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[20 comments]

Is the Category Killer a Broken Model?

January 2, 2014

In the 1980s, the "category killer" arrived on the scene to waylay the retail landscape.

Their wide assortments, aggressive pricing, extensive store network, and perceived expertise in the categories they served sent many smaller independents out of business. But in many categories, their reign was short-lived, evidenced by the exit of CompUSA, Circuit City, Blockbuster, Borders as well as the struggles at Best Buy, Staples, Toys "R" Us and others.

The fault for the failure of many category killers was often placed on the even-larger mass merchandisers, particularly Walmart, Amazon.com, Target, and Costco, although the internet gets the full blame in certain categories. As each collapse has piled up over the last few years, calls for the death knell of the category killer concept are heard.

The recent move by Standard & Poor's to cut Guitar Center's debt rating to junk status prompted analyst Eric Garland to link the chain's struggles to the category killer challenges.

"Guitar Center has the remnants of an inferior business model, one that prizes huge brand names, big volumes, low wages and non-existent character," Mr. Garland wrote in a blog. "I love walking through Guitar Center because I love playing anybody else's guitars — but otherwise it is a catalog with walls."

Mr. Garland said Guitar Center's associates can't match the expert knowledge available at the local music shop, and compared it to the customer service issues that plagued Circuit City.

"Retail in the 21st century will be centered around specialized knowledge, unique offerings and personal relationships, both local and digital," he wrote.

In a recent study, "How Category Killers Can Still Win at Their Own Game," Kurt Salmon partners Kurt Kendall and Steve Pinder agreed that category killers are being undermined by the internet's ability to offer even broader selections and often lower prices.

But the consultants believe big boxes can "turn the tables on online retailers" by recommitting to competitive pricing as well as broad selections (assisted by greater access to online inventory), using their physical stores to better engage customers, and tapping new technologies to upgrade the shopping experience.

A big step toward differentiation involves getting back to doing the "basics well," such as having accessible sales associates and making sure promoted items is in stock.

"Both Macy's and Home Depot lost their way with customers and regained their footing by making in-store service excellence a key part of their turnaround strategies," the authors wrote. "It's why every time you check out at Home Depot an associate will ask you to fill out a survey to tell them how well they're doing — because the retailer knows that the customer's in-store experience will determine whether they'll shop there again."

Discussion Questions:

Is there an inherent weakness in the category killer business model? Are category killers doomed to struggle against the selection and pricing of internet competitors as well as the expert knowledge and customer service acumen of local independents? What suggestions would you have for category killers to enhance their differentiation?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Which of the following is the biggest threat to category killer concepts?

Comments:

Every retailer competes against other brick and mortar stores and the Internet. Consumers want a positive shopping experience and value for their money. Too often, category killers did not provide service that met customer expectations. If a retailer is going to be the biggest in a category, it should back up its size with knowledge and customer service.

Competing solely on size and price is a slippery slope. The Internet will almost always offer the same product at a lower price and have it in stock.

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Max Goldberg, President, Max Goldberg & Associates

The answers to the questions are found in the article. The key to success of so called category killers is to have the full range of products readily available and to provide relevant product information from knowledgeable, customer-focused associates.

The one significant advantage that category killers have over Internet retailers is the sensory experience. Bricks and mortar retailers of all classes need to maximize this advantage. Make the stores fun, informative, and friendly places to visit and there is a real opportunity to level the playing field.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

The category killer business model is only doomed if they choose to continue to exist and function in the same manner they did when they emerged in the 1980s. Successful brick n' mortar retail is rapidly moving toward being able to provide unique products/services combined with insightful knowledge and all done by establishing a personal relationship in both digital and human worlds. Simply being a catalog warehouse with physical stuff is not going to meet the expectations of today's digitally empowered shoppers and will falter if adaptations are not made to change with the times.

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Adrian Weidmann, Principal, StoreStream Metrics, LLC

Our GC is very focused on service, advice, and direction for guitar players like me. The secret for GC going forward is to localize more than expected. If there are many newer players, then dump some of the showroom space and convert it into open workshop space where the great GC advisors can help players - on GC gear - with new chords, re-stringing, etc.
Leverage the Macy's go local model and The Home Depot Workshops on Saturdays gigs.

Also, refine the security station layout at the front of the store. Put it to one side of the entrance - not in the middle of the exit/entrance doors. Also light up the entrance areas for the WOW factor entry.

Wall Street is wrong on GC...this is a retailer that just needs a bit of shopper refocus. They have a following that is strong - online and at the stores - and do care about their shoppers. That was the cat-killers death point - not caring.

Tom...rock and roll - it's 2014!

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

Achilles lives! (or at least his "principle.")

Greatest strength = Greatest weakness

Depth of appeal = Singularity of appeal

Category killers are (were?) the place to go when you wanted "X." Online retailers can inherently supplant the brick and mortar category killer with broader selection, more expertise and less cost.

