Retail bakeries can profit from managing their business like supermarkets do by employing a principle known as category management. In a nutshell, category management means treating each product category like its own individual business unit. Bread, for example, would be handled as a single category and managed accordingly. If you raised the price of one variety of bread, but not other breads, you would analyze the profitability of doing so on the entire bread category, not just the single product.
Supermarkets have learned over the years that consumers respond to price increases and promotions across entire product categories. One individual change affects the whole.
Why this is important to retail bakeries, particularly those that sell a lot of self-serve products, is that category management can help you improve bottom-line profitability. Supermarkets work on slimmer net margins (2-3 percent) than retail bakeries and, therefore, depend on volume sales to raise profits. Still, this principle is a useful tool to understand the effect of pricing changes and seasonal promotions on the profitability of any retail bakery business.
Retailers typically compete on price in one form or another. While the strategy for an everyday low price (EDLP) retailer is certainly different than a hybrid-EDLP or a high-low retailer, price remains paramount as margins decline to an all-time low, according to Willard Bishop, a Chicago consulting firm. Yet, despite its importance, price remains one of most mismanaged areas in consumer goods retailing.
Price communication is one of the most important elements in an effective pricing strategy. Retailers may have solid pricing practices in place, yet shoppers fail to acknowledge, or don’t realize, the values being offered, according to Willard Bishop.
The battle for capturing more share of wallet continues to intensify as the percent of promoted items reaches new heights. For many retailers, more than half of their total sales are promotion related.
The percent of sales from promoted goods is at an all-time high; however, the true impact of these promotions is often unknown due to multi-department tie-ins and inability to determine the tradeoffs between increased traffic and lower margins. To optimize promotions, Willard Bishop uses sophisticated, pooled demand forecasting to determine the optimal mix of products and price points.
The goal is to obtain long term improvements in the efficiencies of the retailer, which leads to increased sales, an improved shopping environment and customer loyalty. The idea behind category management is straightforward: manage each product category in a way that enables maximum consumer appeal while maximizing profits.