“It’s not the company. It’s the credibility. My credibility. I can’t just sit on the bench and let other people play the game. Not my game. Not with their rules.” – Henry Kravis, Barbarians at the Gates

How does a category killer in retail actually emerge? What set of circumstances come together at what point in time that conspire to take the opportunity?

How does a sleeping category awake to find its own version of Barbarians at the gate. How do the strong become the vulnerable in such a relatively short period of time?

Wikipedia defines a category killer as “a product, service, brand, or company that has such a distinct sustainable competitive advantage that competing firms find it almost impossible to operate profitably in that industry (or in the same local area). The existence of a category killer eliminates almost all market entities, whether real or virtual. Many existing firms leave the industry, thereby increasing the industry’s concentration ratio”.

A category killer is usually a big box retail chain that is focused on one or few categories of merchandise and offers a wide selection of merchandise in these categories at relatively low prices. The emergence of such stores has taken a toll on specialised local stores in the same market, but also affected many larger department stores.

What are the characteristics of a category killer?

  • Fast distribution into a fragmented market
  • Deep and narrow range
  • Typically a very strong focus on price and volume
  • High focus on promotional and localised advertising
  • Attacking a passive somewhat disjointed sector invariably reliant on the way it was “in the day”

One anecdote we all grew up on is that locational mix is a strategic advantage, and increasingly this is a less reliable observation, as is the adage that strategy is a relatively fixed three year forecast of all variables.

Category killers treat both assumptions with contempt, vociferously moving forward with a steadfast momentum that is irrepressible in nature.

One category killer that makes this point is Chemist Warehouse. Chemist Warehouse is Australia’s 13th largest retailer by turnover, with sales of $2.7 billion and more than 10,000 staff.

Chemist Warehouse has in excess of 260 stores, representing about four per cent of all retail pharmacies across Australia, however, its sales make up 20 per cent of total retail pharmacy sales, dispensing around 15 per cent of medicines covered under the Pharmaceutical Benefits Scheme (PBS).

This juggernaut is punching at a great pace, decimating traditional pharmaceutical, health, cosmetics, vitamins, and perfumery sectors in its wake. It is not a long bow to suggest that the cosmetic perfumery sector, long the bastion of our department stores, recognising approximately 25-35% of their sales, is under some pressure in their mid-market perfumery and cosmetics product range from an entirely dispassionate category killer.

At least 60 per cent of Chemist Warehouse sales ($1.5 billion) are in retail product, and judging by ranging instore and category mix, it’s not hard to see $300 million being spent in that mid-market cosmetic and perfumery sector alone at Chemist Warehouse.

Perhaps another telling statistic is that this business is already at 90 per cent of the sales of the Myer department store channel.

As my Ebeltoft Group colleague, Hilary Kahn, puts it:

“With supermarkets stocking so much of the front store offer, the independent pharmacists, who didn’t change quickly, were always vulnerable to competition. Inevitably, smart retailers like the Chemist Warehouse owners and partners looked around at the market – they’d watched the lack of positioning give way to price in hardware and electronics. Chemist Warehouse studied the EDLP model and got it right.”

Globalisation, omni-channel, department store wars, fragmented marketplaces all turn to one side while the Barbarians attack the underbelly of the beast.

Happy ‘fit’ retailing

First published by Inside Retail, July 2014