Ah, but they can't provide "touch" - at least not easily. And there-in lies the path to survival for the category killers. Don't replace the internet with breadth or price. That's a killer. Instead, replace the local guitar shop (or whatever) with knowledge AND broader selection. Maybe you can't have the "local guru" in your store - but maybe you can. And you can definitely have a better trained and more knowledgeable staff overall if you exploit your volume to pay better wages than that guitar shop pays.

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Ben Ball, Senior Vice President, Dechert-Hampe

Category killers may be the victims of changing technology (the obsolete business model of the traditional book or record store, for example). But more often they are victims of their own poor execution, just like other retail nameplates that have disappeared over the years. Best Buy is a good example of a big box store that lost its way and has begun to recover through better execution and more innovative use of its own square footage. And the DIY big box stores have recovered nicely from their own missteps and the housing downturn.

Bottom line: There may be room for consolidation (Office Depot and OfficeMax, for example), but there is also space in the retail landscape for category killers who fill a relevant niche and execute well.

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Dick Seesel, Principal, Retailing In Focus LLC

I just love these subjects, as it hits home in my business very hard. First of all, Happy New Year to everyone, and now I will start to get on my soapbox, if I actually had a soapbox.

The business of retail has changed dramatically over the years, and unless you are committed to making changes along the way, than you are doomed for failure. The layout of my store keeps changing, with another Dairy/Deli case coming in, and more center-store SKUs going out, and any small independent who runs their stores like my dad did better wake up.

Our expertise in perishables is important to help the younger consumers who need advice on preparing meals, which the big boys cannot do, and we have a trained staff of deli workers to make sure that questions on gluten free, and diabetic issues are answered properly, so we can gain their trust in preparing for catering their events. Again, the big boys cannot do this.
Do you see a pattern here?

Our store no longer sells diapers, HBA, most general merchandise, or baby formula, as these are categories we cannot compete in. 7UP is our only pop distributor, and I get the major brands from another store when needed.

Thanksgiving turkeys are sold way below cost in our area, and our fresh, all natural turkeys grow every year at a profit, as I won't play the game.

A lot of smart people in the blogging business bring up many scenarios to discuss, but actually living it everyday gives you a whole different perspective on how to pick your fights and believe me, it is not easy to concede any category of goods to sell.

Our service, expertise in our prepared foods, and offering crazy in & out closeouts will hopefully keep us around for many more years, unless we are attacked by some unknown drones flying overhead.

Making a profit is not a crime, and when you own a business in a very poor area, it only amplifies the need to do what we do extremely well, if we want to be a significant member of our small community.

Damn, I am really ranting today - sorry, but the fight to be relevant is something I live for, and I accept the challenge. Okay, I can go home now, as there is a foot of snow on the ground. YUK!

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Tony Orlando, Owner, Tony O's Supermarket & Catering

It's easy to bash "inferior business models" when you get to choose their defining characteristics.

In reality, any business model that does not evolve with the times is doomed to failure eventually. In the case of the Category Killer model, as it stood in its heyday, then the obituaries are appropriate. However, can it evolve to leverage technology and adapt to the changing competitive environment and consumer purchase behavior? Absolutely! While Mr. Garland is looking through the rear view mirror, both HBS and the folks at Kurt Salmon have assessed the situation and are looking into the front windshield of what's possible - and given the tsunami of changes to hit retail the past decade, they're urging for a revolution rather than an evolution.

Neither is suggesting the once high flying model will survive intact, they do provide prescriptive cures to turn the tables on the competition by leveraging their existing real estate investments and ramping up technology spend. It all happens through the in-store experience and that means better and localized assortment decisions, improved in-stock positions, adding deep expertise in their sales associates, and knowing their customers.

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Mohamed Amer, Vice President, Global Integrated Retail Unit, SAP

Offering unique services and excellent in-store and online customer experiences will help category killers remain successful. Also, getting involved locally can't hurt either.

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Debbie Hauss, Editor-in-Chief, Retail TouchPoints

The category killer model surely still exists, however, it often does not require a physical store and in the future, especially for new brands, is likely to be Internet-only or Internet-first. Amazon has shown this as a multi-category killer and brands like Warby Parker or Zappos (prior to acquisition) prove that keying in effectively on customer needs/pricing and delivering excellent service is the basis of leading a product category. So square footage is an unimportant factor these days.

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Ken Lonyai, Digital Innovation Strategist, co-founder, ScreenPlay InterActive

The notion of a "category killer" isn't going away, but the tactics that defined category killers of the '80s are no longer competitive differentiators. 1980s category killers were defined by their breadth of offerings and discount pricing, both of which were huge differentiators from the independently owned retail specialty store. But today customers who value price and assortment are more likely to choose Amazon or Walmart.

While it's no longer necessary to go to a specialty big box to find good prices/assortment on toys/office products/etc., customers will still drive an hour for the subject matter expertise and a curated assortment of an REI or experiential retail of Bass Pros Shop. And of course Apple is the ultimate modern category killer.

These days, consumers value expert curation to help them choose the right product in an increasingly complex world. I'm reminded of the old quote, "If I had more time, I'd have written you a shorter letter."

