value on retailer relationship

Value Creation and CategoryManagement through Retailer–SupplierRelationships

JESPER AASTRUP*, DAVID B. GRANT** & MOGENS BJERRE{

*Copenhagen Business School, Frederiksberg, Denmark, **Logistics Institute, Hull University Business

School, Hull, UK, {Copenhagen Business School, Frederiksberg, Denmark

ABSTRACT This article discusses category management interactions in supplier–retailerrelationships based on conceptual insights about value in business markets. Much category man-agement literature has studied supplier–retailer relationships, but despite value creation beingcentral to category management the conceptual approach is often the power-trust controversy.Based on value concept, category management and supplier–retailer relationship literature thisstudy develops a model and hypotheses of retailer perceived benefits and sacrifices from categorymanagement collaboration. The article proposes that closer supplier-retailer interactions throughthe category management process hold the potential for increased value creation through applica-tion of complementary information resources, an improved coordination of tactical efforts, and analignment of category aims and strategies explicitly linked to retailers’ value systems. Further,the perceived necessity of trust in these relationships meshes with retailers’ perceived sacrificesregarding negotiation power and full control of category marketing variables, thus establishinga trade-off for retailers between benefits and sacrifices.

KEY WORDS: Retailer–supplier relationships, value creation, category management, benefits,sacrifices

Introduction

This article applies conceptual insights of value creation in business markets to addto the understanding of category management collaborative potentials and barriersin relationships between retailers and suppliers of fast moving consumer goods(FMCG), particularly grocery retailers. Based on value concept literature this paperdevelops a model and hypotheses of a trade-off between retailer benefits andsacrifices from moving to closer category management collaboration with suppliers.The role of power and trust related issues are also inherent in the model, as well asintervening effects of different types of brands and categories.

When it comes to value creation, the collaborative ideal put forward in thecategory management literature emphasizes ‘the triple win’ (JIPECR, 1995; ECREurope, 1997), that is, value creation for suppliers, retailers as well as consumers.

Correspondence Address: Jesper Aastrup, Department of Marketing, Copenhagen Business School,

Frederiksberg 2000, Denmark. Tel.: (45) 3815 2931; Email: [email protected]

Int. Rev. of Retail, Distribution and Consumer ResearchVol. 17, No. 5, 523 – 541, December 2007

ISSN 0959-3969 Print/1466-4402 Online/07/050523-19 � 2007 Taylor & Francis

DOI: 10.1080/09593960701632019

However, practitioners and consultants recognize that supplier–retailer relationshipspossess inherent mechanisms inhibiting the development of value. This is alsoindicated in research on category management barriers (Hogarth-Scott and Dapiran,1997; Gruen and Shah, 2000; Kurnia and Johnston, 2003) which is explicitly basedon the power–trust controversy and related issues, and much less explicitly based onthe value concept.

Literature on category management, though founded on ideals of value creation,has not previously analysed the value concept. Lindgreen and Wynstra (2005)identified two streams of research—value of goods and services and value of buyer–seller relationships. This article applies these insights to analyse value creatingaspects of category management relationships from a retailer’s point of view.

This study first discusses category management literature to highlight the lack ofstudies addressing the collaborative phenomenon and value creation. Then, the valueconcept is examined to reach a definition of value in business markets, presentdifferent perspectives on value creation in business relationships, and outline themain ideas to be pursued in the analysis of category management interactions. Next,the value literature is applied in an analysis of the category managementphenomenon. Based on concepts and existing contributions regarding categorymanagement a model and hypotheses are presented that address proposedrelationships between trust, power balance, category management related interac-tions and a retailer’s trade-off between benefits and sacrifices. Lastly, conclusionsare drawn and managerial implications and proposals for future research arepresented.

Category Management as a Business Process and Collaborative Logic

Category management and more generally efficient consumer response (ECR)appeared in the early 1990s in the FMCG-food retail industry. Category manage-ment, as the demand side of ECR, can be seen as ‘a process that involves managingproduct categories as business units and customizing them on a store-by-store basisto satisfy customer needs’ (AC Nielsen, 1992: 9).

This concept implies that product categories are defined as basic business units; afirm’s objectives are to customize marketing in relation to these categories for localshopping needs to achieve business oriented benefits; and consumers are assumed tomake purchase choices from assortments within given categories (Dussart, 1998).Thus, category management represents a strategic marketing planning processtaking as its starting point retailers’ interaction with consumers. This planningprocess is structured through an eight-step model as shown in Figure 1 (JIPECR,1995; ECR Europe, 1997) and which is considered the cornerstone of categorymanagement (AC Nielsen, 2006).

