Advanced Electronics Practice
Category management’s
next horizon:
How distributors
can outperform
As prices and customer expectations rise, category management
separates distribution leaders from laggards.
by Alex Abdelnour, Brooke Daniels, Neal Parikh, and Stefano Redaelli
© thianchai sitthikongsak/Getty Images
June 2022
Like top retailers, the most profitable distributors
have detailed end-to-end views of category
performance. This helps them manage complexity
and supply constraints, keep costs down, and meet
customers’ needs while driving profitable growth.
But few truly understand how to extract full value
from their assortments.
These distributors are now looking to the next
horizon of category management excellence. By
reimagining the role of the category manager,
resetting category strategy, and linking this strategy
to core value levers, they will keep gaining ground in
today’s world of shifting buying patterns and rising
demand and inflation.
The gap continues to grow between
outperformers and the rest of the
industry, which has made little progress
in margins despite nearly a decade of
revenue growth (Exhibit 1). Our analysis
of 140 publicly traded global distributors
shows that even a 1 percent improvement
in the cost of goods sold increases
EBITDA by an average of more than 18
percent.1 Yet we see many distributors
A 1 percent
improvement in the
cost of goods sold
raises EBITDA by
an average of more
than 18 percent.
1
barely scratch the surface of great category
management. Most category teams tend to operate
as centralized buying organizations, reacting to
sales, suppliers’ strategic priorities, and customer
demands rather than shaping the industry and their
assortment requirements.
What is holding the distribution industry back, and
how can it reach the next horizon of exceptional
category management?
What’s holding distributors back
Distribution companies have historically played
a major role across value chains, offering
thousands, if not millions, of products to customers
through elaborate catalogs. The depth, breadth,
and availability of products will continue to be
differentiators and top buying factors for most
customers across the industry. But elevating
category management in distribution is becoming
far more important for four main reasons:
— The growing complexity of customer
requirements. Customers will keep expecting
more, including more seamless omnichannel
Alex Abdelnour and Walter Baker, “Pricing: Distributors’ most powerful value-creation lever,” McKinsey, September 16, 2019.
Exhibit 1
Although
top-line margins
Although top-line
margins have
havegrown
grown overall,
overall, distributor
distributor gross
grossmargins
marginshave
have
fluctuated
fluctuatedmore
morewidely
widelyover
overthe
theyears.
years.
Year-over-year revenue growth, %¹
Year-over-year gross profit margin, % change²
20
15
10
5
0
–5
–10
–15
–20
1
2
2
2009
2012
2016
2020
2.0
1.5
1.0
0.5
0
–0.5
–1.0
–1.5
–2.0
–2.5
2009
2012
2016
Based on a list of 80 top distributors. Revenue growth calculated in local currencies and weighted by average revenue in US dollars over period.
Weighted by revenue in US dollars.
Source: Corporate Performance Analytics by McKinsey
Category management’s next horizon: How distributors can outperform
2020
experiences, greater product and price
transparency, customized recommendations,
more value-added offerings, and faster
deliveries. Understanding the role of brand,
as well as the right product positioning and
placement across customer portfolios, is critical
to knowing where and how to win within and
across categories.
— The ever-expanding depth and breadth of
product assortments. Most distributors find
it difficult to manage the growing volume of
products, increasing price complexity, and
multifaceted supplier terms. Those without
strong supplier relationships and flexible supply
chains have struggled to keep up during the
pandemic. Many lack deep insight-driven
category strategies that could help them weather
the storms of product shortages, supplier price
increases, and disruptive competition.
— An unprecedented inflationary environment
driving uncertainty. High inflation, coupled
with labor shortages and rising freight costs, is
putting intense new pressures on distributors.
But with a deeper understanding of end-toend product categories, a distributor can make
targeted changes in assortments and prices
and identify more favorable product substitutes
to grow market share and maintain, or even
expand, margins.
— A talent gap and rising expectations for
category managers. Many distributors simply
don’t have the capabilities or tools they need
to uncover the most valuable category and
assortment insights. Most category managers
still rely on just a handful of levers, such as basic
contract terms and price-increase avoidance, to
work toward a narrow set of outcomes.
Nonetheless, progress is possible. While most
distributors struggle to manage rising complexity, a
few industry leaders are applying lessons learned
in retail and other industries to transform their
approaches to category management, to gain share,
and to bolster profits.
