANY36 What is Net Profit? Sales - Cost of Goods Sold = Gross Margin + Direct Revenue - ABC Costs = Net Profit INTRODUCTION

37. DELLMART & COMPANY37 Definition ABC is a cost allocation or assignment methodology Cost assignment based on: –Activities - Tasks within a process –Drivers - Factors creating costs ABC

38. DELLMART & COMPANY38 ABC Vs DPP ABCDPP SalesYes Cost of GoodsYes Direct RevenueYes HeadquartersYesNo WarehouseYes TransportationYes StoreYes ABC

39. DELLMART & COMPANY39 Allocates All Costs Headquarters –Management –Merchandising –Finance & Accounting –Human Resources Warehouse –Management –Labor –Benefits –Space –Utilities Transportation –Labor –Equipment –Supplies Stores –Management –Labor –Benefits –Space –Utilities ABC

40. DELLMART & COMPANY40 Primary Processes ABC

41. DELLMART & COMPANY41 Costs Follow Product Flow ABC

42. DELLMART & COMPANY42 Greatest cost is Display Space ABC

43. DELLMART & COMPANY43 Sales By Department ABC

44. DELLMART & COMPANY44 Gross Margin By Department ABC

45. DELLMART & COMPANY45 Net Profit By Department ABC

46. DELLMART & COMPANY46 Superior Private Label Categories Private Label products achieved results superior to branded in the following categories: ABC

47. DELLMART & COMPANY47 PLMA Model APPLICATIONS

48. DELLMART & COMPANY48 Success Factors Logical presentation Reasonable assumptions Demonstrate knowledge of business Promote benefits –Consumer sales –Customer profits APPLICATIONS

49. DELLMART & COMPANY49 New Products Life blood for retailers and suppliers Primary driver of growth Replacement Vs Cannibalization Strategy APPLICATIONS

50. DELLMART & COMPANY50 Approach Select items for replacement –Low sales –Matching consumer target markets Collect customer and competitive data Run model Present –Current sales and net profit –Projected sales and net profit APPLICATIONS

51. DELLMART & COMPANY51 Retail Space Most coveted merchandise element Interacts with pricing Shelf space is greatest item cost APPLICATIONS

52. DELLMART & COMPANY52 Balance Space Too Little Consumer cant find Reduced sales Lost sales Too Much Lower profits APPLICATIONS

53. DELLMART & COMPANY53 Diminishing Returns Excess space does not increase sales Minimum - Case plus order cycle –Minimizes stocking labor APPLICATIONS

54. DELLMART & COMPANY54 Approach Determine minimum units and facings Identify net profit Test & evaluate alternatives –Increase unit sales –Increase facings Present –Current sales and net profit –Projected sales and net profit APPLICATIONS

55. DELLMART & COMPANY55 Retail Pricing Price discussions should not be taboo Price too high –Lost sales Price too low –Lost sales –Lost profit APPLICATIONS

56. DELLMART & COMPANY56 Retailer Goals Low Price Image Gross Margin Quality Ratio High APPLICATIONS

57. DELLMART & COMPANY57 Consumers Recall up to 200 item prices Frequently purchased items High consumables Translates to 500 - 1,000 items creating stores price image APPLICATIONS

58. DELLMART & COMPANY58 Value is King Value = Price Quality APPLICATIONS

59. DELLMART & COMPANY59 Approach Compare product quality Load model Test & evaluate alternatives –Change retail price –Hold constant and change unit sales Present –Current sales and net profit –Projected sales and net profit APPLICATIONS

60. DELLMART & COMPANY60 Promotions Most frequently used promotion tool –Advertising –Display –Price reduction Private Label under- represented –Accrual funds –Lack targeted program APPLICATIONS

61. DELLMART & COMPANY61 Why Promote? Create merchandising excitement Attract customer Foster consumer trial Load pantry Reward loyal consumers Present value proposition APPLICATIONS

62. DELLMART & COMPANY62 Promotions are Difficult APPLICATIONS

63. DELLMART & COMPANY63 Many Promotional Factors APPLICATIONS

64. DELLMART & COMPANY64 Promotion Conclusions Low Private Label share Moderate Private Label share Natl. BrandPrivate Label Natl. BrandPrivate Label APPLICATIONS

65. DELLMART & COMPANY65 Approach Research past promotions Load model Test & evaluate alternatives –Change price –Change index Present –Current sales and net profit –Projected sales and net profit APPLICATIONS

66. DELLMART & COMPANY66 Summary Net Profit is the ultimate sales tool PLMA Net Profit Model –Easy to use –Provides great flexibility –Great learning tool Coach customer to increase profits APPLICATIONS