Most definitions of category management involve explicit attention to the role andimportance of the supplier-retailer relationship in this marketing managementprocess. A shift in attitudes between suppliers and retailers towards recognizing bothas being in the same business is presented as a basic assumption (Dussart, 1998). Forinstance, JIPECR defines category management as ‘. . . a distributor/supplier processof managing categories as strategic business units, producing enhanced businessresults by focussing on delivering consumer value’ (1995: vii). Others go as far as

524 J. Aastrup et al.

arguing for suppliers to be category captains or category advisers, for exampleDussart (1998), O’Keeffe and Fearne (2002) and AC Nielsen (2006).

In an ideal setting category management relationships include high degrees ofcollaboration based on mutuality and trust. ECR Europe (1997) outlines theprinciples of cooperative relationships as: 1) the consumer is the common focus; 2)mutually agreed objectives, strategies, tactics and performance measures, andrewards support cooperative business goals; 3) the importance of trust andinformation sharing; 4) the compatibility of trading partners’ expertise; 5) retailers,suppliers and consumers all win (the ‘triple win’); 6) multifunctional access andcommunication, and leadership at all levels; and 7) openness to change traditionalattitudes and relationships (ECR Europe 1997). In the ideal collaborative form thedecision process is owned by both supplier and retailer in a common process; hencecategory management requires that trading partners play the ‘trust game’ (Kumar,1996). Collaborative value creation is also emphasized as ideal, however withoutbeing very explicit on value elements or what it is about collaboration that createsvalue.

Whereas some category management literature tends to describe ideal forms ofcollaboration (JIPECR, 1995; ECR Europe, 1997; AC Nielsen, 2006), academicjournal articles tend to emphasize issues on inherent barriers or paradoxes in theserelationships. Table 1 briefly presents literature on the barriers of categorymanagement collaboration.

As Table 1 shows, the literature has dealt with barriers in category managementcollaboration based mostly on the power-trust controversy or related theoreticalconstructs, for example, conflicts of interest or opportunism. A few contributionshave pointed towards experienced benefits by suppliers and retailers, however they

Figure 1. Eight-step category management processSource: JIPECR (1995).

Value Creation and Category Management 525

Table

1.Barriers

anddilem

masofcategory

managem

entcollaboration

Author(year)

Typeofstudy

Barriers

anddilem

masofcategory

managem

entcollaboration

Dussart

(1998)

Review

Category

managem

entisdiscussed

asatranslationofpower

oraforced

partnership

inthesense

thatcategory

managem

entem

phasizesaretailer’s

strategyandsuppliersmust

accordingly

developandprioritize

their

resources

andmarketingprogrammes.Thereare

alsoproblemsofsharing

data

founded

intraditionalsupplier-retailer

rivalries.

Hogarth-Scott

andDapiran

(1997)

Qualitativeinterviewswith

suppliersandretailers

Benefits

are

mainly

experiencedbyorfavourretailers,butcategory

managem

enttendto

developrelationshipstowardsless

emphasison

dominatingattitudes

ofretailers.

DapiranandHogarth-Scott

(2003)

Qualitativeinterviewswith

suppliersandretailers

Itisargued

thatcategory

managem

entcanbeseen

asamovem

entfrom

use

ofcoercivepower

towardsexpertorinform

ationpower.Thismayappear

ascooperationbasedontrust

butcoercivepower

alwayslies

beneath

Gruen

andShah(2000)

Grounded

theory

approach

followed

bytest

ofmodel

throughsurvey

Category

managem

entinvolves

aninherenttensionbetweenretailersand

suppliers.It

isshownthatpre-conditionsofbrandversussalesconflict,

opportunisticbehaviourandpre-planningagreem

ents

affectcategory

perform

ance

throughthefactors

ofcategory

planobjectivity,retailer

system

trust

andcategory

planim

plementation.

Dupre

andGruen

(2004)

Expertinterviews

FollowsuponGruen

andShah(2000)anddevelopsacategory

plan

implementationmodel.Buildingtrust

betweenretailersandsuppliers

isdetermined

tobeoneofthecrucialbarriers

toaddress.

Kurnia

andJohnston(2001)

Case

studies

Itisargued

thatinherentcharacteristics

ofECR

work

asbarriers

towards

adoption.In

case

studiesoncross-dockingpractices

itisfoundthat

unbalanceddivisionofbenefits,costsandrisksbetweenmanufacturers

andretailersisabarriertowardsthenecessary

trust.

Kurnia

andJohnston(2003)

Case

studiesandsurvey

FollowsuponKurnia

andJohnston(2001)in

amore

generalstudyofECR

adoptionin

Australiaincludingcategory

managem

ent.Six

barriers

are

revealed:1)alack

ofunderstandingofECR

andnecessary

skills;2)different

motivationsforactivities;3)differencesin

interestsandperceptions;

4)unbalancedexperience

ofbenefits

obtained;5)retailersbeingmore

powerfulthanmanufacturers;and6)lack

oftrust

andinform

ationsharing.


are seen as an indicator of a power imbalance and do not specify what it is aboutcategory management that creates value or benefits. Therefore, we argue thatcategory management collaboration requires further investigation based on valuecreation in business relationships.

