How important is category captainship in the world of retail? If recognition is any indicator, then it’s worth noting that USA-based trade magazine Convenience Store News hosts an annual “Category Captains Awards,” recognising 16 categories, including “candy,” “health and beauty,” and three award subcategories under, “food services".
A "category captain” is generally a retailer’s best-performing supplier or manufacturer in a particular category. This category captain provides insights through relevant consumer data to improve overall category performance and increase the retailer’s growth. As a consumer, you have likely already encountered its influence in product selection and strategic arrangement at your local supermarket. Category management has revolutionised retail decision-making by shifting from viewing individual brands in isolation to treating entire product categories as distinct business units with decisions involving product selection, pricing, shelf placement, promotions, and displays, all with the goal of enhancing profitability.
At the heart of "category captainship" lies a collaboration between retailers and suppliers, particularly leading national brand suppliers that leverages specialised knowledge to drive informed decisions.
Progressive Grocer, which has been tracking the grocery retail industry for more than a century, came up with a list of 19 brands in 2022 that "stepped up to provide trusted guidance on how to keep sales growing not just in their particular categories - even relatively mature ones - but also throughout the store, have emerged as retailers’ staunchest allies in generating hard-won profits." This endorsement underscores the significance of category captainship arrangements, especially in a post-pandemic and data-driven world.
Ahmed Timoumi, Assistant Professor, Marketing, ISB and his team employed a game theoretical model to investigate how category captains strategically share their demand-related knowledge with retailers. This 2023 study is the first comprehensive study to explore category captainship arrangements as tools for transmitting critical strategic information. It is also the first analytical investigation into non-price demand-enhancing category captainship, considering both the impact on sales volume and pricing strategies as retailers strive to maximise their category profits.
Knowledge is Power
Retailers often grapple with managing numerous product categories, making allocating specialised resources to each one expensive and impractical. To address this, many retailers collaborate with leading national brand manufacturers or suppliers, tapping into their insights on demand drivers, consumer shopping habits, and market trends. Both, smaller retailers and industry giants like Walmart, Target, and Safeway, employ this collaborative approach. For example, Walmart partnered with General Mills for the soymilk category, Target with Cadbury Schweppes for premium beverages, and Safeway with Campbell for soups, a 2010 University of Texas study shows.
Traditionally, retailers made decisions about individual brands and products in isolation. However, in the age of data-driven decision-making, it became clear that a more holistic approach was needed.
Category captainship arrangements offer retailers a unique advantage by providing access to superior knowledge and expertise from leading suppliers. The resulting "information effect" equips retailers with valuable insights into consumer preferences and demand patterns, empowering them to optimise pricing strategies and ultimately boost profits.
The primary goal of category management is to optimise the profitability of each category by ensuring that the products within a category work harmoniously to drive sales and maximise revenue.
It's a strategy that requires a deep understanding of consumer behaviour, market trends, and the competitive landscape.
The "Information Effect"
In the realm of marketing and operations management, past research has delved into captainship arrangements, which typically involve three core areas: pricing decisions, product assortment choices, and non-price demand enhancement strategies.
For example, the University of Texas-led study showed that when brands in the category can easily replace each other, services that expand the category are more effective for a manufacturer's sales and margin, than those that shift demand between brandsiv. This motivates captains to provide services benefiting all brands, even if it appears costlier.
However, Professor Timoumi’s primary focus goes beyond pricing-related activities and focuses on aspects such as optimising shelf organisation that leverage the captain's extensive category insights to enhance retail pricing strategies.
North Carolina-based VF Corp, which owns brands such as Lee and Wrangler, acted as category captain for its retail partners in the jeans sector and collaborated with retailers to select the product mix for each region, design in-store product displays, and manage inventory levels. The strategy worked for the jeans category and inspired the company to assume category captainship roles in additional areas such as sports licensing and outdoor performance apparel, according to a June 2009 Vanderbilt University study.
Category captainship arrangements take various forms, with most theoretical analyses focusing on delegation arrangements, where retailers entrust a significant part of category management decisions to the designated captain.
Doesn’t this delegation compromise the retailer’s interest? It seems not - a June 2015 study by the University of Southern Queensland concluded that no substantial evidence suggests retail chains’ power is strategically eroded if they rely on category captainship arrangements.
Professor Timoumi’s findings showed that captains can share demand-related information with retailers in captainship arrangements, pinpointing the conditions for this exchange. Further, it highlights that retailers benefit from this information, especially in refining their retail pricing strategies, introducing the novel concept of the "information effect" in non-price category captainship arrangements.
However, it's important to note that captains may have a natural inclination to promote their own brands, potentially leading to suboptimal decisions for the overall category, and thus the retailer. Nonetheless, even in such scenarios, retailers can benefit by adjusting their pricing strategies based on the information provided by the captain, which can lead to overall optimal outcomes.
Professor Timoumi also delves into advisory arrangements, where retailers maintain control on decisions but seek category captains' advice. The research findings confirm that the information effect of category captainships remains intact, benefiting retail pricing and resource allocation.