The three pillars of category
management excellence
Based on our experience working with distributors
across industries, category management excellence
stands on three main pillars: reimagining the role of
the category manager, resetting category strategy,
and linking strategy to core value levers.
Reimagining the role of the category manager
To win, distributors first need to reimagine the role
of category managers. The best category owners
maintain a P&L mindset, including a comprehensive
understanding of product offerings, pricing and
channels, and cost drivers such as payable terms,
marketing funds, channel fees, and supply chain
performance incentives (Exhibit 2). Their primary
goal is to develop a growth-centered product
portfolio while expanding margins.
Category managers today need to be much more
than buyers familiar with the industry; they should
be proven leaders who are both analytically and
commercially savvy and who take a customercentered view of what products or services
will address customer pain points and create
competitive advantages. They should build category
strategies, including
assortment and
Category managers
pricing perspectives,
today should build
based on customers’
needs and
strategies based
willingness to pay
not on what sales
rather than on what
and suppliers are
sales and suppliers
pushing but on
are pushing.
customers’ needs
and willingness
to pay.
They should maintain
an understanding of
what the attributes of
their core products
are, where they can best position products to drive
growth, and what products may be interchangeable.
Best-in-class category managers also need a
comprehensive view of the business, including
inventory and working-capital requirements, and
must understand how to link critical supplier
Category management’s next horizon: How distributors can outperform
3
Exhibit 2
The category
managerrole
roleinforms
informsthe
theoverarching
overarchingstrategic
strategicapproach.
approach.
category manager
Strategic approaches
Importance to distributor
Assortment
Brand
Pricing
Go to market
Destination
Broad,
differentiated offer
Multiple brands
(including private
label)
Margin leader with
multiple price tiers
High focus and
education across
channels
Staple
Standard selection
with targeted
assortment
investments
Multiple brands
(including private
label)
Aggressive pricing
with multiple tiers
Moderate focus on
categories critical to
customers and
preferred suppliers
Complement
Limited selection to
meet needs
Limited brands
unless strong
customer demand
Margin leader with
limited price tiers
Lower internal
concentration and
focus
Core
Enough selection
to meet needs
Limited brands
unless strong
customer demand
(lead with private
label)
Price leader with
limited or no tiers
Moderate focus on
categories that drive
value
requirements, such as on-time delivery and
payment terms in negotiations, to best position the
assortment and portfolio for broad-based success.
Category managers should not be siloed. Working
from a central position, they should serve as core
integrators of the business—collaborating with
the sales, purchasing, supply chain, and finance
departments to drive penetration and profitable
growth. They need to extend their influence across
functions, informing stocking considerations
and helping to shape sales behaviors. And they
need to have a 360-degree view of the business
and bring the sales organization on the journey,
understanding all the key considerations of
assortment changes and product substitutions
while establishing portfolios that continue to meet
customer expectations.
4
Importance to customers
Resetting the category strategy
To be effective, a category manager must become
the chief strategy officer for his or her category. The
multistep process requires a deep understanding
of each customer and segment, beginning with
the role the distributor’s offering plays for the
target customer and how that role aligns with the
distributor’s goals.
The best category managers know that not all
category strategies are the same. They understand
product positioning and tailor their approaches
based on this awareness. For example, a product
can be a “destination,” critical to a customer’s
portfolio and to the distributor, or “complementary,”
merely adding value to another offering. The
category strategy depends on the product
positioning (Exhibit 3).
Category management’s next horizon: How distributors can outperform
Exhibit 3
The role of the category
categorymanager
managercan
canbe
bereimagined
reimaginedtotothe
thedistributor’s
distributor’sbenefit.
benefit.
Private label,
sourcing, and
requests for
proposals
Vendor
management
Product
design and
specification
optimization
Category
strategies
Marketing
Sales support
and enablement
Assortment
management
Core, activities
Cross-functional enablement
Pricing
Inventory
Stocking
Category manager
“Chief strategy officer”
Technology
enablers
System
architecture
Data quality and
governance
management
Advanced
analytics
For example, a destination product strategy may
help the distributor become a one-stop shop with
a broad, differentiated assortment mix. Pricing will
deliver high margins and high value in multiple tiers.
The brand strategy may also be multitiered based
on customer requirements and could position the
distributor as a market leader with a distinctive and
differentiated category offering. Understanding the
role of the product helps the distributor decide how
much to invest in sales, training, and private-label
offerings, as well as how many brands or SKU types
to offer to support growth.
