Lay the Foundations of Category Management
Managing your convenience store should not be about bringing in new items because you negotiated a hot price on them, or bringing in extra inventory to get that special offer from a supplier, or blindly hoping the choices you are making are the best for your store (but with no strategic information to help back up your decisions).
The opportunity? Move to a more strategic and fact-based approach that focuses on your shopper, which creates foundations for your store that will help you manage your categories using a consistent approach. That will help you to build sales and profit for your store(s). And who doesn’t want that?
By implementing the foundations of category management (catman) in your store, you can achieve all of these opportunities. It’s not a difficult thing to do — you just need to change your perspective and be open to moving to a new way of managing your business.
Get started with these three areas to set your catman foundations:
1. DEFINE & SEGMENT YOUR CATEGORIES
A great starting point for an improved category management approach is to define your categories and the subcategories within each of them based on shopper insights.
Strong category definitions avoid confusion for shoppers when they are shopping in your store by placing the right products together. This is an important first step that may only require a few tweaks to your category definitions, or you may find some new approaches to “category” that you want to adopt for your store.
NACS, the Association for Convenience & Fuel Retailing, has developed some standards to help you get started, but you need to tailor them to meet your specific store’s needs. How you define your categories is directly affected by your store size, as smaller stores will have broader definitions (e.g., a “Total Snacks” category), while larger stores will have more defined definitions (e.g., separate “Salted Snacks” and “Alternative Snacks” categories).
After you define the categories for your store, you want to assign the items you carry into the right category.
Next, the items assigned to a category should be segmented based on the subcategories defined by NACS, as well as based on other segments that may be appropriate for the category.
Once you’ve assigned the subcategories, you can link your item-level point-of-sale data to these segments, allowing you to look at your business at both a category and subcategory level. This will allow you to get much better insights into your business to make better decisions.
2. ASSIGN CATEGORY ROLES & STRATEGIES
Another important step you should take when applying category management to your store is to assign category roles. Realize that not all categories are created equal, nor should they be treated equally. Your larger categories (which are usually most important to your target shopper) should be allocated more time and resources in your store than your smaller categories.
NACS has defined five distinct category roles in the convenience channel: destination driver, staple, niche, occasional/seasonal and fill-in. Category roles provide guidance for how you treat different categories in your store. Once you understand the roles in detail, you should do the actual work of assigning roles to your categories.
For example, categories that are assigned the “destination driver” role are your most important categories in terms of sales and they drive shoppers to your store. Examples of c-store destination categories include tobacco, beer, cold beverages, foodservice and fuel.
In your destination categories, you may want to offer a broader assortment of items; allocate ample shelf space (ensuring no out-of-stocks on your fastest-moving items); price competitively; and promote most frequently. You should allocate a high percentage of time and resources against destination categories.
3. READ & INFLUENCE YOUR INCOME STATEMENT
As a c-store owner/operator, you need to understand how to read and make decisions that affect your income statement.
By increasing sales or reducing cost of goods sold, you will net a larger gross margin — or money you take to the bank. Every choice you make in your store — how much product to buy, to keep as inventory in the back room, to price, promote and shelve your products, and what products to carry — has a direct influence on your income statement.
You can influence margin in your store by:
- Increasing sales through changes in your key drivers of volume and profit;
- Decreasing cost of goods sold through pricing and promotional strategies and inventory management; and/or
- Decreasing operating expenses.
As a c-store owner/operator, the opportunity is to understand how the day-to-day decisions you make, and how the measures you track and/or are responsible for, drive the overall results in your financial statement. Because that’s what you take to the bank.
Something else that is not included on your income statement is your balance sheet, which includes a “current asset section” called merchandise inventory. This asset consists of goods that you own on your balance sheet date and hold for the purpose of selling to your customers. The in-store merchandise inventory includes the costs incurred to buy the goods, ship them to the store, and otherwise make them ready for sale. In simple terms, it’s the value of all the product sitting on your shelves and in your back room that you’ve paid for and haven’t sold yet.
If your assets are tied up in high amounts of inventory, it restricts other more productive investments for your store.
Moving to a category management approach will help you make more strategic choices for your categories as they relate to assortment, shelving, pricing and promotion — which will ultimately improve the results on your income statement through increased sales, reduced cost of goods sold and/or reduced inventory.
Thinking about your business this way will help you to make better choices that will improve your net profit. And again, who doesn’t want that?
Once you’ve created these category management foundations, you can start to analyze your categories and get insights to help you make better decisions for your categories and your store. Stay tuned for how to do this in my next article.
Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News for the Single Store Owner.