Seeing ads from Kraft Foods in a business magazine for the supermarket industry is not surprising. In the series it's running now, though, the ads don't feature Kraft's portfolio of top-selling products, one or more of which 99 percent of Americans consume daily. You're more likely to find Kraft Singles, Oscar Mayer Hotdogs, Jell-O or Cool Whip at home than on the pages of a trade magazine.
Instead, this $17-billion subsidiary of Philip Morris is running multipage ads about the solutions the Kraft sales force offers its retail partners to improve their bottom lines. The company has even trademarked the service, "Kraft Plus."
In the highly competitive food-sales business, Kraft is positioning its sales force as a strategic partner armed with consumer insight and the tools for translating information into customized and practical growth strategies. Much more than a trademarked slogan meant to inspire a sales force, Kraft Plus is about empowerment. And because Kraft's salespeople generate 90 percent of the company's sales, giving them the tools to be more productive has a direct impact on the bottom line.
The Food Supply Chain
Over the last 10 years, and more intensively in the last three, consumer-product sales have changed dramatically, taking on a fact-based approach. Today's salespeople not only want tools to help them share information with their accounts, they need them.
Just how effective Kraft has been at giving its sales force the right tools is evident in the company's sales figures: Compounded growth over the last few years approaches 10 percent, while profit margins jumped from 14.8 to 17 percent from 1995 to 1997. As Kraft's sales go up, so do those of its trading partners. Some report growth in product categories supplied by Kraft that is four times the national average.
How? Most large consumer-product vendors like Kraft are forming partnerships with retail customers to implement a process called category management. This business practice takes such categories as cheese or toothpaste and manages them as separate and strategic business units within a store. Retailers assign roles such as "traffic builder" or "profit contributor" to each category and work with vendors to develop a mix of products, prices and merchandising that will best meet consumer needs-and meet specific volume and gross-margin goals by category.
Because category management focuses on the consumer as the driver, the supply chain is transformed into a demand chain. Instead of suppliers pushing products onto retailers' shelves, retailers pull from manufacturers the products that fulfill the needs of consumers who shop their stores. In such a chain, all trading partners must be dynamically linked in a common effort to provide value to the end consumers. And determining what will satisfy them requires intensive analysis of data and new levels of cooperation between buyers and sellers.
Supermarkets, which provide most of Kraft's sales, have traditionally felt pressed upon by vendors to carry an ever-increasing number of new items. They've also felt the sting of lower margins as many manufacturers switched to Every Day Low Pricing (EDLP), and watched as their suppliers supported new retail channels that stole market share in category after category.
Vendors, for their part, accused retailers of profiteering through a host of charges and slotting fees, and of pocketing promotion money rather than implementing the promotion. All too often, products tended to get on the shelf if salespeople had enough deal money-and not because the products served a consumer need.
Kraft was one of the first consumer-product manufacturers in the United states to recognize the potential of using information and cooperation to identify and capitalize on opportunities within categories. Says Nick Feimer, director of sales technology and information at Kraft, "We view ourselves as a trading partner with our customers, so what we're trying to do is help them grow their business while we grow our business. That's the way, as trading partners, that we can both be profitable and both achieve our goals."
Kraft also wants to be designated the retailer's key partner or "category captain." Captains, while they are supposed to be impartial and objective, have a strong influence over the assortment of products and brands in a category. And Kraft tries to win this coveted position by having not necessarily the most powerful brands but the best consumer understanding, information and analytical capabilities to help the retailer grow sales.
A Recipe for Headaches
Kraft first delved into category management back in 1987. It then incorporated into its internal efforts a systematic process model developed by the Food Marketing Institute (FMI). This process, which has become something of a standard in the industry, includes eight steps: defining the category, defining the category's role in the store, assessing current performance, using scorecards to define growth opportunities, developing strategies, developing tactics, implementing the plan and doing periodic reviews.
Moving through these steps requires intensive analysis of POS data, geo-demographics, consumer decision trees, product assortments, pricing, promotions and so on. And depending on the category, the process can take from 200 to as much as 1,200 hours to develop.
Such effort is a far cry from the traditional activities of salespeople and retail buyers. One day, they were expected to milk the other for the best deals possible. The next, they were supposed to sit down, go through loads of sensitive data and make a detailed six-month plan for maximizing profits in each product category. Even their bonuses were on the line.
The innovative but demanding approach to sales placed new demands on Kraft's sales force and required new skills in order for them to incorporate such sophisticated category understanding into their product-sales strategies. It required new talents on the retail buyers' side, as well. Because both sides need to understand category dynamics, both sides have to learn new ways of looking at their businesses.