Value in Business Relationships

The concept of value for customers is central in marketing and marketing relatedfields: it is the essence of the marketing process (Holbrook, 1994; Tzokas andSaren, 1999); an important constituent of relationship marketing (Ravald andGronroos, 1996; Tzokas and Saren, 1999); and an important source of competitiveadvantage (Woodruff, 1997; Anderson and Narus, 1998). Customer value isstudied in numerous contributions and from quite a number of different angles.For extensive reviews of this literature see Holbrook (1994), Payne and Holt(1999), Lindgreen and Wynstra (2005) and Wilson and Jantrania (1994). Thediscussion below will firstly present basic characteristics of the value concept, thendiscuss three approaches to value in relationships, and finally take up the issue ofrelationship sacrifices.

Value as Benefits and Sacrifices Depending on Underlying Value Systems

A basic characteristic is that value is preference (Holbrook, 1994) in the sense that itrelies on an evaluative judgement in relation to sets of standards, criteria, reasons,norms, goals or ideals. Most definitions emphasize this as a perceived trade-offbetween benefits and sacrifices (Zeithaml, 1988; Anderson et al., 1993; Anderson andNarus, 1998; Kotler, 2000; Ulaga and Chacour, 2001).

Furthermore, value is relative (Holbrook, 1994). The perceived trade-off betweenbenefits and sacrifices is comparative to competing products or in-house alternatives(Holbrook, 1994; Anderson and Narus, 1999; Ulaga and Chacour, 2001). Also, itconsists of multiple components (Ulaga and Chacour, 2001), is based on individualperceptions, criteria or underlying values (Woodruff, 1997; Neap and Celik, 1999;Ulaga and Chacour, 2001), and is situational to moments or occasions (Woodruff,1997; Ulaga and Chacour, 2001).

Much work emphasizes a customer’s usage situation and their underlying valuesystems (Zeithaml, 1988; Anderson et al., 1993; Woodruff, 1997; Anderson andNarus, 1999; Neap and Celik, 1999; Tzokas and Saren, 1997; Ulaga and Chacour,2001; Flint et al., 2002). Most importantly for this paper is Woodruff’s (1997)definition of value based on means-end chain thinking from Gutman (1982).Woodruff (1997) arrives at a hierarchy of value elements making it possible to tracelinkages from attribute based value to a customer’s underlying value system, that is,consequence based value and goal based value.

Against these basic characteristics of the value concept customer perceivedvalue in business markets can be defined as ‘the trade-off between the multiplebenefits and sacrifices of a supplier’s offering, as perceived by key decision makersin the customer’s organization, and taking into consideration the availablealternative supplier’s offerings in a specific use-situation’ (Ulaga and Chacour2001: 530).


Value of Trust, Value Drivers and Value through Interaction

Whereas most contributions emphasize value from an acquisition or transactionalapproach, other research efforts on the value of buyer–seller relationships emphasizethat elements of the relationship can be of value above and beyond what is actuallyexchanged between partners (Tzokas and Saren, 1999; Ulaga, 2003; Lindgreen andWynstra, 2005). This represents a core assumption in an apparent ‘paradigm shift’from transactional marketing to relationship marketing (Gronroos, 1994; Tzokasand Saren, 1999) that has also been discussed by the IMP Group (Hakansson, 1982;Axelsson and Easton, 1992; Hakansson and Snehota, 1995).

Conceptually this is very simply captured by Ravald and Gronroos (1996) whoargue that traditional marketing literature only considers one exchange episode andignores relational aspects. They define total episode value as consisting of episodebenefits and sacrifices as well as relationship benefits and sacrifices. In value literaturethis manifests itself in three approaches that are not mutually exclusive and can belabelled: 1) value of trust, 2) value drivers/value functions, and 3) value throughinteraction, as detailed in Table 2.

A first perspective is to see trust as a valuable element. Ravald and Gronroos(1996) argue that relationship benefits consist of elements of credibility, security,trust and loyalty that all lead to profitable relationships. This line of reasoning inwhich elements of trust and commitment are seen as central elements of relationshipvalue is well documented. For example, trust is an important element of perceivedrelationship quality (Naude and Buttle, 2000) and adaptations, trust andcommitment positively influence value creating functions in customer relationships(Walter and Ritter, 2003); see also Morgan and Hunt (1994), Ganesan (1994),Kumar (1996) and Grant (2004, 2005).