As the bar rises on category strategy development,
the most successful category managers have the
skills to take a data-backed and insight-driven
approach to compete more effectively. They use
internal product, sales, and margin data alongside
external competitor and market research to gain
deeper insights. And as chief strategy officers, they
sustain profitable growth across categories.
Tracking and
learning
Automated
workflows
Digital
visualization
Linking strategy to core value levers
Among leading distributors, the category
management function is a profit center designed
to grow revenues and margins. Category managers
at these distributors consistently use a suite of
levers to drive margin expansion as it relates to the
category strategy. We have found that five of these
levers, coupled with advanced analytics to uncover
deeper insights, deliver outsize impact (Exhibit 4):
1. Optimizing the assortment mix. In the past
decade, OEMs have tried to differentiate
themselves and offer customers more options
by manufacturing mountains of products with
different designs but similar functionalities,
such as hammers in more than a dozen colors,
significantly raising complexity and costs for
distributors. Industry leaders are now tackling
this complexity using customer-centered
research to understand what drives buying
behaviors, what products—inside or outside
Category management’s next horizon: How distributors can outperform
5
Exhibit 4
By
taking different
different value
can
unlock
By taking
value levers
levers into
into account,
account,category
categorymanagers
managers
can
unlock
company.
overall opportunity for the company.
Value levers to unlock overall opportunity
Preliminary
Assortment levers
• New item introductions
• New value tiers
• Conversion to preferred items
Sales levers
Private-label levers
• Cross-selling and bundling
• Upselling
• Segment-specific strategies
• New categories
• Expanding product line offering
• New brand positioning
Supply chain levers
Supplier levers
• On-time in-full performance
programs
• Administrative fees
• Data as a service
• Lower net cost of products
• Channel distribution fees
• Payment fees
• Volume incentives
their current product mix—drive demand, and
which innovative products, including those with
low sales today, will become more relevant in the
long term to provide a truly distinctive offering
and drive profitable growth.
We’re seeing the most innovative
distributors make surgical but substantial
A food and beverage
assortment reductions and regularly
distributor raised
reimagine assortment mix to stay aligned
margins by 10
with customers’ needs. A leading food
percent across most
and beverage distributor, for example,
categories while
was facing intense pricing pressure
from
traditional and nontraditional
reducing enterprisecompetitors. The merchandising team
wide SKUs by 50
took a category- and customer-centered
percent.
view, resetting strategies based on
in-house and third-party data and other
market insights. They worked with sales and
analytics to better understand their market
position and gain a deeper understanding of
6
customer requirements to deliver a simpler
assortment at lower cost while increasing
variety and value. The steps they took included
product assortment rationalization, expansion
in some areas, and better integration of
continuous customer insights to guide pricing,
brand development, and assortment selection.
These efforts drove 10 percent gross margin
improvements across most categories while
dramatically lowering complexity with an
enterprise-wide SKU reduction of 50 percent.
2. Elevating the role of private labels. Few
distributors get full value from private-label
offerings or penetration. While some leaders
have converted 60 or even 70 percent of their
product portfolios to high-margin private-label
substitutes, many still struggle to shift more
than 20 percent. Those who do harness privatelabel offerings wisely can enter new categories,
expand margins without raising prices, and
Category management’s next horizon: How distributors can outperform
create competitive advantages and pricing
protection by offering unique products that
can’t be shopped around. The biggest hurdles
for most organizations include customers’
preferences for familiar branded products and
the inability of distributed and undertrained
sales teams to explain the value of private-label
offerings. Meeting those challenges can raise
gross margins by double-digit percentages and
can improve overall EBITDA by more than 100
basis points. Private-label integration, done well,
is a powerful tool for any distributor.
3. Unlocking value from better supplier
engagement. Many distributors are at the mercy
of the thousands of suppliers they partner with.
In some sectors—such as IT, alcoholic beverages,
and heating, ventilation, and air conditioning
(HVAC) distribution—dynamics strongly favor
suppliers, forcing distributors to play the game
of maximizing rebates and value derived from
any of the other cards they have been dealt
while managing the long tail of vendors where
distributors have equal power. In other industries,
distributors can partner with suppliers
to unlock significant value, especially in
Better supplier
categories in which distributors have a
segmentation helped
competitive list of alternative vendors,
improve negotiation
products that are interchangeable, and
the right incentive alignment with sales
outcomes, raising
on customer engagement and cost
margins on addressable
protection.
customer surveys. They launched a formal
process to attract new bids across existing
suppliers and alternative suppliers with more
competitive price offerings. With a more
robust fact base, teams segmented suppliers
more effectively and reached more favorable
negotiation outcomes, improving margins on
addressable spend categories by 10 to 20
percent.
