May, 1998

Fruits of Thought

The Cat Trap

Category management is all the rage. Unlike many other management devices that seem to come and go with little more impact than that of boosting consultants’ incomes for a few years, category management seems to be having some real impact in produce operations. Unfortunately, the impact is not positive.

Up to this point the impact was mostly semantic, with many buyers finding their titles, but not their jobs, changed to category managers. Slowly but surely, however, category-oriented thinking is gaining supremacy in the produce department, and that thinking is leading to a most unfortunate consequence: less variety.

The way this is coming about contains a management lesson important to heed: Always create systems so as to reward your actual goal, not some intermediate step which might lead to that goal, or to some other totally unanticipated result.

We all know this in produce. Many who have worked in retail have seen the damage done when top management, usually having little or no experience in fresh produce, begins a campaign to, say, wipe out shrink. Incentive plans are put in place, shrink statistics are carefully watched and the whole organization gets behind the effort to reduce shrink.

Shrink almost always does fall, right along with sales and profits. Why? Because by emphasizing shrink reduction, of course, the store winds up having produce managers who reduce their orders. This means low shrink, but also heavy out-of-stocks and less variety. Since the real goal is not to reduce shrink but, rather, to increase sales and profits, the key has to be a program to maintain “best practices” in the produce department, which will serve to both minimize shrink and increase the sales and profit picture.

Category management is dangerous because it encourages a similar kind of myopia. First a category is created, say stone fruit, and then the emphasis is placed on looking at maximizing profits within that category. Thus, devoting space to a particular variety of plum can only be justified by looking at the impact of that plum’s sales on the stone fruit category. Of course, this is absurd. Plums are not a category; stone fruit is not a category, even produce as a whole is not a category. Nobody should care about his profit on any particular produce sub-category.

We are talking about supermarkets, and consumers come precisely because they prefer the easy availability of a large variety of food and non-food items all in one place. What this means, of course, is that the plum variety is not there principally to boost plum sales profitability, nor even the profitability of stone fruits in general. Indeed the plum variety’s real purpose isn’t even to boost produce department sales – the variety of plums are there to attract consumers who will buy filet mignon, high margin deli items, extra virgin olive oil and a whole lot more.

The problem is that quantifying the impact of selling any one item is very difficult. So, if one doesn’t have confidence in one’s own merchandising sense or doesn’t even have an overall store merchandising philosophy and a compensation plan that encourages department heads to look beyond the confines of their own department, then one is tempted to turn to statisticians. These folks will generate reams and reams of data that will clearly point to how SKUs can be “rationalized” – without any injury to sales or profits.

Yet all this data adds up to more smoke than light, and the impaired vision caused by the smoke can do real damage to produce departments and supermarkets in general. For a long time produce and other perishable departments have suffered from a paucity of data. Now that the data is coming in, perishable departments are faced with an even more difficult task: How to understand it and use it well. To do this requires much more than charting PLU data on individual produce items.

Sure this data might tell you that a particular specialty item is selling less than a case a week at your best store. But what does that mean? The statisticians might finger that item for elimination. After all, the space isn’t being used efficiently. The category manager, of course, is like a horse with blinders on. He is charged with enhancing the performance of a category, and very often his compensation is tied to his success in that regard. He has neither authority nor incentive to think about the impact of his decision to carry an item such as, say, balsamic vinegar. So the specialty item gets deleted.

This completely rational decision – for a category manager – is often exceedingly irrational for the store as whole. It is not only a question of the general proposition that customers are attracted to variety and that a large specialty department will lead to individual customers preferring one store over another because it stocks certain favored items. It is not even that extensive displays of specialty items, such as those geared to minority holidays such as the Jewish holiday of Passover, create the mental impression that a given store always has all the desired items, even among consumers who never would buy off a Passover display.

To understand the real import of specialty produce, one must recognize that all customers are not created equal. Customers who buy specialty produce also are the ones who buy high-margin prepared foods and specialty grocery items. In other words, specialty produce customers are the most valuable shoppers in the store. In an age where people can buy groceries at warehouse clubs, on the Internet and through many other venues, this is worth a thought.

We don’t get enough top supermarket executives interacting with the produce industry at conventions and so forth, but when we do, lip service is always paid to the idea that produce sets the tone for the store. Category management doubtless has some points in its favor. If, however, the perspective cannot be expanded to encompass the impact of merchandising decisions on the ability to attract customers, then category management is a trap in which the industry must avoid getting caught. We are men, not mice; we must see that beyond the cheese lays a trap.  pb