Table 2. Three approaches on the value of relationships

Value approach Authors

Value of trust:. Trust and related elements such as

commitment, credibility, integrity,security etc are seen as valuableelements or determinants ofrelationship value or long-termrelationships

Ravald and Gronroos (1996), Gronroos(1997), Grant (2004, 2005), Walter andRitter (2003), Morgan and Hunt (1994),Ganesan (1994), Kumar (1996), Naudeand Buttle (2000)

Value functions/value drivers:. Value is result of specific value

functions or value drivers that theparties bring to the relationship

Walter et al. (2001), Walter and Ritter(2003), Moller and Torronen (2003),Biggemann and Buttle (2005), Wilsonand Jantrania (1994), Lapierre (2005),Ulaga (2003), Ulaga and Eggert (2006),Liu et al. (2005)

Value through interaction:. Value is result of co-creation

processes between relationship parties

Normann and Ramirez (1993), Wikstrom(1996), Tzokas and Saren (1997, 1999).


Second, some literature more specifically considers the value functionsand drivers of relationships, contrary to the literature above that emphasizesrelationship elements such as trust and commitment. For example, Walter et al.(2001) and Walter and Ritter (2003) distinguish between direct functions (profit,volume and safeguard) and indirect functions (innovation, market, scout andaccess) of relationships. Similarly, Biggemann and Buttle (2005) outline fourdifferent forms of value that a relationship can deliver: personal, financial,knowledge and strategic value.

Empirically, value drivers have been identified by Lapierre (2000), Ulaga (2003),Liu et al. (2005) and Ulaga and Eggert (2006). For instance, Ulaga (2003) usedgrounded theory to identify product quality, service support, delivery, supplierknow-how, time-to-market, personal interaction, direct product costs and processcosts as value drivers. Ulaga and Eggert (2006) found that sourcing benefits (that is,service support and personal interaction) and operations benefits (namely, supplierknow-how and time to market) are strong contributors to overall relationship value,while direct costs are least important.

Finally, as a third approach, the literature has explored how and why interactionscan add to or co-create value. Normann and Ramirez (1993) argued that firms donot add value along given value chains; instead activities are part of a value creatingsystem with different economic actors co-producing value. Tzokas and Saren (1997,1999) go one step further and argue that interaction is a necessity for value to beproduced. The linking of value chain activities represents the mechanisms that createvalue (Tzokas and Saren 1997), and relationship platforms between relationshipparties are identified as the areas of activities that can possibly contribute to thevalue co-creation process. A similar argument is made by Hakansson and Snehota(1995); they define resources as a relational phenomenon in the sense that no elementis a resource without a known use. The value of resources lies in their use potential;and heterogeneity in use means that value is dependent on which resources arecombined.

Relationship Sacrifices

The emphasis in the literature is on benefits, despite the importance and frequency ofsacrifices in definitions of customer perceived value. As value is relative (Holbrook,1994) all identified value drivers and functions (Walter et al. 2001; Ulaga and Eggert,2006) can be seen as possible sacrifices relative to alternatives. However, specificsacrifices of episodes and relationships have been identified in the literature. Kotler(2000) distinguished between monetary, time, energy and psychic costs perceived.Ulaga (2003) derived direct product costs or price and process costs includinginventory management, order-handling and incoming inspections. These were latergrouped into direct costs, acquisition costs and operations costs (Ulaga and Eggert,2006). This is close to the total cost of ownership concept (Ellram, 1995) that besidesdirect price includes inventory cost, transaction costs and costs associated with poorquality and delivery failures.

Ravald and Gronroos (1996) and Gronroos (1997) distinguish between direct,indirect and psychological relationship costs. Psychological relationship costs areadditional to the costs identified above and are associated with uncertainties about


conflicts and contingencies affecting the relationship (Gronroos, 1997). Similarly,Lapierre (2000) outlined conflicts as relationship related sacrifices in addition toprice, time and efforts.

Ford (2003) takes the IMP’s view that relationships should be seen also as burdens(or sacrifices). Relationships are unruly as they necessitate adaptations and reactionsto factors not fully controlled. Hence, relationships mean giving up some freedom.Also, relationships are undetermined as they have a time dimension that is subjectiveand uncertain. Relationships are demanding as they always demand time and effort.Furthermore, relationships are exclusive in the sense that giving priority to specificcounterparts tends to exclude others. Finally, relationships are sticky as behaviour ina relationship is connected to other relationships.

Relationships being unruly and exclusive relate to issues of dependency and power.Developing closer relationships affects the balance of dependency and power whichcan also be perceived as benefits or sacrifices (Emerson, 1981). Power can manifestitself in two ways; in the division of surplus value (Cox, 1999, 2004; Hingley, 2005) or inthe control of how to create value (El-Ansary and Stern, 1972; Coughlan et al., 2001).Assuming that business essentially is about appropriating value for oneself, aninevitable conflict area exists in relationships when both parties seek to maximize theirshare of surplus value despite cooperative efforts to create this surplus value (Cox,1999, 2004). In contrast, earlier research emphasizes the ‘benefit’ of power incoordinating, adapting and integrating marketing decisions and variables to pursueone’s own strategies and goals (see Stern, 1969 or Frazier and Summers, 1986).