4. Integrating supply chain performance. Supply
chain performance is critical because product
depth, breath, and availability are what
distribution is all about. The category manager
must play the role of integrator by aligning
product positioning and portfolio strategy with
supply chain performance. Especially where
category strategies shift and new products
or suppliers may be introduced, supply chain
performance is critical to sustain buy-in and
support across the sales organization. This
means working closely with suppliers and
inventory management to consistently meet key
performance metrics—such as on-time delivery
and specification requirements—and to maintain
competitive cost, quality, and availability. Supply
chain partners are critical in helping to set
terms in supplier negotiations and in sustaining
performance.
Supply chain partners can even help execute
new category strategies. A large industrial
distributor was experiencing significant pricing
and delivery pressures in one of its commodity
categories. It had been making local purchases
across multiple locations and had limited
visibility on price and performance. The category
owners worked with the supply chain to develop
a buying approach co-led by a centralized
inventory and category team. Based on new
monthly forecasts across sites and commodity
index tracking, they negotiated better rates with
larger buys and stronger delivery terms, saving
millions of dollars per year while reducing freight
costs and increasing inventory turns.
spend categories by 10
to 20 percent.
In our experience, many distributors
can extract a lot more value from a
given category with the right approach to
supplier engagement. Just as a distributor
segments categories and customers, it should
segment suppliers, using category insights
and analytics to develop a clear fact base and
boost negotiation leverage. A leading distributor
helped its category management organization
conduct fact-based supplier negotiations by
building a custom data set to identify price and
product discrepancies. To prepare for supplier
negotiations, category owners gained targeted
insights supported by contract teardowns,
historical growth trends, cleansheets, and
5. Sales enablement and commercial activation.
Even the best category strategies won’t deliver
Category management’s next horizon: How distributors can outperform
7
on their potential without the full alignment and
enablement of the frontline sales organization.
Sales reps are positioned to influence customer
purchasing behavior, educate first-time and
returning customers on product selection, and
support the growth of new product introductions,
such as private-label offerings. It is critical to
bring the sales organization on the journey by
helping them understand what’s in it for them and
their customers. They also need to understand
how they can advance the category strategy.
Best-in-class distribution category managers
are equipped and empowered to partner with
sales in strategy development, support frontline
sales execution, and conduct go-to-market
planning. One leading distributor enlisted the
entire sales organization in an end-to-end
training journey linked to the broader category
strategy, including creating performance
management dashboards and incentives
to support margin expansion. Sales teams
engaged in product training across the new
assortment and protected negotiated terms
across categories including freight, fees, and
improved costs. Greater sales awareness and
alignment between cost improvement and
commercial efforts ultimately protected cost
savings and helped to drive incremental margin
expansion.
Outperforming in a more competitive
new marketplace
For distributors across industries, the stakes
are rising. Customers are more demanding,
assortments are ever more complex, and new digital
entrants are highly disruptive—and each of these
trends will continue to compress margins. But every
distributor has untapped potential to catch up to
retail and other industries and create significantly
more value with category management.
In the next few years, the outperformers will gather
and harness more customer and category insights
and use analytics in new ways to get more from their
product portfolios and to meet customers’ needs
better than ever. The best category managers
will build new capabilities and adopt the mindsets
of P&L owners. With a 360-degree view of the
category strategy, they will be empowered to lead
across functions with the supply chain and sales
departments. They will be the chief strategy officers
of their categories and drive sustained profitable
growth, leaving the laggards behind.
Alex Abdelnour is a partner in McKinsey’s Atlanta office, Brooke Daniels is an associate partner in the New York office,
Neal Parikh is a partner in the Dallas office, and Stefano Redaelli is a senior partner in the Stamford office.
The authors wish to thank Frank Boudon, Brian Fedewa, Ben Mathews, Kevin Sachs, and Abhishek Singh for their
contributions to this article.
Copyright © 2022 McKinsey & Company. All rights reserved.
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Category management’s next horizon: How distributors can outperform