Category Captaincy on the Frozen Food Aisle
MKTG 640: Category Management
Professor Scott Beck
06 October 2016
Introduction
Category captaincy is an arrangement whereby a retailer outsources management of a whole category to a supplier. The category captain would be responsible for assortment planning, determining which SKUs to stock, and the selling price for each SKU. If this seems like a vital position to be in control of, that’s because it is. The case in focus follows Wilson Chen, a relationship manager for Freezer Foods as he weighs the angles on exactly what it means to be a category captain. A buyer of Freezer Foods, Big city Grocer is offering category captaincy to either Chen’s company or a competitor of Chen’s, TV Meals. Chen’s most extreme concern is that, theoretically speaking, a category captain could completely shut out any brand he wanted. This foray will discuss why the grocer is offering category captaincy to a supplier, benefits and challenges of category captaincy, what Chen should offer to win the captaincy, and personal recommendations on how Chen should approach the proposal.
Implications to Consider
Upon further research, category captaincy is not all that rare in retail settings. In fact, category captaincy is very common in retail environments with a faster life cycle. For instance, category captaincy is given to some suppliers in the fashion industry. Some may wonder why exactly a grocer such as BigCity is offering category captaincy to a supplier. When one takes a step back, a fuzzy picture comes into focus. A grocer is not necessarily worried about how one SKU does, but rather how each category (made up of a collective of SKUs) performs. As the case study goes on to outline further:
“Managing an individual SKU, or even an individual brand, to maximize its profitability might encourage price-cutting in an attempt to steal sales from other SKUs, or brands. The lower prices might drive increased sales and profits for the focal SKU but reduce the profits of other SKUs by more than the increase in profits gained by the focal SKU. Thus, independently managing each SKU, or brand, could earn less from the category as a whole than managing the entire category.” (Viswanathan & Bundle, 2015)
A category captaincy given to a supplier would give the retailer the expertise needed in order to avoid this effect of cannibalizing by pricing, and allows the retailer to enjoy the benefits of an overall more healthy category.
While category captaincy can work well for the retailer, it may have some unintended competitive consequences. One of Chen’s concerns was that should his company lose out on the captaincy, what is to stop his competitor, TV Meals, from completely squashing out Chen’s brands on the shelf? External research shows that category captaincy actually benefits most manufacturers involved. In fact, one publication found that a category captaincy leads to a service efficiency effect. (Subramanian, Raju, Dhar, & Wang, 2010) This is observed when service that expands a category is more effective in increasing a manufacturer’s sales and margins than service that shifts demand from a rival’s brand. (Subramanian, Raju, Dhar, & Wang, 2010) In short, diversifying your own offerings can do more for increasing your brand equity than taking away demand from a competitor. So Chen needs not to worry. Category captaincy is usually a mutually beneficial arrangement for all parties involved.
This may lead some to question whether category captaincy is breaking any anti-trust laws, especially when prices are agreed upon between all parties involved. The case study offers that there was a judicial case, Conwood Company vs. United States Tobacco Company (USTC) where USTC abused its position of category captaincy. The courts in this case ruled against USTC citing that they plotted to exclude competition by preferring their own brands and were rightfully fined 1.06 billion dollars. (Kurtulus, 2008) The only problem with this, however, was that category captaincy is ubiquitous in the retail industry. If category captaincy was illegal, surely no other company would partake in such a practice. Chen illuminates us on the deciding factor: category captaincy only becomes frowned upon legally if it harms the final beneficiary, the consumer.
Moreover, there are other benefits and challenges to consider when engaging in category captaincy. For one, retailer costs are kept down. By outsourcing category management to a supplier, the retailer saves on not only having to assign manpower to manage a category, but on the consumer analytics that the supplier already has in order to make correct category decisions on the sales floor. The downside to this is that from the manufacturer’s standpoint, a potential competitor has access to your sales numbers from the scanner data used. However, this is a small price to pay if it means your overall category is growing. Whatever the case, research does show that the average quarterly revenue of a category is better by at least 8.22% if a manufacturer controls a category in a retail space compared to a retail managed category space. (Viswanathan & Bundle, 2015) A cynic manufacturer may say, “Okay, so what if overall category grows, it doesn’t mean anything if my own brands don’t grow.” Fortunately, it does. In Exhibit two, it’s shown that both, manufacturer y and manufacturer z increased their brand development index (BDI) significantly when a manufacturer was captained with a category as opposed to retailer managed. (Viswanathan & Bundle, 2015) So yes, all in all, category captaincy definitely has advantages as shown empirically here. Moreover, there is a lot of data that supports any manufacturer can do better under manufacturer category captaincy as opposed to retailer captaincy. However, Chen should keep an eye on this: manufacturers who have captaincy and then lose that captaincy to rivals stand to lose their BDI, almost always. This means that yes, in general, a manufacturer will do better under a manufacturer category captaincy but obtaining that captaincy and retaining it is crucial.