Thus, benefits for appropriating value created in relationships as well as benefitsfrom controlling how value is created also represent potential sacrifice elements toconsider when engaging in closer relationships. The next section synthesizes the gapsin the category management literature addressed above by applying conceptualinsights from the value literature addressed in this section.

Category Management Interactions and Value Creation—Model and Hypotheses

Our overall consideration is whether or not a retailer should engage in closercollaboration with suppliers to manage categories, from the point of view of theretailer’s perceived value. According to the discussions of value above we regard thisconsideration as a trade-off between benefits and sacrifices. Further, we adoptWoodruff’s (1997) distinction between attribute based and consequence based valuefrom the retailer’s perspective. We thus pursue value through interaction reasoning;therefore trust is not a valuable element but a pre-condition for value creatinginteractions. The issue of value drivers or value creating functions is a less explicitpart, however it implicitly underlies the reasoning in Hypotheses 1–3 discussed belowregarding research and managerial implications. Our proposed model and resultanthypotheses are shown in Figure 2.

Creation of Value Through Closer Category Management Interaction and theNecessity of Trust

The eight-step model in Figure 1 can be considered as a domain of planning andimplementation activities that can potentially benefit from closer interaction and


adaptation between supplier and retailer (Tzokas and Saren, 1997). It can also beseen as a model linking category activities explicitly to consequences and ends in theretailer’s value system (Woodruff, 1997). Specific benefits from closer interactionswill be discussed below relative to three issues: 1) the use of complementary resourcesand capabilities; 2) a common understanding of category structures, roles, objectivesand strategies and explicit linking to retailers’ value systems; and 3) the co-ordination and adaptation of activities.

Category management is fundamentally an information-driven process (Dussart,1998; AC Nielsen, 2006), and throughout the eight steps there is a heavy reliance onapplying information of different formats and perspectives. Possible inputs to thedifferent steps include point-of-sale (POS) data, consumer insights on motives,preferences and purchase habits in a category (through basket analysis, householdpanel data, focus groups and so on), financial analysis of categories, and marketanalysis of suppliers’ market shares and retailers’ actual and fair shares (JIPECR,1995; Qureshi and Baker, 1998; Johnson, 1999; Dewsnap and Hart, 2004; ACNielsen, 2006). Efficiency considerations have relied mainly on sales data whileideally category management applies in-depth insights on the consumer to support

Figure 2. Proposed model of benefits and sacrifices from category management interactions


marketing decisions for a category (Johnson, 1999; Gruen 2002; Dewsnap and Hart,2004).

The information resources applicable in category management are not evenlydistributed between retailers and suppliers (Johnson, 1999; Dewsnap and Hart,2004). Retailers control very detailed POS data; they hold contribution and profitdata, and information on supplier share. Suppliers on the other hand may holddeeper insight into consumer behaviour and behavioural trends in the category.Information from third parties is also accessible, for example, market data and paneldata. Therefore, the thrust of category management is that closer interactionbetween retailers and suppliers through the different steps will be based on richerinformation and more nuanced or detailed views. This should lead to betterunderstanding of consumers, better understanding of categories, better categorydefinitions, better informed category role and strategy assignment, and ultimatelymore optimal category tactics in relation to the desired consequences of retailers, forexample, traffic, profits, excitement. Thus;

H1: Through closer interaction on category management suppliers andretailers will use a richer and more nuanced amount of information toimprove retailer perceived value regarding desired category consequences.

Much coordination of activities takes place between retailers and suppliers but isnot necessarily based on explicitly communicated category definitions, assignedcategory roles, category objectives and strategies. A supplier–retailer preplanningagreement is one success factor found to affect category performance (Gruen andShah, 2000). Similarly, suppliers must align strategies and marketing programmeswith the retailers’ category roles and strategies (Dussart, 1998), as well as committingresources to retailers’ destination categories (Dupre and Gruen, 2004).

Category management begins with the retailer’s strategy (AC Nielsen, 2006) and inthis manner the eight-step process aims at linking the retailer’s overall strategies andobjectives with the category tactics and category activities. Category definitions,category roles, and category strategies should be communicated from retailer tosupplier as desired consequences through the category management process, oremerge as a result of supplier–retailer interaction which is closer to the ideal (ECREurope, 1997). This explicit alignment is a necessary common ground for developingand implementing strategies and tactics. The terminology of category roles andcategory strategies should be applied in the planning process to assure proper andexplicit linkages between the overall strategies and objectives of the retailer, thedesired consequences (such as traffic generation or profit building) and the actualactivities in the category. Thus;

H2: Through closer interaction on category management suppliers andretailers will better communicate and align category definitions, rolesand objectives to improve retailer perceived value regarding desiredcategory consequences.