Listerine makers Warner-Lambert collaborated with Wal-Mart to exchange demand predictions six months prior to the anticipated retail sale date, to enhance order precision and optimise production planning. The information exchange resulted in Listerine experience a significant improvement in its production scheduling, and Wal-Mart boosting its in-stock position from 85% to 98%, a 2008 University of Pittsburgh study shows.
However, delegation arrangements surpass advisory arrangements in terms of information potential, challenging the conventional belief that the retailer has the best knowledge that results in best outcomes. Delegation can unveil valuable information, even if it comes with an expected loss in demand due to the captain's opportunistic behaviour. In contrast, advisory arrangements may not provide these insights.
In practical terms, these findings provide valuable guidance for retailers. Captainship arrangements can be especially beneficial in categories where retailers are uncertain about how brands respond to non-price promotions.
As category captain for baking goods with its retail partners, General Mills focused on SKU rationalisation to simplify choices and reduce duplication, leading to clearer options for consumers and category growth. This approach increased a retail partner's base dollar volume by 10.2%, according to a June 2009 Vanderbilt University study.
Even in categories with lower sensitivity differences, captainship can still boost profits. Overall, captainship arrangements work best in categories where brands are easily interchangeable, emphasising their potential to increase retailer profits.
Making Informed Choices
Using a numerical simulation, the authors show that in 28% of the cases, the retailer benefits from category captainship arrangements, resulting in an average 10% boost in profit and reaching even a 31% increase. These findings support the analytical results and highlight the impact of such collaboration between retailers and suppliers.
Prof Timoumi’s study also explored advisory captainship arrangements, where advice can differ in scope (from specific brand recommendations to broad retail pricing suggestions) and confidentiality (whether shared with all channel players or kept between the retailer and the advisor).
Colgate - Carrefour’s category captain for oral care – recommended rearranging the retailer’s display by placing toothbrush products above toothpaste which resulted in a 6-16% rise in sales in Carrefour's oral care category, benefitting both companies. This channel improvement was cost-effective as Colgate leveraged its existing consumer studies and expertise, saving Carrefour from conducting expensive research, according to a June 2009 Vanderbilt University study.
Similarly, Ross Products, which served as Safeway's category captain for the infant formula category in 2004, identified under-merchandising issues, and recommended changes in shelf space positioning and pricing adjustment. Safeway implemented the suggestions, resulting in a 9.2% increase in the category sales. The Vanderbilt research authors noted that while Safeway could have improved the category independently, Ross Products’ category captainship proved cost-effective due to their expertise.
The team observed that category captains can be helpful when retailers are unsure about how brands react to category changes and when they don't expect much difference between brands.
Secondly, the study emphasises the role of cross-price sensitivity. It suggests that retailers are likely to profit from a captainship arrangement in categories where consumers are more likely to switch between brands based on pricing.
These two observations are touchstones for managerial decisions in that they provide practical guidance to retailers to go beyond evaluating category captainship solely based on its ability to expand category volume. Instead, retailers should consider factors such as uncertainty levels, expectations regarding sensitivity differences, and brand substitutability within the category.
Aye, Aye Captain
Of the 434 cases of category captainship examined by a 2011 Vanderbilt University study, 16 were in the Candy and Gum category, 12 in Alcoholic Beverages, two in Soaps and Detergents and no reported implementations in the Dairy and Milk category, highlighting the varying degrees of competition for the category captainship role among manufacturers across different product categories.
Further, the number of manufacturers serving as category captains also varies widely across categories. In some categories, a single manufacturer, such as Unilever, may exclusively hold the category captain role, as observed in the Ice Cream category. In contrast, the Baby Food and Products category has seen the involvement of six different manufacturers as category captains for various retailers. The Vanderbilt study noted that these manufacturers include Kimberly-Clark, Johnson & Johnson, Ross Products, Abbott Nutrition, Nestle Nutrition (Gerber), and Beech-Nut.
This emphasises that the intensity of captainship competition can differ from one category to another, with some categories having a more diverse set of manufacturers vying for the captain position. In contrast, a single manufacturer may dominate others. These observations underscore the importance of understanding the dynamics of category captainship within the context of specific product categories and the unique competitive landscape that characterises each one.
The research thus shows that the “information effect” still holds true for store brands and national brands in the competition for shelf space as the category manager is incentivised to select the rival's brand for display to enhance base demand indirectly.
While existing theories focus on the "volume effect" of captainship arrangements, Professor Timoumi’s research introduces the concept of the "information effect," wherein the captain's decisions transmit valuable demand-related information to retailers. In an information age, this reduces uncertainty about brand demands, enabling better pricing across the entire category.
The study highlights key insights, emphasising that retailers should not evaluate captainship arrangements solely based on category volume expansion. Instead, they should recognise the informational value in making better pricing decisions, with the ultimate objective of improving overall profitability.
The article is based on the research paper:
Timoumi, Ahmed., Esseghaier, Skander., Kockesen, Levent. (2023) "Should the fox guard the henhouse? Category captainship arrangement as a strategic information transmission mechanism", Production and Operations Management