In the mid-1980’s, Schnuck’s had a problem. The regional grocery chain based out of St. Louis, Missouri, with about 60 stores at the time, was in a competitive price battle with Kroger, then the country’s second largest grocery store chain. Economies of scale were not on their side.
At the time, much of the conventional grocery market was witnessing stagnation, as markets became saturated and revenue growth leveled off essentially at the pace of population growth (today, conventional format stores are in slow decline). Regional and local chains like Schnuck’s were going out of business. In a situation like this, few options exist for grocery stores: introduce new features and profit centers to stimulate growth or find efficiencies in the existing system. Schunck’s was about to pursue some hybrid of both.
While Schnuck’s battled Kroger, Brian Harris, then professor of marketing at the University of Southern California, was developing a novel idea to transform the business of food retail. Up to that point, despite the development of numerous technologies to help manufacturers and retailers produce products, ship them around the world, monitor their movement, merchandise, market, sell and track sales, the practice of figuring out exactly what products to sell in the aisles of the supermarket and especially where to place each product on the shelf was a bit of a mystery. Part art, part science, part tradition and part intuition, planning shelf space was an under-developed field.
What if, Harris thought, a discipline could be created? What if retailers could figure out a smarter way to chunk the store into a series of categories? And what if each category could be managed in such a way to most efficiently and productively organize products in the store, shelf by shelf? Instead of relying on tradition and intuition, what if retailers could be a bit more scientific about their decision of what to stock and where to stock it?
Harris called this new discipline category management.
The relationship between Schnuck’s and Harris emerged in the late 1980’s. To Schnuck’s, the category management theory sounded good, and the regional chain was seeking tactics to fight the national giant. They had, after all, always considered themselves as a state-of-the-art operation, and this new discipline looked like the future of the industry.
It began in the baby food aisle. Harris’ program pointed to a strategic positioning of certain hot sellers in prime shopping areas. Sales jumped 20 percent, and soon Schnuck’s was employing the discipline in every other category of the store.
From the outset, category management was more than just a new technology. It also prompted a major culture change at the retailer.
“We reviewed our buying and merchandising teams to see what type of people would fit into a category management program,” said Randy D. Wedel, senior vice president of marketing and merchandising. “We knew then what we know today: we need people capable of taking on far broader responsibilities than the old buyer-merchandiser type philosophy.”
By the 1990’s, Schnuck’s had 25 category managers on staff, and over 150 categories in their stores.
Soon after, though not solely due to category management, Kroger decided to leave the St. Louis market. The regional David had beaten back the national Goliath. Schnuck’s understanding of its local market, leveraged through Harris’ system, had helped the chain win, category by category.
The barcode, though first conceived of in the late 1940’s in response to the needs of the food retail industry, was not implemented on a widespread basis until the late 1970’s. An innovation for industrialism’s inventory management systems, there are still many areas of the retail world where the barcode, however ubiquitous, is still not used to its fullest capacity—such as in many urban corner stores and “mom & pop” convenience stores.
Point-of-sale (POS) scanning technology, combined with the barcode, would come to generate enormous amounts of new data for food retailers in the 1970s, giving insights that would come to drive tactical decisions. This also created potential opportunities for improving shelf space management, assortment, promotion and pricing decisions. By the mid-1980’s, space management systems were created for personal computers at the store level—“Apollo” and “Spaceman” were two of the first programs.
But what Brian Harris was proposing was something more expansive than looking at barcodes and data sets. Harris proposed a new business discipline in food retail (or really, retail in general). What Harris found at Schnuck’s was a test pilot willing to combine technological innovations with a new business ideology.
The revolutionary idea behind category management was how food retailers would conceive of categories inside their store. Instead of managing a varied collection of products, they would now think of the store as a set of product categories, and manage accordingly.
Each category would need to be strategized differently. People don’t shop for snacks or soda the same way they shop for meat or produce. In those prior categories, brand is more critical; in the latter, freshness is often the driver.
And with category management, instead of one storewide marketing plan, food retailers now fragmented their overall strategy, making each category its own business, with its own consumer research, pricing strategies and performance goals.
The growth-share matrix, first created by Bruce Henderson at the Boston Consulting Group in the late 1960’s, is instructive as a guiding logic for this practice. BCG, the famous global management consulting firm (whose then Vice President Bill Bain would go on to create Bain & Company in 1973 and Bain Capital in 1984 (where Mitt Romney famously developed his strategic business skills)), worked for many of the biggest holding companies, conglomerates and big corporations of the 1960’s and 1970’s, providing data-driven advice on where to best allocate their funds, what industries to get into or out of and eventually, what companies to buy and sell. This was not completely dissimilar to the corporate raider ideology of private equity capital firms (like Bain Capital) that would come to define late capitalism.
Imagine a simple chart that maps market growth rate on the y-axis and relative market share on the x-axis. Certain companies, industries or product categories have higher or lower potential market growth rates. Consider the explosive growth potential of Apple, or of yogurt (especially driven by “Greek Yogurt”) over the course of the 2000’s. High growth rate is nice, though it’s not the only way to assess a potential asset. Market share can measure a reliable and consistent revenue stream, such as a company like P&G, or a category like milk. Companies and categories with high growth rates and high market share, like Apple, are considered “stars” in the growth-share matrix. Companies and categories with low growth rates but high market share, like milk, are considered “cash cows.” There is great consistency among the cash cows, so a company can milk these assets over the long term. High potential growth rate but low market share assets are labelled “question marks.” They could turn into an asset of great value or not, it’s hard to say. And low potential growth rate combined with low market share makes an asset a “dog” in the matrix. Apologies to the pet owners out there, but we always knew Mitt Romney wasn’t much of a dog-lover anyways.
By combining the barcode, computer systems and this new logic of strategic capitalism, category management reinvented the grocery store as a different kind of economic machine.
Over the course of the 1990’s, every national, regional and even most local grocery store chain adopted the category management discipline. This was an era of grocery store consolidation, as more and more regional chains were eaten up and local chains went out of business, an extinction phase largely brought on by the increased sophistication of the major players. This movement towards more sophisticated technologies, like category management, also created a solid career for Brian Harris, who left academia to form the Partnering Group in 1990.
But at a certain point in the 1990s, Schnuck’s, and all the other grocery stores out there, realized that its new army of category managers was still not big enough or powerful enough to face the daunting task of optimally organizing an entire chain of stores, with tens of thousands of products.
So, they began allocating the category management task to their suppliers, the consumer-packaged goods (CPG) companies. And as the CPG industry also consolidated itself through mergers and acquisitions in the 1980s and 1990s, an increasingly smaller number of companies began allocating space for an increasingly larger number of grocery stores.
The result was a massive homogenization of the grocery store industry. CPG category managers, more interested in best practices than the competitive concerns or need for differentiation among grocery stores, tended to create the same space allocations for every chain. What was in their best interest was to reduce the variety of CPG options on the shelf, and so smaller regional or local CPG companies were pushed to the deepest margins of the larger chain stores.
An old veteran grocery executive once told me a kind of industry joke.
“Take any grocery store executive,” he said, “and put a blindfold on him.
“Then take him anywhere in the country to a grocery store. Keep the blindfold on, and bring him into aisle 6 of the store.
“Take the blindfold off.
“And then ask him to figure out which store he’s in.”
Chances are, he can’t.