Ultimately, value added from closer interactions in the category managementprocess appear from the implementation of strategies and tactics through


coordinated and adapted activities of retailers and suppliers (Gruen and Shah, 2000;Dewsnap and Hart, 2004; Dupre and Gruen, 2004). Category activities ofassortment, pricing, promotion, merchandising and supply chain management(AC Nielsen, 2006) appear as activities in the retailer’s domain, but rely on activitiesin the suppliers’ domain. Assortment improvements rely on supplier activitiesregarding new product development or promotion and positioning of brands; aretailer’s promotional campaign relies on a supplier’s ability to take this into accountfor production and delivery planning. Therefore, a potential major benefit of closerretailer-supplier interactions is better coordination and adaptation of activities inthese two respective domains. The ideal of category management is retailer-suppliercoordination of these activities, for example, product development and positioning ofnew products adapted to agreed upon possibilities in the retailer’s assortment. Thus;

H3: Through closer interaction on category management suppliers andretailers will improve coordination and adaptation of activities in relationto tactical implementation in the category to improve retailer perceivedvalue regarding desired category consequences.

As noted above, trust is seen as valuable in itself (Ravald and Gronroos, 1996;Naude and Buttle, 2000). The perspective taken here emphasizes value ‘through’trust, that is, trust is seen as an enabling element in the interaction necessary foradded value creation. Collaborative category management interaction based on trustand mutuality was presented as an enabling component in the original industryreports (JIPECR, 1995; ECR Europe, 1997), and characteristics outlined above oncategory management interactions, for example sharing information and aligningstrategic plans, underscore this necessity of trust and mutuality.

Trust can be defined as ‘a willingness to rely on an exchange partner in whom onehas confidence’ (Moorman et al., 1992: 315). Ganesan (1994) and Doney andCannon (1997) distinguish between two components of trust: credibility andbenevolence. Credibility is based on the expectancy that partner A and partner A’sexpertise can be relied on to fulfil the word or written statement of partner B.Benevolence on the other hand is the extent to which partner A is believed to begenuinely interested in partner B’s welfare and is motivated to seek joint gain.

As noted previously, several authors have addressed issues related to trust asmajor barriers to category management interaction. They report on inherentproblems and paradoxes compared to the necessity of trust and mutuality, andargued that major barriers for ‘close partnerships’ lie in unbalanced power,differences in interests and incentives as well as imbalanced division of risks; costsand benefits; a perceived risk of opportunism and a lack of trust in partners; and alack of trust in category management benefits. Hence, issues related to trustrepresent an ideal relationship atmosphere enabling potential benefits of closercategory management interaction. However, barriers exist in issues relating to thelack of trust. Thus;

H4a: Higher degrees of credibility and benevolence between retailer andsupplier will increase sharing and use of complementary informationresources and capabilities in category management related interactions.


H4b: Higher degrees of credibility and benevolence between retailer andsupplier will increase explicit communication and alignment of categoryaims and strategies in category management related interactions.

H4c: Higher degrees of credibility and benevolence between retailer andsupplier will increase operational coordination and adaptation ofactivities in category management related interactions.

The Intervening Effect of Category Roles and Purpose of Brands

The value creating potential of closer category management interaction may dependon the type of product and type of category. Dhar et al. (2001) showed that the effectof marketing tactics on category performance depends on the characteristics of thecategory in consumer related terms. Similarly, we expect that a retailer’s perceivedvalue from closer category management interaction will depend on the role thecategory plays for the retailer as well as the role and importance of the singleproducts and brands.

Category management differentiates between four generic category roles: destination,routine, occasional/seasonal and convenience (JIPECR, 1995; AC Nielsen, 2006).Destination categories are categories through which the retailer differentiates andpositions itself as the store of choice. Routine categories are categories through whichthe retailer wants to be one of the preferred providers. Occasional/seasonal categorieschange importance in the retailer positioning depending on seasonal (for example,summer) or occasional (for example, Christmas) circumstances. Convenience categoriesare necessary for the retailer in order to have a full assortment, but do not representcategories used for differentiation. Hence, different categories have different importancefor the retailer in order to obtain its desired market position, that is, they are used toachieve different consequences. Thus, we expect that retailer perceived benefits of closerinteraction will be stronger in the case of categories of higher strategic importance forretailers, for example destination categories. Thus;

H5a: A higher strategic importance of a category will increase retailerperceived potential value from closer category management relatedinteraction regarding desired category consequences.

