Solving the Problem of Category Leakage

Every retail leader has a common problem and it's leakage, the loss of volume from a current shopper who buys a category sold in that retailer’s store from a competitive retailer. The most dramatic example is the disposable diaper category where Amazon claims 25 percent of category sales from mothers who are buying most of their other baby needs from conventional, neighborhood, brick-and-mortar retailers that they visit multiple times per month.

This leakage problem is growing by the hour as shoppers became more digitally empowered to find better item choices from a diverse retail universe.

You would think retailers would be addressing this issue, but we find little if any comprehensive response to the problem. Today’s response ranges from avoidance to self-delusion about the adequacy of current efforts. This is alarming given that leakage is pandemic.

Why are retailers failing this major strategic test? I think many understand the problem is serious, but they have put it in the "too hard" pile. They sense its solution is multifaceted, and like so many of us when faced with a problem requiring strenuous effort, we avoid taking arms against a sea of troubles and by opposing, end them.

As far as leakage is concerned, the retail leader has become Hamlet. So, the first reason leakage has not been solved is that it require leadership that thus far has been absent or inadequate.

Once the retail leader has decided to confront leakage and solve it, the problem requires four things:

1. A correct analysis of the problem

2. Better use of data

3. A new organizational structure

4. An internal process

Let’s start at the top: analyzing the problem correctly. In order to solve the leakage problem, retailers must think above the category level to the need state level. Let’s use a simple example familiar to all. A person who buys diapers from Amazon is, in all likelihood, a mother. A mother has a baby and satisfying the baby’s needs is a comprehensive concern or "need state" involving numerous categories. She may be buying diapers from Amazon, but she’s probably buying baby food from the local grocer and other baby needs from a drugstore or a mass merchandiser such as Walmart.

Therefore, the key is understanding the baby need state itself -- on both a rational and emotional basis -- and then providing the ideal shopping experience so that one of these formats can increase its share of wallet from the need state.

That’s where using data more creatively comes in. Today, retailers have more data than ever before. Loyalty card data offers powerful answers to the need state problem. For their part, manufacturers have an astonishing variety of data providing depth and richness to understanding the need state. Moreover, retailers have more research tools with which they can compile a document we call the "Voice of the Need State."

No one is doing this in a best practice manner for a combination of reasons, usually traceable to ignorance of the best practice or an internal failure of leadership to demand such a document. I have had proud retailers tell me they have such a document, but when challenged to produce it, everyone comes up empty.

This gets us to the third reason: organizational design and responsibilities. Retailers function within an organization designed by Darwin to survive in their environment, which requires a buying skill and a logistics skill (get the stuff we buy to a store where shoppers can buy it). Therefore, retail organizations are designed around categories functioning within larger corporate silos such as dry grocery, perishables, health and beauty aids, and general merchandise.

Retailers are designed around their needs, not shopper need states. No one retailer owns shopper needs. And in the few cases where embryonic shopper management groups have been formed, these groups are paralyzed by the habits of the powerful Darwinian silos that exist within the organization.

The best example is the lack of a need-state marketing process. When some retail employee, usually an individual category manager, does identify a multi-category need state to serve, that individual manager does not know what internal buttons to push. In many cases, the manager will reach out to a supplier and ask if they can assemble a coalition of the willing from non-competitive suppliers to create what -- a promotion.

That’s right. Retail category managers think of need states as a time-sensitive weekend promo (i.e., Easter or back to school). Category managers are event driven, not relationship or shopper need state driven. They rarely think of a need state as a continuing 52-week need that, if met superlatively, can bind the shopper to the retailer forever and stop leakage in the need state.

So, there you have it. Leakage occurs at the need state level, and retailers are organized by categories. No one owns the shopper need state and if someone in the organization does own need states, that person has no process and little authority to overcome the powerful organizational inertia that produces 52 weekly events.

One person stands above this dysfunctional organizational landscape: the retail leader. Somewhere there must be a retail leader with the intellectual bandwidth and personal energy to solve the need-state-driven leakage problem by organizing the internal skills, the data and the process to own shopper need states. Only then will leakage be minimized.

Gordon Wade is CEO and director of best practices for the Category Management Association (CMA). The mission of the CMA is to advance professional standards in category management.

Editor's note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News.