There is no doubt that category management works: By 1995, numerous companies were citing cases of how they applied the process and were able to increase turns and boost profitability. Still, Kraft was having difficulty getting buy-in from the very retailers it was trying to help. After eight years of developing and successfully implementing the FMI process, only 15 to 20 of its accounts were actively pursuing category management. Kraft had a wealth of consumer insight. Its salespeople were armed with scan data, household panel reports and in-depth understanding of more than 30 key categories. They were doing everything right, but something was wrong.
Then, the discovery. Most of Kraft's accounts were overwhelmed by the intensive work required to move through the eight steps. And that, says Feimer, is the reason Kraft started down the path of forging more streamlined category management. "We always have used the FMI process because it's well planned and well developed, but it was also a process that, for many retailers, was more comprehensive than they had the resources to be able to act against."
Not only does the average supermarket have well over a hundred categories to manage, the ink on most retail category manager's business cards had hardly had time to dry. Even those who did have the right analytical skills often got bogged down with "analysis paralysis." As Feimer notes, "We found that trying to go to the full-blown FMI process required more than the resources that were available, both in terms of training and in terms of time commitment-and on both sides, from a manufacturer's perspective and from a retailer's perspective."
In Careful Measure
For Kraft to benefit from its knowledge about growing sales by category, it had to streamline the FMI process and make it more convenient for its customers to use. Just as important, it also had to make the process more convenient for its salespeople.
"We had been engaged in a lot of category-management projects using the more comprehensive FMI-type process. And while it was clearly an effective one, there were ways of streamlining it and getting 80 percent of the value with significantly less effort," Feimer says. In fact, he adds, streamlining is the push behind automation at Kraft. "With all of our sales-information applications, the goal is to derive 80 percent of the value with 20 percent of the time and effort required. That is a pretty efficient approach to category management, as well as a lot of other things we do with retailers."
Called 3-step Category Management, the process Kraft developed has turned out to be both more efficient and more effective. It is supported by a suite of software applications that automate much of the time-consuming analysis required by FMI's eight-step process. These tools also help the sales force convey to retail partners what drives a category and why consumers want Kraft's products.
"Even those who did have the right analytical skills often got bogged down with `analysis paralysis.'"
step one overviews consumer profiles as well as total size and trends in the category. Here, Kraft provides hard copies of graphs and charts that show if more households are buying the category or if consumers are trading up to larger size packages, among other peeks into the consumers' shopping cart. The middle step assesses a retailer's management of category sales tactics, such as assortment, space management, pricing and promotions. The third step is a tactical plan with specific, actionable suggestions for implementing the strategy.
Feimer explains: "Most of those original eight steps get combined in the middle step, category assessment, which we think is the most important part and is where probably the largest degree of automation takes place. There, we're applying the information from syndicated sources and putting it in a template form that can be used for analysis and development of strategy and tactics."
Syndicated data comes mostly from Nielsen and helps answer questions that are critical to maximizing sales from the category. For example, is the ratio of shelf space to sales appropriate for each product at this store? How do average sales prices at this store compare to another store or cluster of similar stores in the market? What share of this category does this retailer have in its market? What is the effect of promotions at this store versus others?
The streamlining applications have proven to be useful in a variety of instances. Kraft uses them when an account requests a "mini-review" of a category or multiple categories. They also work as part of a portfolio of management techniques. That is, a complete category management plan might be developed for strategically important "destination" categories, while streamlined reviews are developed for "routine" categories.
The Right Category Mix
One key tool for some of this analysis is a proprietary software product called Efficient Assortment Optimizer. It finds the most profitable and consumer-friendly mix of products in a category by automating the multistep manual process called for by FMI. Without it, assortment optimization can take weeks. With it, it is a matter of hours. No steps are eliminated, but the system automatically crunches the numbers and suggests assortments for categories based on preferred scorecard measures such as volume, gross margin and net profitability.
Although Kraft generally develops software internally, when developing this program, it sought feedback from some of its best customers about how its reports should be tailored to their needs. One such company was Supervalu, the nation's largest food wholesaler and an operator of 328 stores. According to Michael Terpkosh, the company's director of category management development, "When they were in the development stage, Kraft did come to us and ask if the types of charts and formats they were developing would be acceptable in our category reviews. Their reports were pretty good already, but we asked them to run the reports in a slightly different way, and they offered the flexibility to suit our category-management program."