The type of product may also influence perceived benefits. Most research dealswith relationships between providers of branded goods and retailers (Ogbonna andWilkinson, 1998; Hogarth-Scott, 1999), however private labels and private brandshave become increasingly important for retailers (Burt, 2000). Branded productscontribute differently to their categories. Some are considered traffic builders, othersprofit builders, while some brands create excitement. Brands also differ in the degreeof brand loyalty shown by consumers that affects the ‘freedom’ of the retailer toexclude it from the category. Hence, we would expect that the more important abrand is for the retailer’s category in terms of loyalty or desired categoryconsequences, the more value creation potential will be perceived from categorymanagement related interaction.


However, manufacturer brands cannot in themselves differentiate a retailer fromothers unless exclusivity is given; this is one reason that the strategic use of privatelabel brands has evolved (Laaksonen and Reynolds, 1994; Burt, 2000). Privatebrands are increasingly being used as brands competing with brand leaders (Bhasinet al., 1995; Burt, 2000) to establish store differentiation and loyalty. Private brandshave evolved from being low cost/low quality generics used to appropriate largermargins versus manufacturers’ brands (Ogbonna and Wilkinson, 1998), to off-settingsupplier power by providing alternative products or margin gaps being used innegotiation (Bhasin et al., 1995). Hence, the retailer’s strategic contribution fromprivate brands considerably affects retailer perceived value from closer categorymanagement interactions. Thus;

H5b: A higher perceived strategic importance of traded brands (whethermanufacturer brands or retailer brands) will improve retailer perceivedpotential value from closer category management related interactionregarding desired category consequences.

Power Advantage and Retailer Sacrifices

Value, according to definition, is concerned with benefits and sacrifices, and in lightof the value concept it must be questioned whether the issue of closer categorymanagement collaboration and relationships meshes with elements of retailerperceived sacrifices. Closer and more frequent interactions with suppliers take timeand effort since the category management and the eight-step model is time-consuming. An average buyer in Danish grocery retailing has relationships withabout 80 suppliers and additional time and resources for these relationships aresuppressed or lacking.

Getting into closer and more frequent category management interactions alsomeans giving up some freedom as it implies greater commitment and dependencytowards suppliers (Ford, 2003). When engaging in closer interactions retailers allowsuppliers to contribute value drivers other than the traded products and brands(Ulaga, 2003), and this increases the dependency of retailers towards them (Emerson,1981). It also means relationships become more exclusive as closer interactions givepriority to specific counterparts, especially when engaging in collaborative formatssuch as category advisers, category captains and preferred suppliers (Dussart, 1998;O’Keeffe and Fearne, 2002).

These issues of dependency and exclusivity affect the power balance and there seemsto be a widespread consensus that retailers are the more powerful partner in relation-ships with suppliers and manufacturers (Akehurst, 1983; R. Grant, 1987; Dawson andShaw, 1990; Kumar, 1996; Howe, 1998; Ogbonna and Wilkinson, 1998; Burt, 2000;Dapiran and Hogarth-Scott, 2003; D. Grant, 2005; Hingley, 2005). The main factors ofretailers’ power advantage are a concentration in retail structures, control ofdistribution activities, control of information and the introduction of own brands(Ogbonna and Wilkinson, 1998; Dawson and Shaw, 1990; Fernie and Sparks, 2004).

This power advantage can benefit retailers in the division of surplus value (Cox,1999, 2004; Hingley, 2005) and in their having control and influence regarding


channel decisions (El-Ansary and Stern, 1972; Coughlan et al., 2001). Thus, anychange to elements of the power balance can be seen as sacrifices for retailers interms of losing negotiating power and giving up full control of important marketingvariables. Thus;

H6: Through closer category management interaction retailers will have toinvest more time and resources into specific relationships therebyincreasing retailer perceived sacrifices.

H7: Through closer category management interaction retailers become moredependent on, and have to give more exclusivity to, suppliers therebynegatively affecting the retailer’s negotiation power advantage andaffecting the division of surplus value.

H8: Through closer category management interaction retailers become moredependent on, and have to give more exclusivity to, suppliers therebynegatively affecting the retailer’s control of the category’s marketingvariables.

Conclusions, Managerial Implications and Further Research

This article has applied insights on the value concept to develop an understanding ofcategory management in retailer–supplier relationships. Category managementcooperation is dealt with extensively in the literature based on the power–trustcontroversy. However, little work has been done relating to category managementvalue creation even though this is highly emphasized in normative descriptions of thephenomenon.

The value literature has been discussed in relation to business markets andinsights were applied in a literature-based discussion of category managementinteractions between retailers and suppliers in FMCG sectors. From this discussionthis study has suggested that it is through the use of complementary informationresources, and the explicit linking of category efforts to retailer strategies anddesired consequences that closer retailer-supplier interactions hold the potential forincreased value creation for retailers. Even if all eight steps in the process are notcompleted, each step can create benefits for both parties involved, for instancetactical coordination.