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Jason Goldberg, VP Commerce Strategy, Razorfish

There is not any more or less of a weakness in "category killers" than in other business models. We can point to successes and failures in BOTH category killers AND in non-category killers.

The successes/failures are in execution, operations, customer service, etc. Implementation and being unique (or at least meeting/exceeding customer expectations) are where it is at.

My suggestion would be to be who they are - SPECIALISTS at the category and educate, bring unique items to the shopper, have expert staff, and extend their contact with the shopper beyond just the purchase transaction (provide lessons, followup, etc.).

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David Zahn, Owner, ZAHN Consulting, LLC

If the price is right, and the in store team is knowledgeable (and available) then the category killers have an edge over anyone else. A shopper can walk into a store, be sure of the right advice, pick up a product, not worry that they will have paid too much, and walk out ready to use their purchase right then and there. That's not possible over the internet.

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Peter J. Charness, SVP America, Global CMO, TXT Group

The basic model of category killers is very sound, actually. The challenge rests with in-store staff responsiveness, as with ANY retailer. Online stores will always compete on price and selection, however, the physical stores have the opportunity to win the shoppers' business with knowledgeable employees. That is still a stronger value proposition than online merchants because a shopper can touch, feel, etc., the product in-store much better than online. Physical stores will be around forever, including the responsive category killers.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

One of the main and early category killers to the supermarket has been pet supplies. Retailers like Pet Supplies Plus and PetSmart are alive and well. In addition, many live in the same plazas as supermarkets, furthering their advantage.

While heading to the internet is not the first place I think of for these goods or services, their brick and mortar locations are a regular stop.

Both of these, in particular, PetSmart, have grown far beyond just a place to save a buck on a bag of dog food. They have capitalized on services offered, as well as expertise well beyond a bargain price for a bag of chow.

In addition, they grew the expansion of many options and choices for feeding your pet well beyond the standard Purina offering that used to lead the choices in the supermarket. For a long day trip, our dog can be dropped off to stay and be picked up bathed, trimmed, and nails trimmed at a moderate price. Services well beyond the stocked shelves are where this type of "killer" has made the separate trip a value.

I find it interesting that these "killers," one of the earliest to take on a section of the supermarket, were not even mentioned.

'Scanner'

I would not write off Guitar Center. Eric Garland may play the guitar but he apparently does not play the keyboard or use DJ equipment. There may be location and real estate issues, but I would not write off Guitar Center.

Ed Dunn, Founder, (Stealth Operation)

I agree with many of my BrainTrust colleagues who have suggested category killers are not doomed. And, I love the reference to PetSmart ... that's a great example. I'd also say Whole Foods has differentiated its offering to remain relevant to its shoppers and it remains a category giant.

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Dave Wendland, Vice President, Hamacher Resource Group

Category killers that succeed will reinvent to focus on the experience, meeting shopper expectations for selection and service. Becoming large and offering low prices leaves little room to differentiate and connect with savvy shoppers who can compare price and assortment across channels and stores. Retailers are learning to connect with shoppers in the ways that matter - there are good examples from REI to L.L.Bean to Home Depot.

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Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions

If category killers are only focused on price and selection, then yes, they are doomed. Retailers who find themselves in this game must, of all people, learn how to arm their associates with tools that go beyond what the consumer can find online.

Don't hand them a tablet so they can look up the info that the customer has likely already read. No, find out what the customer wants out of the in-store experience and give it to them.

Oftentimes the consumer comes into the store and seeks out an associate if they want to know more about the the whole product experience. How do you connect this to another of these? How do I make this work with my other thing? What can I add to this to make another outfit? You get the picture.

Arm your associates to provide category killer service! 'Nuff said!

Lee Kent, Brings Retail Executives Together to Meet.Learn.Profit, RetailConnections

It depends on the category. For those where price is the sole factor, it appears as if there will be only one or two survivors per category, like Bed, Bath and Beyond in HBA and kitchen/home, Best Buy and HH Gregg (at least in the DC-Baltimore market), Staples in office supplies, etc.

But damn, it's 20+ years since the book "The Experience Economy" came out. I do remember a provocative article in the New York Times maybe 10 years ago about McDonald's and a roundtable about what they should do. One person said they should reposition around the absolute best in hamburgers. (And similarly, KFC can do this with chicken.) Everything hamburgers. Now they haven't done that, but there are many many artisan and Five Guys type businesses out there doing very well in the category.

I don't play music, I deal with urban revitalization. But I was blown away about how an Archstone apartment building in DC (now owned by Avalon Bay) opened with a couple jam rooms in the building. Similarly, the alternative papers in Minneapolis have tons of classified ads about cheap studio space.

GC has an opportunity that is pretty unparalleled. See "school of rock" etc.

But it is counter to how chains are set up with planograms, etc. to dumb down the personnel, rather than to be great with it.

P.S. Saw an article recently on Tony O's in Progressive Grocer maybe? I was impressed.

Richard Layman, Consultant, Retail Empire LLC

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