Based in part on the advice of its customers, Kraft created an application that shows in graphic form just how many items a retailer should offer in a certain category. Beyond that number, additional items will only cannibalize sales of existing products and increase the retailer's handling and tracking costs. Kraft developed this particular solution in conjunction with an outside company, Milton Merl Associates. It is similar to that company's ABC Now optimizer application, which also provides complex, comprehensive and time-saving assortment analysis.
Another tool that complements the 3-step process is the Efficient Promotion Analyzer (EPA), which Kraft developed in-house. EPA helps retailers understand what drives promotional success for an individual item as well as the effect of promotions on a total category. Again, variables such as the level of retail execution, out-of-stock conditions and display location are so many that careful analysis begs for automation. EPA shows what type of promotions increase a retailer's market share in the category and best support the category role and strategy. Postpromotion fall-off, as well as external factors, including how retail competitors responded to the promo, are also included.
Getting all this information out to the field is straightforward, reports Feimer. "Everybody in our field organization has a laptop and has access to an intranet and a sales-information site that has a library of documents," he says. "Among the documents are things called consumer category reviews, which summarize all of the key consumer information that would be useful, from a retail category-management perspective, for each of our categories."
The system allows the company to share a lot of other consumer information that has been assembled within different operating units at headquarters. "As an example, for our pourables category, the consumer category review would have information about consumers of the category, consumers of our brand, some competitive brands, perceptions about it, demographics and consumption behavior. Consumer category reviews now would also include consumer decision trees, which are being used broadly in the retail industry to define the category and how consumers go about making trade-offs and decisions about products within the category. A whole variety of information that we typically have used at headquarters to better understand the consumer has been encapsulated in a way that it can be used by the field-sales organization for category-management purposes."
Says Terpkosh, "Kraft has been probably one of the best at going through and making the category-management process more practical for its team in the field. What I think is important is that the 3-step category management product allows its field salespeople to spend less time data crunching and more time on analysis and working with us to make category decisions."
"Retailers also ranked Kraft among the highest suppliers for delivering the kind of consumer insight that drives sales."
The Proof is in the Pudding
Kraft's organizational structure was instrumental in the development-and current success-of the 3-step process.
In 1995, Kraft's parent company Philip Morris dissolved the former Kraft USA and General Foods operating groups and consolidated their manufacturing, distribution systems and sales forces under the Kraft Foods banner. It was then that the company also realigned its 3,000 field-sales representatives into regional business teams and created about 300 dedicated account teams in the field for nearly every major customer. Headquarters selling and retail execution for each account were put under the management of a single team leader; each account team is also supported by a category manager (or as many as five category managers for larger accounts). Additionally, approximately 20 people in local information teams support the account. This is true across all classes of trade-supermarkets, mass merchandisers, clubs, convenience stores and other formats.
As the company began work on the 3-step process, recalls Feimer, "We were in a favorable position from a resource perspective because we have a decentralized sales-information staff that is very actively engaged in category management and has been since 1995 when we had the unification."
Now, almost five years later, that favorable position has translated into a favorable impression among retailers. In a survey conducted by Cannondale Association of Wilton, Conn., 19 percent of retailers reported that the category-management information provided by Kraft's salespeople has provided a competitive advantage for their stores. Kraft ranked second, behind only category-management pioneer Procter & Gamble. Retailers also ranked Kraft among the highest suppliers for delivering the kind of consumer insight that drives sales.
"Over the last four years," says Terpkosh, "Kraft has proven itself time and time again to have superior category-management knowledge, systems and people resources. Its expertise, insights and technical development keep Supervalu's category-management program on the cutting-edge of our industry. There have been numerous advancements proposed by Kraft and accepted by Supervalu as part of our category-management program."
Indeed, Kraft reports that the 3-step program has resulted in category growth rates for its customers that are higher than the national average. While no more than 20 accounts commit to the more detailed eight-step methodology, Kraft has enlisted another 100 to 150 accounts to practice the 3-step approach.
According to Feimer, "The results we are getting, on average, for our customers is about a 5 percent growth in the category when we're doing category management-this, versus the competitive market growing at a margin of about 2.5 to 3 percent greater than what you'd see if you were not engaged in category management."
As for the impact of 3-step, he adds, "It generally hit the 80/20 rule in that we are deriving at least 80 percent or more of the value with a lot less than the full effort."
A Key Ingredient of Success
Kraft Plus well describes the effect the 3-step process has had on Kraft Foods' sales. By focusing on the services its customers need, Kraft has become more profitable and, at the same time, improved relations with its trading partners. As planned, enabling Kraft Foods sales force with automated solutions to streamline the supply chain is the key to this win-win relationship.