However, aligning efforts with retailer strategy and applying complementaryinformation resources requires certain efforts. The presence of trust represents anecessary pre-condition for this closer interaction—however it may be a designatedtype of trust, for instance limited to the necessary coordination of tactical effortswithout the strategic alignment earlier in the process. Closer interaction meshes witha retailer’s perceived sacrifices of relationship efforts, losing negotiation power andgiving up full control of important marketing variables in the category. Hence, anoverall trade-off between benefits and sacrifices for retailers exists as a trade-offbetween the benefits of closer category management interaction and the sacrifices ofgiving up full category control and negotiation power. It is further argued that a


higher strategic importance of category and brands for retailers will increase theperceived benefits from closer category management interactions.

Managerial Implications

Implications for management relate to two issues: how the ‘negotiation model’ or‘relationship model’ between suppliers and retailers can be developed towardsharvesting the full benefits of category management interactions, and how supplierscan position themselves as value creating partners, that is, preferred suppliers orcategory advisers.

Several challenges for developing new negotiation models appear. New negotia-tion models must make interactions possible in initial phases of the categorymanagement process, as interactions cannot simply be limited to tactics,implementation and reviews. It is through these initial phases that complementaryinformation resources and the alignment of objectives hold the largest potential toadd value. New negotiation models must also ensure an atmosphere allowingcommunication and alignment of category aims and strategies. Establishing trustand mutuality has been the ‘standard answer’ to this problem.

However, other governance mechanisms for cooperating in unbalanced relation-ships must be considered; this issue represents a ‘fact of life’ in the industry andmeshes with retailers’ perceived sacrifices. Thus, new negotiation models must alsotake into account retailer sacrifices. They must build on system trust, that is, retailerperceived benefits, however they must also consider how the benefits can be achievedin power unbalanced relationships without negating retailer control of categoryvariables as well as the negotiation power of retailers.

There are also implications in terms of how suppliers can position themselves asvalue creating partners. An identification of the value drivers and value functions incategory management and the supplier’s underlying capabilities should be the baseto build a position as a value creating partner. Basically, suppliers must documentand convince retailers of the benefits of using suppliers more intensively in thecategory process, that is, they must build retailers’ system trust. They have to investin and develop their information resources and complementary skills in a way to addvalue through the category management process. Many information and datasources are available (if shared) and hence the capabilities of analysing and applyingthis data into valuable inputs to category planning can be crucial.

Creating retailer perceived value implies that the efforts, initiatives and advice ofsuppliers in the category management process starts with the strategic aims andcategory roles of the retailer, rather than the perspective of the supplier’s brands.This might represent a necessary change in the capabilities and mind-set of suppliers.Further, suppliers must ensure that their tactical and operational resources andefforts are prioritized in accordance with areas of activities relevant for the retailer.

Research Limitations and Further Research

Our arguments have been derived from concepts in the literature and as such are of atheoretical nature. Empirical research needs to explore these issues more thoroughly.The model and hypotheses derived in this article can serve as a starting point for


empirically exploring what it is about category management interactions thatgenerate perceived benefits and sacrifices for retailers. For example, are potentialbenefits of closer interaction present in retailer perceptions? If so, why and based onwhich value drivers? Or, do perceived sacrifices in terms of resource requirementsand loss of category control represent major barriers for closer category manage-ment interaction? Answers to these questions are important for further work on thenormative model on how to collaborate on category management.

Qualitative and quantitative research set-ups have complemented each other wellin the sparse previous empirical research on value creation in business markets.Similar approaches specifically for category management and retailer-supplierrelationships would be valuable for gaining further insight into the identification oftypes of benefits and sacrifices of category management interaction as well as for theformalized testing of our proposed hypotheses. Qualitative or grounded theoryapproaches in studies of retailers can reveal underlying value drivers of categorymanagement relationships as well as the perceived benefits and sacrifices of workingcloser together with suppliers on category management related issues.

Further, the present practice of category management interaction can beaddressed qualitatively involving both suppliers and retailers. Such research canreveal how and whether present interactions take advantage of complementaryinformation resources, and how and whether interactions that secure these efforts areanchored in retailer strategies. Such qualitative approaches are a natural first step forfuture research since perceived value from category management relationships ispresently under-researched.

Further, the discussions and research agenda presented in this article might also beapplied in a study of suppliers’ perceived benefits and sacrifices to obtain a morecomplete picture of the phenomenon. Supplier’s positioning towards variousretailers might depend upon the type and depth of the potential relationship tothe specific retailer. Therefore, investigating various positioning strategies andtactics, may reveal future potential for further collaboration and create possibilitiesfor learning by suppliers and retailers, utilizing insights from other relationships.Also, the possible clash between retailer brand building, including private label andprivate brand strategies and supplier brand strategies, must be explored in order toidentify future possibilities for collaboration, competition and co-opetition.

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