Proposal
Chen has to be aggressive in his proposal to BigCity Grocers. The research shows that having captaincy translates to positive profit trends. When posed with the question of whether or not to compensate BigCity for the right to be a category captain, absolutely yes. Compensate them. Because, the opportunity cost is way too high should he not offer something and TV Meals offers a sizable compensation package. Moreover, the amount of compensation should be scaled. In general, captaincies last an average of two years. This amount should be baselined as “X”. Every year after should be scaled somewhat like the table below:
Years of Captaincy
Amount Compensated to BigCity Yearly
2
X
3
X*1.1
4
X*1.2
6
X*1.4
8
X*1.7
For instance, if BigCity agrees to eight years of Freezer Foods captaincy, then they are entitled to the base of whatever amount the Freezer Foods board approves as the baseline, times two to be paid out yearly. If Chen and Freezer Foods are going to compensate BigCity, then Freezer Foods should definitely try to get a maximum return on investment by incentivizing longer contracts.
Next, Chen has to address how the grocer measures success. There are a slew of factors that Chen has to stay on top of. For instance, out-of-stocks, defined as the percentage of outlets where a SKU was listed as being available, but was not available when looked for has to be kept in checked. Moreover, Chen has to be aware of inventory turns, calculated as product revenues divided by average level of inventory. Then there’s service levels such as amount of on-time deliveries. And finally, there’s share of shelf and numeric distribution of SKUs. All of these can be grouped into category logistics. And as such, Chen should create a task force of five to ten team members whose sole responsibility it is to stay on top of these five key percentage indicators and make sure that they don’t fall below preset retailer preferences. This task force would also be tasked with routine external audits to further alleviate the workload on Chen and at the same time meeting the needs of the retailer to make sure their customer experience is bar none.
And the final part of the proposal is solely Chen’s to take on. Chen has the responsibility of driving a retailer’s two biggest key percentage indicators. The first being brand development index (BDI) and the second being category development index (CDI). While Chen has to answer to his boss at Freezer Foods for the BDI, he also has to answer to the retailer for the CDI. The two ideas are not mutually exclusive and one can have a successful balancing act between the two.
Conclusion
In conclusion, category captaincy has shown that it can mutually benefit all parties involved in the program. Chen has to be careful not to completely stifle out competition from TV Meals before he is accused of antitrust by the retailer, or worse yet, the legal team at BigCity. The research shows that while manufacturers almost always do better under a category captaincy as opposed to retailer managed, it is better off to be a category captain than a category follower. Furthermore, the research supports that sustaining is a captaincy is just as crucial. This is evidence by the steep drop in BDI after a rival takes over after a captaincy is lost. With this in mind, Chen has a winning plan that can benefit all parties involved and win the captaincy for his company.
Chen should be aggressive in his proposal, which is broken up into three parts. First and foremost, Chen has to be competitive in his compensation to BigCity for the right to be a category captain. A scaled system of compensation will incentivize the grocer not only to pick Freezer Foods, but to select them based on a longer agreement. This will give Freezer Foods a distinct competitive advantage over TV Meals. Secondly, the grocer has a few logistical items that are at the forefront of how the grocer frames success. Chen will offer a team of five to ten member whose sole responsibility it is to stay on top of the five KPIS, such as out-of-stocks, inventory turns, service levels, share of shelf, and numeric distribution. And finally, Chen will personally manage two of the biggest KPIs that the retailer keeps an eye on. The first being BDI and the second being CDI. BigCity will not go wrong by selecting Freezer Foods, especially when Chen will have addressed every potential pain point and trepidation that BigCity Grocers may have. Category captaincy, while at first glance may seem counter intuitive, in actuality, is healthy for the marketplace and consumers in the end.
WORKS CITED
Kurtulus, M. (2008). Category Captains: Who’s in Charge? Retrieved October 06, 2016, from http://www.owen.vanderbilt.edu/faculty-and-research/vanderbilt-business- inbrief/category-captains-whos-in-charge.cfm
Kurtuluş, M., & Toktay, L. B. (2015). Category Captainship Practices in the Retail Industry. Retail Supply Chain Management International Series in Operations Research & Management Science, 147-174. doi:10.1007/978-1-4899-7562-1_7
Subramanian, U., Raju, J. S., Dhar, S. K., & Wang, Y. (2010). Competitive Consequences of Using a Category Captain. Management Science, 56(10), 1739-1765. doi:10.1287/mnsc.1100.1211.
Viswanathan, M., & Bundle, N. (2015, April 10). Managing the Competition: Category Captaincy on the Frozen Food Aisle. Ivey Publishing, 1-12.